Mr M Baines v Secretary of State for Justice: 2402698/2024
EMPLOYMENT TRIBUNALS
Case No 2402698/2024
Between
Mr M BainesClaimantSecretary of State for JusticeRespondent
Before
Employment Judge BarkerMiss Brooke Ward (instructed by counsel) for claimantMr Jones (instructed by counsel) for respondentDate 31 March 2025
JUDGMENT
[1]The claimant’s claims for disability discrimination (sections 15, 19 and 20 Equality Act 2010) are dismissed, having no reasonable prospect of success (rule 38 Employment Tribunals Rules of Procedure 2024.)[2]The claim is hereby dismissed. JUDGMENT having been handed down to the parties at the conclusion of the hearing on 31 March 2025 and written reasons having been requested by the claimant in accordance with Rule 60 of the Employment Tribunals Rules of Procedure 2024, the following reasons are provided:
REASONS
[1]At a case management preliminary hearing on 21 November 2024, Employment Judge Fearon set this matter down for a public preliminary hearing to determine the following issues:(a) Disability status (if disputed)(b) Any outstanding applications for amendment(c) Any outstanding applications for strike out/deposit order(d) Case management[2]The respondent confirmed at the outset of the hearing that disability status was no longer disputed, and neither was the claimant’s application to amend his claims. The only matter before the tribunal, save for any case management that may follow, was the respondent’s application to strike out the claims, or in the alternative impose deposit orders, on the basis that the claims had no (or little) reasonable prospects of success.[3]The Tribunal’s power to strike out is at Rule 38 of the Employment Tribunals Rules of Procedure 2024. This provides “(1) The Tribunal may on its own initiative or on the application of a party, strike out all or part of a claim response or reply on any of the following grounds – (a) that it is scandalous or vexatious or has no reasonable prospect of success”[4]Tribunals are cautioned against striking out discrimination claims at an early stage in the proceedings, especially where there are disputes of fact. It is the respondent’s submission that there are no disputes of fact in this case. Tribunals are also cautioned against taking the draconian step of striking out a claim without first having taken the claimant’s claims at their highest, and having considered whether there are any alternatives to strike out that may be considered instead.[5]The claims as amended are for ss 15, 19 and 20-21 Equality Act 2010 (“EQA”). The claimant alleges that the central issue for the Tribunal, is (the following quoted from the claimant’s successful amendment application) “the respondent’s taxation of the claimant’s termination payment despite their entitlement to an exemption under ITEPA 2003, as a result of their dismissal, due to disability”.[6]The provision, criterion or practice pleaded by the claimant as resulting in discrimination in relation to both ss19 and 20-21 EQA is “subtracting tax and national insurance from termination payments, which included those termination payments made under the Civil Service Compensation Scheme”. This is also said to be the “unfavourable treatment” for the purposes of the complaint under s15 EQA.[7]The claimant’s case is that he has an entitlement to a tax-free payment, on the basis that s406 Income Tax Earnings and Pensions Act 2003 (“ITEPA”) states: 406 Exception for death or disability payments and benefits “This Chapter [that termination payments over £30,000 count as taxable employment income] does not apply to a payment or other benefit provideda. In connection with the termination of employment by the death of an employee, or b. On account of injury to, or disability of, an employee”[8]The respondent’s application for strike-out sets out the basis on which the claims have no reasonable prospect of success in relation to each of the allegations of the Equality Act 2010. I will address these in turn in due course.[9]However, given the arguments made on behalf of the claimant, it is necessary to clarify any misunderstanding as to the way in which the Civil Service operates its payroll (via a third party organisation) and how the UK tax system is operated by HMRC. To the extent that this is necessary, I have taken judicial notice of these matters. This is because I find that the claimant’s case is based on two key misconceptions or misunderstandings. The first is that s406 ITEPA of itself demonstrates that he has an incontrovertible right to receive the sum tax-free, without consideration of the specific terms of the respondent’s compensation scheme and any HMRC guidance that may apply in relation to it. The second is the presumption that the respondent has a free choice, a discretion, as to whether to apply tax/NI to his termination payment or not.