Oti- Obihara v Revenue & Customs [2010] UKFTT 568 (TC)

FTT-Tax
Oti- Obihara v Revenue & Customs
[2010] UKFTT 568 (TC) · 2010-11-15
[1]This is an appeal by Mr Chidi Anthony Oti-Obihara (“the Appellant”) against an amendment by The Commissioners for Her Majesty’s Revenue and Customs (“the Commissioners”) by way of closure notice of the Appellant’s self-assessment tax return for the tax year ended 5 April 2006.[2]In summary the issue between the parties is as follows. The Appellant was employed by a US investment bank in London. In the course of his employment the Appellant claimed that he was subject to racial discrimination and harassment, and, after internal grievance procedures had been applied, eventually instituted proceedings against his employer before the employment tribunal. Before the matter came to a hearing at the employment tribunal the Appellant negotiated a settlement with his employer, whereby his employment was terminated, he waived all legal claims he might have against his employer, and he received a settlement sum of £500,000, which his employer paid after deducting income tax of £103,400. The Appellant did not include the payment of £500,000 in his self-assessment tax return on the grounds that it was not income from his employment nor a payment received in connection with the termination of his employment.[3]The closure notice issued by the Commissioners on 15 September 2009 amended the Appellant’s self-assessment tax return to the following effect: £28,000 of the payment of £500,000 was treated as damages for injured feelings and therefore not taxable; the balance was treated as a payment received in connection with the termination of the Appellant’s employment, and therefore subject to income tax (except for the first £30,000, which was free of tax). The closure notice requires the Appellant to pay a further £72,192.54 of income tax (that is, in addition to the tax withheld by the employer), giving the Appellant a total income tax liability of £175,592.54 in relation to the settlement payment of £500,000 he received.[4]In his appeal, the Appellant argues that of the settlement payment, only £18,206.40 is a payment in connection with the termination of his employment (this sum is arrived at by reference to the amount of his annual salary and his contractual notice period), with the balance representing a payment of damages for racial discrimination and harassment, which is not liable to income tax. He argues that since the amount of the employment termination payment is less than £30,000 it is free of tax, so that he is entitled to recover all the tax withheld by the employer, and the closure notice should be amended to the effect that no further tax is payable.[5]I have to decide how much of the settlement payment is properly regarded as a payment in connection with the termination of the Appellant’s employment (and therefore chargeable to income tax, subject to the £30,000 exemption).[6]It is my decision that the sum of £165,000 is properly regarded as a payment in connection with the termination of the Appellant’s employment, and that accordingly the sum of £135,000 is chargeable to income tax. The Appellant’s self-assessment return should be amended accordingly with, if the figures so require, recovery by the Appellant of any excess tax withheld by his employer. The relevant statutory provisions[7]The legislation which applies to this appeal is shortly stated, and is found in the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA 2003”).[8]Section 6(1) ITEPA 2003 provides, “ The charge to tax on employment income…is a charge to tax on (a) general earnings…”. For these purposes both “employment income” and “general earnings” mean “ earnings within Chapter 1 of Part 3” .[9]Section 62 ITEPA 2003 provides:
“(1) This section explains what is meant by “earnings” in the employment income Parts [ that is, including Chapter 1 of Part 3 ]. (2) In those Parts “earnings”, in relation to an employment, means – (a) any salary, wages or fee, (b) any gratuity or other profit or incidental benefit of any kind obtained by the employee if it is money or money’s worth, or (c) anything else that constitutes an emolument of the employment.”
[10]Since payments made on the termination of a person’s employment are not salary or other emoluments of the employment, they are brought within the income tax charge by special provision. Section 401 ITEPA 2003 provides (so far as relevant to this appeal):
“(1) This Chapter applies to payments and other benefits which are received directly or indirectly in consideration or in consequence of, or otherwise in connection with – (a) the termination of a person’s employment … by the person….”
[11]The charge to income tax in the case of such a termination payment is provided in section 403 ITEPA 2003, which also provides exemption from tax for the first £30,000 of such a payment:
“(1) The amount of a payment or benefit to which this Chapter applies counts as employment income of the employee or former employee for the relevant tax year if and to the extent that it exceeds the £30,000 threshold.”
