MR W J MARSHALL v KVAERNER E & C UK LTD [2001] UKEAT 1506_00_2305

EMPLOYMENT APPEAL TRIBUNAL

BAILII case number: [2001] UKEAT 1506_00_2305

Case No Appeal No. EAT/1506/00

Venue 58 VICTORIA EMBANKMENT, LONDON EC4Y 0DS

Between

MR W J MARSHALLAPPELLANT

KVAERNER E & C UK LTDRESPONDENT

Before

Sir Christopher Bellamy

Date 23 May 2001

[1]APPEARANCES For the Appellant MR C DARTON (of Counsel) Messrs Gray Purdue Wellesley House 202 London road Waterlooville Hants PO7 7AN SIR CHRISTOPHER BELLAMY QC This is an appeal by Mr W J Marshall against the decision of an Employment Tribunal sitting at Southampton, the summary reasons for which were sent to the parties on 15 September 2000. The appeal comes before us today by way of an Ex Parte Preliminary Hearing in order to determine whether the Notice of Appeal discloses a reasonably arguable point of law. It is, of course, only if there is such a point of law that this Appeal Tribunal has jurisdiction to determine the appeal.

[2]As a preliminary matter a point of procedure arises. The Notice of Appeal is dated 24 October 2000 and it was pointed out to the Appellants by the Appeal Tribunal by letter of 27 October 2000 that the appeal was being brought on the basis of summary reasons whereas under the relevant rules of this Tribunal the appeal should be brought on the basis of extended reasons. A request for extended reasons made to the Employment Tribunal was however refused on 2 November 2000 on the grounds that that request was out of time.

[3]We have before us today equally an appeal dated 23 October 2000 against that refusal to supply extended reasons. Under the relevant practice direction of this Appeal Tribunal we have discretion to hear an appeal on summary reasons only. That is at paragraph 2(2) of the Practice Direction ( Employment Appeal Tribunal Procedure) 1996 . It is accepted in the present case that the summary reasons do set out very fully the finding of the Tribunal of the point at issue. It is further accepted that this appeal can be properly determined on the basis of the summary reasons. We are therefore prepared in principle to hear the appeal on the basis of the summary reasons.

[4]The Appellant's claim before the Employment Tribunal was on the basis of a wrongful deduction from wages contrary to Section 13 of The Employment Rights Act 1996 . That Section provides:

"1 An employer shall not make a deduction from wages of a worker employed by him unless – (a) the deduction is required or authorised to be made by virtue of a statutory provision or a relevant provision of the workers contract, or (b) the worker has previously signified in writing his agreement or consent to the making of the deduction. 2 In this section "relevant provision", in relation to a worker's contract, means a provision of the contract comprised – (a) in one or more written terms of the contract of which the employer has given the worker a copy on an occasion prior to the employer making the deduction in question, or (b) in one or more terms of the contract (whether express or implied and, if express, whether oral or in writing) the existence and effect, or combined effect, of which in relation to the worker the employer has notified to the worker in writing on such an occasion."

In this particular case the relevant contractual documents before the Employment Tribunal are not in fact signed by the Applicant and it is not established whether or not he ever signed the documents signifying his agreement in writing to the deductions concerned within the meaning of Section 13(1)(b). We think it highly unlikely in the circumstances of this case that the Applicant would have undertaken the assignments in question – which I will describe in a moment – without any written acknowledgement of the terms upon which he was doing so, but it is unnecessary to take that point any further for today's purposes.

[5]The question that arises, in effect, is whether the deductions concerned are made by virtue of a relevant provision of the worker's contract within the meaning of Section 13(1)(a) of the Act. In this particular case there is no dispute that the Applicant in fact undertook the relevant assignments to which the documents to which I will come in a moment refer, and that the deductions in question were in fact made. So, the question is, in effect, what was the contract between the parties, and did that contract authorise the deductions in question?

[6]The issue turns on the deduction by the Respondents, Kvaerner E & C UK Ltd, of what is described as 'Notional United Kingdom Tax'. The way the Tribunal puts its findings at paragraphs 6-12 of the decision is as follows:

