The First-tier Tribunal (FTT) decision in Krishna Moorthy v HMRC ( UKFTT 834 was heard on 5 August 2014, and concerned the tax treatment of a payment to Mr Moorthy from his former employer following the termination of his employment.
Mr Moorthy was born in 1952 and began working for Kent County Council in 1988. In 1999 his employment was transferred to Babtie Group Limited which was itself taken over by Jacobs Engineering (UK) Limited (“Jacobs”) in 2004. Mr Moorthy’s employment was transferred to Jacobs in March 2008.
In February 2009 Mr Moorthy together with other members of the executive management team were told that there would be a restructuring, as a result of which there would be fewer executive posts. Mr Moorthy was unsuccessful in reapplying for a role and was made redundant in March 2009. He had a twelve month notice period and was put on garden leave until March 2010, shortly after which he received statutory redundancy pay of £10,640, from which no tax was deducted.
Later, in March 2009, he commenced proceedings in the employment tribunal claiming that he had suffered discrimination on the grounds of age. In January 2011 the parties engaged in mediation, as a result of which a compromise agreement was signed, whereby Jacobs paid Mr Moorthy “an ex gratia sum of £200,000 by way of compensation for loss of office and employment”. The payment was without admission of liability by Jacobs and was in full and final settlement of Mr Moorthy’s claims. Jacobs paid the first £30,000 without deduction of tax, and the balance subject to income tax at 20%.
When Mr Moorthy completed his tax return he claimed that the entire payment should be tax free, requesting a refund of £34,000. This was blocked by HMRC’s system. Mr Moorthy’s advisers then entered into correspondence with HMRC. In order to bring the matter to a conclusion HMRC proposed that, even though they did not believe there was any discrimination, they were prepared to accept that £30,000 of the payment (in addition to the statutory £30,000 exemption for compensation for loss of office) should be free of tax.
Mr Moorthy appealed this decision and asked for a statutory review. The Review Officer concluded that there was no discrimination, and that the whole of the payment except for the first £30,000 should be subject to income tax. However, although he did not agree that the additional £30,000 offered by way of concession should be tax free, he did not wish to disturb the offer made by HMRC.
Mr Moorthy appealed to the Tribunal.
Mr Moorthy’s adviser argued that the payment was not taxable because it was made (a) on account of discrimination and (b) to protect Jacobs’ reputation.
HMRC argued that the payment had been received “directly or indirectly in consideration or in consequence of, or otherwise in connection with” the termination of Mr Moorthy’s employment. It was therefore taxable under ITEPA 2003, s 401, except for the first £30,000 which is exempted by s406.
The FTT started by looking at the wording of the statute, highlighting that s401 is very widely drawn. Not only does it catch payments made directly in consideration of a termination, but it also includes payments which are not even in consideration or in consequence of a termination but “otherwise in connection with” a termination.
Despite Mr Moorthy’s arguments, the tribunal had “no hesitation” in finding that the £200,000 in its entirety was made “directly or indirectly in consideration or in consequence of, or otherwise in connection with” the termination of Mr Moorthy’s employment.
Moreover, the tribunal picked up on the point that Mr Moorthy had already received £10,640 in respect of statutory redundancy pay, which means that only the balance of £19,360 could be set against the £200,000. In addition, Jacobs should have deducted income tax at 20% under PAYE from the difference, so Mr Moorthy should be entitled to a credit for the £2,128 that should have been deducted.
However, Mr Moorthy was worse off than he would have been had he accepted HMRC’s settlement offer. The tribunal considered their position with regard to the additional £30,000 offered by HMRC as a “concession”. As this was not a concession in the sense of a general or public concession the tribunal concluded that they had no jurisdiction to take this “concession” into account. Even if they were wrong in this view, they would find that the granting of the further £30,000 was, in any event, an unlawful concession, and would not be able to take it into account for that reason.
The Tribunal’s conclusion was that Mr Moorthy was taxable on £200,000 less the balance of £19,360 from the £30,000 exempt amount. He would be entitled to an additional credit in respect of the PAYE of £2,128 that should have been deducted.
The decision increased Mr Moorthy’s assessment over and above the figures included in the original closure notice issued by HMRC. However, at the beginning of the hearing the FTT alerted Mr Moorthy to the possibility that he would end up worse off, and to the fact that Jacobs and HMRC failed to take into account the previous year’s statutory redundancy payment. It would have been possible for Mr Moorthy to withdraw his appeal during the hearing, but he chose not to take this route.
The lesson to be learned from this case is to know when to strike a deal with HMRC, and when to take heed of indications that by continuing with a tribunal hearing the outcome could be worse than what HMRC is offering to settle.
If HMRC offer a “concession” that is not a general or public concession, this should be considered very carefully as it will not be upheld by a Tribunal unless there is some basis in law.