[10]I disclosed for the sake of transparency to the parties at the outset of the hearing that I was formerly employed as a lawyer by HMRC and that therefore I had some independent knowledge and understanding of how HMRC operates and how tax legislation is implemented in practice. However, with hindsight this was not necessary as the understanding required for the purposes of this case is simply based on information generally available to the public as to how HRMC administers the UK’s tax system.[11]Turning to each of the underlying assumptions in the claimant’s case and taking the second assumption first. It is a commonly understood principle of the UK tax system that individual employers cannot pick and choose which employees do and do not pay PAYE and NI on their earnings, or on any payments made to them, without particular arrangements being made with that individual (such as to change the terms of their engagement to become self-employed and account for tax/NI on that basis). If an employer understands that they are required to pay tax on a particular payment (whether due to advice from its accountants, payroll provider or HMRC), then they are required to pay that tax.[12]An employer’s understanding of its tax liability can therefore come from a number of sources. It is highly unlikely to simply be from one or two provisions of a tax statute such as the ITEPA. As well as tax statutes and statutory instruments, HMRC drafts and publishes hundreds of policy statements and guidance notes for a wide variety of circumstances to allow employers and members of the public to understand when tax/NI is and is not payable. For example, the extensive HMRC PAYE manual is published in full on www.gov.uk[13]It is then the job of accountants and payroll providers to apply those rules and that guidance to determine when they should and should not account to HMRC for tax/NI for their employees. The employer has a statutory duty to follow those rules and that guidance. Failure to do so may be found to be tax evasion, also called tax fraud, which is a criminal offence. For large public sector bodies such as the respondent, there may well be guidance specifically written by HMRC for that body, or specifically written for a scheme such as Civil Service Compensation scheme. This may have been written in conjunction with representatives from the public body, or not.[14]Some rules are relatively clear-cut and straightforward to apply, such as the rule that the first £30,000 of any termination payment may be paid free of tax. Others may require the employer’s payroll provider to seek guidance from HMRC on a case-by-case basis as to whether or not a payment is liable to tax. This does not mean that the decision is that of the employer on a case-by-case basis. It remains that of HMRC.[15]Therefore the premise advanced by the claimant, which is that the respondent has discretion and should have exercised it to provide the claimant with a taxfree payment, would appear to be a misunderstanding of how the tax system operates. Finally, the claimant would appear to have no rational basis for this premise. There is nothing from which the claimant appears to be able to conclude that the respondent has discretion in relation to his tax/NI payments.[16]The second assumption made by the claimant is that the wording of s406 ITEPA entitles him beyond doubt to a tax-free settlement payment. I find that this assumption is also fundamentally flawed. For the reasons set out above, the administration of the PAYE and NI system is far more complex and nuanced than the black letter law of a single provision of a statute, viewed in isolation, may suggest. The claimant repeatedly indicated to me during the hearing that s406 was absolutely clear. I did not accept that proposition. The claimant was not able to point to any particular tax advice that he received, or to any information on the tax status of the scheme, which confirms this to be the case. In fact, a letter in the bundle of documents from an HMRC case worker expressed a provisional view which I considered to be reasonable, that the reason why the claimant’s payment was not wholly tax-free was because not all of the payment was due to the claimant’s disability. Part of the payment was calculated on the basis of the claimant’s good conduct and his good cooperation with the process. This part of the payment was not (as per s406) “on account of injury to or disability of an employee” and therefore it was likely that this was why none of the balance over £30,000 was exempt.[17]This led to the claimant’s counsel objecting to the basis on which the strike-out decision had been made, which was that I had taken (or enquired about) the availability of evidence to support the claimant’s assertions of entitlement under s406 ITEPA. I note that the basis of assessment of a strike-out application is the likelihood of a party being able to establish their case at a final hearing. The Tribunal may take into account what evidence is, or would be, available to the Tribunal at that final hearing in making such an assessment.