"6 The Applicant was employed by the Respondent as a senior project control engineer. In or about May 1997, the Applicant commenced an assignment in Georgia and Azerbaijan, working on a pipeline project. The terms of the assignment are set out in two letters, both dated 12 May 1997, one of the letters setting out the details of the assignment and another explaining the basis upon which net overseas pay was to be calculated. Under the terms of the letters, the Respondent would deduct from the Applicant's earnings a sum which was equivalent to the amount of UK income tax which would have been deducted from the Applicant's basic salary had UK income tax been payable. The Respondent also became responsible for all overseas taxes on the full amount of the remuneration. 7 It has been explained by the Respondents and it is part of their case that the scheme was designed to give employees an element of certainty as to the taxes they would have to pay when working overseas. It is intended to equalise earnings between employees working in different countries on the same project under different overseas tax regimes. The deduction of hypothetical UK tax was not dependent upon any actual liability to either UK or overseas tax. 8 It is the Applicant's case that since he doesn't have any UK tax liability for the period in question that the amount deducted as hypothetical tax should have been refunded to him. It is his argument that the letters of assignment that form the basis of the contract between the parties make no provision to the effect that the hypothetical tax will not be refunded and as a result it is the Applicant's case that in failing to refund the amount deducted, the Respondents have made an unlawful deduction. The Respondent's case is simply that under the terms of the contract they were entitled to make the deduction, a matter which is not in dispute and that under the terms of the contract there was no provision for a refund to be made either express or implied."

The Tribunal then goes on at paragraph 10:

"10 If there is any doubt as to what is properly payable to a worker the Tribunal must resolve that doubt in order to determine properly whether an unlawful deduction within the meaning of Section 13 has been made. In determining whether a sum of wages was properly payable Tribunals are required to adopt the same approach as other civil courts in a contractual action. [What] we are required to do in a case of this type is to consider the evidence very carefully, including of course any documentary evidence, and then decide what the amount is properly payable to the Applicant and having decided the amount properly payable we must then go on to ascertain whether or not there has been an unlawful deduction. 11 We have been taken to the letters of assignment which form the basis of the contract between the parties. We make the finding that there is no express provision providing for the refund of the amount deducted in respect of a hypothetical tax. We note in particular that in each case the letters of assignment were accompanied by notional tax calculations. We take those notional tax calculations to be an important part of the letters of assignment. The letters of assignment spell out the reason why the hypothetical income tax is being deducted. The notional tax calculations go one step further and provide in our view clarification beyond doubt as to what is to happen in the event of an employee accepting the assignment that is being offered. In particular of course it sets out the gross pay, any additional payments that are due, any deductions that will be made from that salary and of course at the end of the day, importantly, what the net pay will be. The Respondents wish to equalise, so far as it is possible, the pay received by employees doing similar jobs in different parts of the world and for that reason they have introduced this hypothetical tax system. 12 We have looked in vain for any express provision which provides for the refund of this hypothetical deduction. Similarly we find ourselves unable to find any implied grounds for refunding the amount deducted under the hearing of hypothetical tax deduction. In those circumstances it is our unanimous decision that there has not been an unlawful deduction from the Applicant's wages and the complaint is dismissed."

[7]We have been taken to the documents in question and I shall refer first to the documents to which the Tribunal itself refers, which are the documents concerning the assignment in Georgia and Azerbaijan. Those consist of two letters dated 12 May 1997. The first letter begins with the following words:

"The Company has pleasure in offer you an overseas assignment in Azerbaijan/Georgia, subject to the following conditions:" and at (c): "

Your signed agreement to abide fully to the terms and conditions of this Agreement which includes the supporting letter on taxation which shall also be signed by both parties prior to mobilisation." Paragraph 4 of the letter deals with remuneration and points out that the Applicant is entitled to his UK Base Salary plus an Overseas Premium of 80% of that salary. It goes on at paragraph 4.2:

"The overseas salary will be paid in sterling, monthly on the third to last working day of each calendar month, into a bank nominated by you within the sterling area. It will be subject to Hypothetical UK tax deductions, and Class 1 National Insurance Contributions (see supporting letter)"

The supporting letter to which reference is made is equally dated 12 May 1997 and reads as follows, under the heading, 'Re: Taxation':

"The Company has adopted the principle of hypothetical income tax which it applies in the computation of employees' net overseas salary. Details of the calculation of your net overseas salary are attached. UK hypothetical tax will be applied to your UK basic salary. The overseas uplift, bonus and overtime payments will be free of such deductions . Income tax arising in the host country will be administered by the Company and where those taxes exceed the amount calculated from your salary under the hypothetical tax principle the Company will agree to settle these. Under the current United Kingdom tax legislation, persons working overseas for a period in excess of 365 days, receive the 100% overseas deduction, meaning they should not be liable to pay UK income tax on income arising from that employment. EARLY DEMOBILISATION UK income tax assessment which will arise as a result of a premature termination of the overseas assignment, for any reason, remains the employee's sole liability, as does the breaching of the rules on non-residency from the UK. However, in such an event you should advise our Payroll manager of the details of the UK assessment you may receive in relation to our assignment. From the detail the Company will review the assessment in line with any double tax agreement which may exist between the United Kingdom and the host country, making any information available to Her Majesty's Inspector of Taxes host country income tax paid which may influence the UK liability. Please confirm your acceptance of the contents of this letter which are to be read in conjunction with your Overseas Service Agreement dated 12 May 1997."

