COMPLIANCE
Met Police case tests basic PAYE principles
Justine Riccomini FFTA AIPA Chartered MCIPD ChFCIPP, head of taxation, the Institute of Chartered Accountants of Scotland (ICAS), discusses the reasoning behind the decision in a ‘back to basics’ employment tax case, involving Met Police officers, which was recently heard at the Court of Appeal
Key points ● this case considers whether amounts paid regarding insurance policy and legal ‘success’ fees were taxable as employment earnings
● the Court of Appeal decided they weren’t exempt from pay as you earn (PAYE) ● the case centred around the definition of the words ‘profit’ and ‘from’.
The case of HM Revenue and Customs (HMRC) v Keith Murphy was heard in July 2022 and the decision handed down less than three weeks later, in August 2022. The case can be read in its entirety here: http://ow.ly/2HXn50L7Uz6. Lady Justice Andrews, who delivered the decision, wasted no time in coming to the nub of the issue facing the judiciary – in this case, the meaning of the words ‘from’ and ‘profit’ within the Income Tax (Earnings and Pensions) Act (ITEPA) 2003 Section 62 – the section of the act which defines what counts as earnings from employment. Section 62 can be accessed here: http://ow.ly/pMxk50L7UJR.
Background Mr Murphy was amongst a group of police officers working for the Metropolitan Police (‘The Met’) who took legal action against The Met in 2014 via the High Court. That case concerned itself with arrears of overtime and other allowances they believed they were entitled to by way of statutory debt under the Police Regulations 2003, while they were employed by The Met. To pay for the legal costs, the claimants entered into a damages-based agreement and insurance policy, the former including a success fee should the courts find in favour of the claimants, or an out of court settlement be reached with The Met. In May 2016, a settlement was reached with The Met based on no admission of liability. The settlement didn’t include funds ring-fenced for the success fee or insurance but did include legal costs of the claimants. Indeed, Clause 8.1 of the
settlement stated, "Other than the Agreed Costs, the Parties shall each bear their own legal costs in relation to the Dispute and this agreement." That case concerned itself with arrears of overtime and other allowances they believed they were entitled to by way of statutory debt The Met agreed a form of making payment to the claimants under Clause 3.3 of the settlement agreement, which included them being invoiced for the success fee by the solicitors and paying under the Police Regulations 2003
this sum and the insurance premium directly to the creditors. Both amounts would be deducted from the total sum payable to the claimants prior to payment. Clearly, any payments made to the claimants in respect of arrears of pay and allowances were taxable under PAYE. However, The Met applied PAYE to the costs too – in other words, applying PAYE to the whole amount paid directly to, and on behalf of, each claimant. This approach contradicted the amount declared as taxable income by Mr Murphy on his tax return. He had treated the success fee and insurance premium as not taxable on him personally, as they weren’t earnings, and he hadn’t received them directly. HMRC issued discovery assessments and Mr Murphy appealed. Court decisions The decision taken by the First-Tier Tribunal (FTT) was that the whole amount should
| Professional in Payroll, Pensions and Reward | November 2022 | Issue 85 36
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