[18]The claimant’s counsel provided an email to the Tribunal, from the date of the hearing, at 13.26, as follows: “Dear Judge, Further to the submissions in the application for strike out and the submission of the claimant’s entitlement to s.406 (exemption). I made the submission regarding the way the Respondent had put its Defence and that not being how they had pleaded its case, I failed to draw the Tribunal’s attention to the following paragraph in the Strike Out Application to support the contention (for which I apologies): 12: Substantive Challenge:- There is no dispute of fact in this case. In short, the Claimant will say he was not afforded a s.406 ITEPA 2003 tax exemption on his termination compensation payment. The Respondent accepts that no exemption was applied ‘at source’. Accordingly, reasonable prospect of success in this case does not turn on factual issues that are disputed, but on the correct application of the agreed facts to the legal framework and statutory test(s). The above appears to correlate with the Claimant’s understanding of the way the application and Response had previously been put. If of course, their position has changed then that would require an application to amend their Response so that the Claimant understood the case he had to meet. Of course, the Respondent accepts that it applied the £30k exemption and that somewhat undermines the contention that the tax matters are one for HMRC.” (emphasis added).[19]With respect to the claimant’s representative, the final sentence neatly encapsulates the fundamental misunderstanding on which his claim is based. The respondent applied the £30k exemption because it understood it had a statutory duty to do so. This does not undermine the contention that “tax matters are one for HMRC”. My view is that there is no contention, and no ambiguity, that tax matters are for HMRC. Such matters are for HMRC, as a matter of legal obligation.[20]Finally, as was noted to the claimant during this hearing, disputes about the proper application of tax and NI to a payment are not within the jurisdiction of the Employment Tribunal. There is a Tax Tribunal within the Tribunals Service specifically for the purpose of challenging HMRC’s interpretation of tax legislation. If the claimant considers that s406 ITEPA provides him with an absolute right to a tax-free medical inefficiency payment, he may ask the Tax Tribunal to make a ruling to that effect. The Employment Tribunal has no jurisdiction to do so.[21]Turning to the respondent’s particular submissions in this application, which focus on the Equality Act 2010, these demonstrate in any event that the claim has no reasonable prospect of success.[22]I agree with the respondent that, in relation to s19, the claimant’s comparison group does not properly reflect the legal test as set out in Booth v Delstar Limited [2023] EAT 22, which is that “the group of people of which the claimant is a member, must have the same disability as the claimant”. There is then to be a comparison between that group, and those who do not share that specific disability. It is not a comparison between people with disabilities and those without. Given that the compensation scheme applies to other disabled people who are prevented from carrying out their job on account of a different medical condition other than the claimant’s (Thoracic Dural Arterio-Venous Fistula – ‘TDAF’), the claimant would appear to have considerable difficulties in showing how his group of those with TDAF are placed at a particular disadvantage when compared with those who may also be disabled, but not by reason of TDAF, when the same scheme is applied to all.[23]Furthermore, the respondent pleads the justification defence that the PCP was a proportionate means of achieving a legitimate aim, which is “to ensure compliance with the respondent’s obligations to deduct tax at source in accordance with the relevant tax legislation and rules and to avoid unnecessary enquiries, inspections or audits”. I have taken judicial notice of the fact that the respondent is highly likely to have no discretion as to how to treat the claimant’s compensation payment and is obliged to account to the Revenue as instructed, for tax and NI. The claimant will, I find, have considerable difficulties in challenging the proportionality or the legitimate aims of the respondent’s defence.[24]In relation to the claim under s15, the respondent’s submissions make the following two points. Firstly, as a matter of law, taking the decisions in Williams v Trustees of Swansea University Pension and Assurance Scheme and another [2018] UKSC 65, and McAllister -v- Commissioners of Her Majesty’s Revenue and Customs [2022] EAT 87 into account, a claimant cannot complain of disability discrimination where they have been favourably treated but feel they should have been treated more favourably still. That characterises the claimant’s circumstances in that, on account of his inability to carry out his duties due to his disability, he has been given a compensation payment, but requires it to have been paid free of tax and NI deductions.