To that letter are attached two hypothetical tax calculations for Azerbaijan and Georgia respectively. Those indicate that the deductions that are to be made from the overseas salary include an item that is described as 'notional tax provision' as well as other deductions for National Insurance and other matters. At the bottom of the calculations there is a figure that indicates something called "monthly notional tax provision".

[8]That assignment of the Applicant to Georgia and Azerbaijan apparently continued until June 1999 and there is a letter before the Tribunal of 1 June 1999 indicating that the contract is at an end, stating that the overseas salary would be paid up to 22 May and the Applicant would revert to his UK salary and that he has exhausted all accrued overseas leave. There is nothing in that letter concerning any settlement of accounts, as it were, regarding the repayment of the notional tax liability deducted in accordance with the documents I have just set out. It does not appear that in relation to the Georgia assignment the Applicant ever asked for a settling of accounts prior to the claim that he made against the employers after termination of his China contract which was made in or about the beginning of March 2000.

[9]We have then also been taken to documents relating to a further assignment that the Applicant undertook for his employers in China and that is under letters dated 4 June 1999. That assignment apparently came to an end in February 2000, a few days before the date envisaged. The letter itself dealing with the assignment is dated 4 June 1999 but the accompanying letter relating to taxation is dated 7 June 1999. These matters are not in fact referred to by the Employment Tribunal but for completeness we have taken them into account anyway. The letter of 7 June 1999 which was written to the Applicant reads as follows:

"This letter serves to describe your taxation position during your assignment to China. The Company will indemnify you from any overseas income taxes which may become payable on your overseas remuneration related to this assignment. The Company will be responsible for the administration of any payment of any overseas taxes as they fall due relating to this assignment. The Company has adopted the principle of hypothetical tax which it applies in the computation of employees' net overseas salary. Details of the calculation of your net overseas salary are attached. Hypothetical tax will be applied to your UK basic salary, any overseas uplift, bonus and overtime payments will be free of such deductions. Under the current United Kingdom tax legislation persons working overseas for a period including a complete fiscal year (6 th April – 5 th April) may be eligible for non resident status. This means they should not be liable to pay UK income tax on income arising from that period of employment. In the event that your employment with the Company should terminate, this host country indemnity will cease to apply from the date of such termination. The settlement of any UK or overseas tax liabilities which may arise will become your sole responsibility from the date of termination, and any hypothetical tax deductions in excess of overseas taxes paid to that date will be refunded to you."

Then under the heading Premature Demobilisation, the letter goes on:

"Any liability for UK income tax which may arise as a result of premature demobilisation or the breaking of the non-residency rules remains the sole liability of the employee. In such an event you should advise our Payroll Manager of the details of any UK assessment you receive in relation to your assignment. The Company will review the assessment in line with any double taxation agreement which may exist between the United Kingdom and the host country, making information available to HMIT in respect of any overseas income taxes paid which may influence the UK liability. Should such a situation arise, the Company reserves the right to recover retrospectively any outstanding UK tax that may be due on your overseas earnings in respect of this assignment. In this respect any hypothetical tax deductions in excess of overseas taxes paid to the date of demobilisation will be utilised towards the settlement of any UK tax liability."

That letter is equally accompanied by hypothetical tax calculations that are along the same lines as those for Azerbaijan and Georgia and refer to notional tax provisions monthly and notional tax provisions are made by way of deduction.

