COMPLIANCE
HMRC then argued that if the sum received didn’t represent a termination payment, it must represent a restrictive covenant as Mrs A’s conduct or activities were being fettered by the settlement agreement she had signed. This would make it chargeable to tax under Section 225 of ITEPA 2003 instead. Mrs A agreed that a restrictive undertaking had been signed up to but that it was nothing to do with her employment. What was the court being asked to resolve? Two issues required consideration, which were: l whether the settlement value represented A) a termination payment, or B) a payment in return for agreeing not to do something (this could be not to pursue an employment tribunal claim or not to disclose confidentialities); or l if the payment was deemed to be B), whether this represented a restrictive undertaking taxable under Section 225 of ITEPA 2003. Deliberations When the employer didn’t uphold Mrs A’s original grievance, the decision also contained a request to respect confidentiality. Mrs A sought advice on the matter from a professional adviser and commenced proceedings at the employment tribunal. The adviser had covered the notional charges to tax under both Section 401 and Section 225 of ITEPA 2003, should a termination of employment occur. However, Mrs A argued that at that stage, she hadn’t considered leaving the employment, so the settlement agreement proposed didn’t relate to her termination of employment at that time. However, later, Mrs A decided she was unable to carry on working for the employer due to the stress of it all and agreed to leave. Her lawyer agreed on a settlement figure of £1.1 million under the provisions of a settlement agreement. Mrs A suffered the substantial tax deduction noted above and wrote to HMRC to ask whether the tax treatment was correct. She believed the payment wasn’t compensation for loss of
employment, but rather, for injury to feelings. However, under Section 406 of ITEPA 2003, injury is only exempt if it’s classed as psychiatric and injury to feelings is not exempt. She then completed her self-assessment return to show an overpayment. HMRC opened an enquiry into the return and concluded that Section 401 of ITEPA should apply to it. As this would mean the first £30,000 would be exempt, she could only claim an overpayment of £6,136. Several key sections of the settlement agreement were relied on by the FTT to assist them in reaching their conclusions. So were numerous other tax cases on termination payments, each of which has a distinct fact pattern, but which enabled the judiciary to conclude that Section 401 was widely drawn, as it states: “or otherwise in connection with an employment”. Conclusions and decision The FTT concluded, “In our view, it is clear from the terms of the Settlement Agreement that the payment was, at the very least, in consequence of or otherwise connected with the termination of Mrs A’s employment.” However, this was a secondary consideration. The FTT also concluded that the primary decision had to be that the payment must have come under the charge to tax at Section 225 of ITEPA 2003 (and be taxable in full). Statement of Practice 3 (1996) determines that, if a specific payment is made in return for an agreement not to pursue an employment claim via the employment tribunal, it should automatically qualify as a restrictive covenant payment under Section 225 of ITEPA 2003. The Tax Tribunal chose to note that a Statement of Practice is merely an HMRC interpretation and has no legal force. It still came to the same effective conclusion independently from its review of the settlement agreement clauses which repeatedly referred to restrictions being the main reason for the payment, that Section 225 should apply anyway. The FTT concluded: “There is no doubt that an agreement not to pursue claims or proceedings is a restrictive undertaking
within the scope of Section 225.” They went on to conclude at Paragraphs 63 and 64 of the decision: “It was paid…in respect of the restrictive undertaking given by Mrs A that she wouldn’t make or pursue any claims against the employer and / or the owner relating to or arising out of her employment or its termination. Accordingly, we find that the Compensation Sum is chargeable to tax as earnings from employment under Section 225(3). That conclusion is sufficient to determine this appeal but, in case we are wrong, we consider whether the payment was received by Mrs A ‘directly or indirectly in consideration or in consequence of, or otherwise in connection with’ the termination of her employment and is therefore chargeable to tax as employment income, to the extent that it exceeds £30,000, under Section 403(1).” The FTT decided the settlement couldn’t be apportioned into different elements because it was clear it was received primarily as a restrictive covenant and derived from employment. The appeal was dismissed and leave of appeal granted, to expire within 56 days. Final thoughts As the amount Mrs A received was deemed to be wholly taxable under Section 225, technically speaking, this negates the residual overpayment of £6,136 originally allowed by HMRC when they concluded the payment fell within Section 401 of ITEPA 2003. If HMRC acts upon this FTT decision and disallows the overpayment, Mrs A will be worse off than if she had accepted its original decision. n Links corner (listed in order of appearance in article) FTT case : http://ow.ly/semH50OksyE Section 401 ITEPA 2003 : http:// ow.ly/1J1W50OksIb Section 403 ITEPA 2003 : http:// ow.ly/gzon50OksQl Section 225 ITEPA 2003 : http:// ow.ly/CT1Z50Okt05 Statement of Practice 3 (1996) : http://ow.ly/6Ymn50OktB4.
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| Professional in Payroll, Pensions and Reward |
Issue 91 | June 2023
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