[25]Secondly the respondent notes that the claimant’s pleading states “The Claimant relies on his termination payment being subjected to tax and NI and the Respondent’s failure to provide a s.406 exempt disability-related payment upon termination as being an act of unfavourable treatment because of termination and legal right to an exemption under s.406 ITEPA 2003 which arose in consequence of his disability”. The claimant appears to suggest that his termination payment was subjected to tax and NI "because of termination and legal right to an exemption”. I have already expressed my doubt as to the claimant’s absolute “legal right to an exemption”. However, I accept in any event the respondent’s pleading that the claimant’s tax treatment was not “because of” the “something arising” as stated, but because of the obligation to pay tax.[26]In relation to the claim that the respondent failed to make reasonable adjustments in relation to the tax treatment of the payment, the respondent’s submission is that the duty to make reasonable adjustments has been confirmed in relevant case law (below) as the duty to make adjustments which “enable the disabled person to remain in or return to work” or “to enable disabled people to play a full part in the world of work”. (Salford NHS Primary Care Trust v Smith UKEAT/0507/110).[27]The respondent’s submissions also referred me to Aleem v E-Act Academy Trust Limited [2021] UKEAT/0099/20/RN which noted as follows at [30]:- “In O’Hanlon v HM Revenue and Customs UKEAT/0109/06, 4 August 2006, the disabled employee was off long-term sick, leading to her pay falling to half-pay after six months. She contended that it was a reasonable adjustment to maintain her pay at full pay. The EAT, at [67]-[75], held that it would be a very rare case in which such an adjustment was reasonable. It would require exceptional circumstances. That was, in part, because this would be a usurpation of the management function of considering the costs implications. But it was also because “the purpose of the legislation is to assist the disabled to obtain employment and to integrate them into the workforce.” It was not “simply to put more money into the wage packet of the disabled” but to “enable them to play a full part in the world of work.” [emphasis added][28]I agree with the respondent that this paragraph neatly summarises the current position on reasonable adjustments and financial benefits. I also agree therefore that a respondent’s duty is to remove any disadvantage caused by a PCP such as to enable employees to remain in work and that it does not encompass the terms of a compensation payment as suggested by the claimant.[29]For these reasons, I find that the claim for a failure to make reasonable adjustments has no reasonable prospect of success, taking the claimant’s case at its highest. Furthermore, the respondent has excellent prospects of succeeding in a defence of proportionality and legitimate aims.
Conclusion
[30]I have taken into consideration the general note of caution to Tribunals not to strike out discrimination claims at an early stage in the proceedings. However, the respondent is correct in summarising this case as one where there is no factual dispute. It is accepted that the claimant is a disabled person and was paid a termination payment subject to deductions. The respondent accepts that it outsourced its payroll to a third party. The disputes are as to the correct application of the law. There are also disputes about the application of the relevant provisions of the ITEPA to the claimant, but this Tribunal has no jurisdiction to consider those.[31]Having found that the claimant’s claims have met the test in rule 38 of having no reasonable prospect of success, I must now consider whether or not to exercise my discretion to strike out. Is it proportionate to do so? I find that it is. It is not in the interests of justice to allow a claim to proceed that will in all likelihood not succeed. The claimant may have a valid complaint about the tax treatment of his payment, but his remedy does not sit in this jurisdiction or with this respondent. Would it be in the interests of justice to allow the claimant a further opportunity to clarify his arguments? I find it is not. The claimant’s representatives have had notice of this hearing and were given the opportunity to make submissions on the respondent’s application, including during this hearing. The claimant is represented by solicitors and counsel. Full opportunity was given to him to explain the basis of his claims during this hearing.[32]Having taken the claimant’s case at its highest, there is no possible legal argument open to the claimant on which there are prospects of success in these proceedings, for the reasons set out above. Given this, it is not appropriate or proportionate to apply the lesser sanction of a deposit order instead of strikeout.[33]Therefore, all of the claims are hereby struck out under rule 38 Employment Tribunal Rules of Procedure 2024. The claims are hereby dismissed. Approved by