In the hot seat

‘How to get £600,000 tax free’. (Headline in Taxation magazine 18 June 2015)

The Excello law summer conference took place on 1 July, the UK’s hottest day for 13 years. Skimming the conference programme on the way to Stapleford Park, I realised that I was down to give a 20 minute ‘tax insight’ qualifying for CPD points. As I had thought I was going to talk about myself for 20 minutes (an easy task for any lawyer) this meant I had around an hour and a half to get something technical together.

First I turned to Twitter.  Top trending for #HMRC were:

• HMRC want power to break speed limits
• HMRC hand deliver a tax bill for £0
• HMRC’s call centres’ poor performance

Certainly not the stuff of a TED talk nor even a tax talk.

All was not lost. I had a copy of a recent issue of Taxation magazine in my bag.  Sad, possibly, but it saved my bacon. Flipping through, I noticed the headline quoted above.  The article (by Philip Fisher of BDO LLP) discussed the Mr A case which dealt with the tax treatment of a payment under a compromise agreement. Excello has a fair few employment lawyers so ‘Bingo!’

Mr A worked as a trader for a bank for a number of years. He had received £600,000 from the bank before he left. HMRC’s view was that the payment was taxable as earnings from employment (under section 62 of the Income Tax (Earnings and Pensions) Act 2003) because it was paid to make good shortfalls in salary. HMRC accepted that the payment was not made in connection with the termination of Mr A’s employment. Mr A’s argument was that the sum was paid to settle a threatened racial discrimination claim (stemming from Mr A’s unfair treatment in receiving low or no bonuses and no salary increases over several years) and was therefore tax free. The First-tier Tribunal (Tax Chamber) agreed with Mr A.

Compensation for injury to feelings is an area where different tribunal jurisdictions appear to be taking different tacks. The Employment Appeal Tribunal (EAT) in Timothy James Consulting Ltd v Wilton expressed the view that all awards for injury to feelings were exempt from tax. In doing so it was following its own decision in Orthet Ltd v Vince-Cain. 

The later decision of First-tier Tribunal (Tax Chamber) in Moorthy held there was no exemption from tax for awards for injury to feelings where the discrimination claim was connected with the termination of employment. Tribunal Judge Redston criticised the EAT decision in Orthet on the basis that the EAT had misread the relevant tax provisions.

In Vento v Chief Constable of West Yorkshire Police the Court of Appeal set out three bands of awards linked to the degree of seriousness of the discrimination to guide tribunals (the ‘Vento guidelines’). While HMRC accept that compensation for injury to feelings is exempt from tax where it is unconnected with the termination of employment, they are likely to contend that it is for the taxpayer to show why any payment for injury to feelings exceeded that recommended by the Vento guidelines.

That was what I talked about on the day.

My original presentation would, obviously, have been much more interesting.  It covered:

• Why I hate Dudley (the place not the name)
• My stunning victory over HMRC at Knightsbridge Crown Court in 1993
• My favourite colour (duck-egg blue or, for Farrow & Ball devotees, Lulworth Blue)
• My star sign (Leo, the same as Mussolini and Princess Margaret but there, I hope, the similarity ends)
• How I was nearly called Hazel

Shame that it ended up in the bin.

*** UPDATE – January 2016***

The Upper Tribunal has dismissed Mr Moorthy’s appeal against the decision of the First-tier Tribunal.

Tax lawyer specialising in business tax, SDLT and VAT