[10]The principal argument that has been put before us today by Mr Darton, who has very clearly and persuasively presented the Appellant's case, is that, read as whole, those contractual documents do not sufficiently clearly set out what the deductions are to be for the purposes of Section 13 of the Act. In particular he submits that an objective observer could reasonably have thought, as the Applicant in fact did, that there would be a refund of the notional UK tax deducted if in fact it turned out that there was no liability to UK taxation. It is said that the documents do not explain to the employee clearly enough the terms and effect of the deduction. They do not explain clearly that there will be no refund if there is in fact no liability to UK tax and they leave open to a reasonable observer the inference that the money will effectively be refunded. There is no sufficient explanation of the policy and in particular the references to what will happen in the event of premature demobilisation, such as the reference on the second page of the letter regarding China where the Company "reserves the right to recover any outstanding UK tax in the event of premature demobilisation", and states that any hypothetical tax deductions will be put towards settling that UK tax liability, leave open the inference that refunds will be duly made. That is the essence of the argument. It is perhaps fair to point out that, according at least to the Tribunal's decision, the Applicant's case before the Tribunal was that there should be a refund on the basis that he had no liability to UK tax and the amount deducted as hypothetical tax should have been refunded to him, that is at paragraph 8 of the Tribunal's decision. However, in the submissions today it has been said that the Applicant's subjective expectation was not that he would have the whole of the UK tax liability refunded to him, but that he would have refunded to him the difference between the deduction for the hypothetical UK tax liability and any overseas tax that had in fact been paid on his behalf by the employers. That was apparently the kind of arrangement that had existed between the Applicant and a previous employer in the same line of business as the Respondents in this case.

[11]We have given very full weight to the arguments presented to us today but we have come to the conclusion that we must reject them. Our primary task is to assess whether the Tribunal has made an error of law or has reached a conclusion that no reasonable Tribunal properly directing itself could have reached on the evidence before it. Taking particularly into account the finding of fact that the Tribunal makes as regards the letter of assignment at paragraph 11 of the decision we have been unable to identify any relevant error of law. It seems to us that the contractual documents, notably the letters of 12 May 1997, very fully set out that there is to be deducted from the Applicant's overseas salary a certain sum which is described as "notional tax provision". It is quite clear that that sum was in fact deducted and that the Applicant knew that that sum was going to be deducted. It would therefore appear in accordance with the contractual documents and in accordance with Section 13(1)(a) of the Act that the deduction in question was authorised to be made by a relevant provision of the worker's contract within the meaning of that Section.

[12]The question then arises as to whether there was any ambiguity in the authorisation of that deduction or whether there was some term of the contract whereby the sums in fact deducted should be repaid in the event that no UK tax fell due or that there was a relevant difference between the amount of tax paid by the employer in the overseas country concerned and the amount of notional tax deducted from the Applicant's salary. On those points we agree, first of all, with the finding by the Employment Tribunal that there is no basis in the documents from which one can find provision for the refund of the hypothetical deduction in question. As the Tribunal correctly states in paragraph 12 of its decision:

"One looks in vain for any express provision which provides for the refund of the hypothetical deduction."

The Tribunal went on to find that it was unable to identify any implied grounds for refunding the amount deducted under the heading of 'hypothetical tax deduction'. We find ourselves equally unable to identify any basis for saying that it was impliedly part of the agreement between the parties that this deduction described as 'deduction for hypothetical tax' was in fact refundable. In our view, it is neither here nor there as to whether there was any actual liability in this particular case to either UK or overseas tax; the simple situation is that this was a deduction that was agreed to, as far as we can see, very clearly, by the Appellant.

[13]We would observe, contrary to the argument that has been put before us, that so far as the matter is dealt with in the documents expressly at all, there is an express provision for the possible refund of this notional tax deduction in the event of premature termination of the contracts in question. That appears in the contractual document relating to China, to which we refer, at page 43 of our bundle, where the Company expressly says that in settling any UK or overseas tax liabilities in the event of premature demobilisation any hypothetical tax deductions in excess of overseas taxes paid to that date will be refunded, and that similarly, on the following page, hypothetical tax deductions in excess of overseas taxes paid will be used towards settlement of any UK liability arising in the event of premature demobilisation. That strongly suggest to us that in circumstances other than premature demobilisation no refund of this sum of money is contemplated as between the parties.

[14]As regards the ambiguity argument we take the view that it is clear from these documents that there is a deduction to be made and that the documents sufficiently make it plain for the purposes of Section 13(1)(a) of the Act what that deduction is to be. If the Applicant is to establish that there was some unexpressed term of the contract, either that the deductions would automatically be refunded, in which event it is not clear exactly why the deductions were being made in the first place, or that the difference between the UK notional tax deducted and the overseas taxes in fact paid by the Company would be refunded, if such a term were to be part of the contract, it is, in our judgment, up to the Applicant to establish that and to show us that the contrary conclusion by the Tribunal was incorrect in law. Reading the documents as a whole we have come to the conclusion that the Applicant is unable to establish that inference and accordingly we cannot detect any error of law in the Tribunal's decision. It follows therefore that this appeal will be dismissed and for good order's sake it follows also logically that the appeal against the refusal to give extended reasons is formally dismissed as well, although as I say we felt able to fully deal with this matter on the basis of the summary reasons.