There are detailed rules to determine the £30,000 threshold, for example where there are termination payments from associated employers, but none of those rules are applicable in this appeal.[12]Finally, it is necessary to make brief reference to paragraph 37 of the Income Tax (Pay As You Earn) Regulations 2003: this provision requires that where a former employer makes a payment to a former employee in respect of the former employment and that payment is made after the employment has ceased, then the former employer must deduct tax at the basic rate when making the payment. The evidence and the findings of fact[13]In evidence before me was an agreed bundle of documents comprising the closure notice and self assessment return in dispute; correspondence between the Appellant and the Commissioners; and documents relating to the Appellant’s employment, his complaints to his employers as to racial discrimination and harassment, the grievance process undertaken by his employers, his applications to the employment tribunal, the compromise agreement between the Appellant and his employers under which the payment of £500,000 was made, and various emails from his employers relating to that agreement. The Appellant prepared a witness statement, and at the hearing gave further evidence, including in cross-examination by Miss Parslow on behalf of the Commissioners.[14]The following are my findings as to the facts in this case:(1) The Appellant is of West African origin.(2) On 9 February 2004 the Appellant began employment in London with Morgan Stanley International Inc. (“Morgan Stanley”) as a second year associate in their Fixed Income Division, a position which required him to work on the trading floor at Morgan Stanley.(3) Morgan Stanley is a US investment bank with its headquarters in New York and a substantial operation in London.(4) The terms of the Appellant’s employment entitled him to a base annual salary (fixed at £60,000 as at February 2004), a one-off “sign-on payment” of the sterling equivalent of $20,000 should he remain employed for a period of one year, and the right to be considered for an annual discretionary bonus quantified by reference to his performance and conduct and also the profitability of Morgan Stanley, such bonus to be paid provided the Appellant remained employed at the end of Morgan Stanley’s fiscal year.(5) For the year ended 5 April 2005 the Appellant received gross remuneration of £88,039.26, which included a year-end bonus of approximately £20,000.(6) The Appellant was entitled to no more than three months’ notice by Morgan Stanley to terminate his contract of employment.(7) The Appellant ceased to be employed by Morgan Stanley on 26 August 2005. At that time his base annual salary was £72,816. He received no discretionary bonus for the year in which he ceased to be employed.(8) In June 2004 a new manager was appointed to the business in which the Appellant worked. The Appellant asked this manager to introduce him to a wider range of colleagues on the trading floor, and at a meeting for that purpose the manager introduced the Appellant to those colleagues as their “new slave”. The Appellant was the only African working on the trading floor.(9) The Appellant felt degraded and humiliated by this incident. He reported it immediately to the human resources department at Morgan Stanley, and the matter was taken up by the company’s chief operations officer in London, who gave the Appellant reassurances that there would be no repetition of such an incident. The distress suffered by the Appellant as a result of this incident resulted in his taking leave of absence, with Morgan Stanley’s consent, for two weeks.(10) At the end of June 2004 the Appellant was sent on a training course to Morgan Stanley’s head office in New York for three months. During that period the Appellant received mentoring from an Afro-American senior colleague in the head office.(11) On his return to his position in London the Appellant found that his standing with certain of his colleagues had been undermined by the “slave” reference. He was either ignored or abused. In particular, he was regularly referred to by one junior colleague using an explicit and deeply offensive obscenity related to the Appellant’s African origins. On one occasion the Appellant was physically insulted, a matter which he subsequently reported to the police. All these matters were reported to his manager.(12) The Appellant sought legal advice from a law centre, and he was advised that he should request that his complaints be dealt with in a formal grievance procedure by Morgan Stanley and that, if the matter were not dealt with to his satisfaction by that process, he should begin proceedings before the employment tribunal claiming racial discrimination.(13) During this time the Appellant sought the possibility of transferring his job within Morgan Stanley, including the possibility of moving to a different office. Within the area of business where the Appellant worked there were reorganisations which led to discussions of redundancy, but the Appellant was taken out of this process in anticipation that he would be transferred to another job within the bank. Such a transfer did not in fact happen.(14) Before the formal grievance process was carried out, and before the Appellant began proceedings in the employment tribunal his manager discussed with the Appellant his intentions to appeal to the employment tribunal. The manager urged that any grievance process should be kept confidential within the bank, and intimated that the Appellant might jeopardise his promotion prospects if the matter came before the employment tribunal. The manager expressed the view that Morgan Stanley would offer financial compensation to the Appellant for the discriminatory and other incidents if the matter could be resolved internally by agreement, suggesting a possible sum of $1 million as compensation. At that time (early 2005) the sterling/dollar exchange rate was such that the sterling equivalent of $1 million was approximately £500,000. These matters were communicated to the Appellant in conversation only.(15) In March 2005 the Appellant requested that his grievances be formally dealt with. That process (including an internal appeal) continued until July 2005. The grievances complained of related to a number of issues including the redundancy process, appraisals and work management. It also dealt with the incidents claimed by the Appellant as racial discrimination and harassment. The racial complaints were upheld, but in the formal decision resulting from the grievance process those conducting the process considered that the “slave” remark was more likely to have been intended to place the Appellant in the hierarchy of the business group than to have been a reference to his racial inferiority. The decision records that the Appellant had indicated to the grievance panel that this was his view. The grievance panel also upheld the complaint that the offensive and racially-based expletive had been used in the presence of the Appellant, but that they had not seen any evidence that it was directed specifically to the Appellant. The grievance panel did not uphold the complaint about the alleged assault, accepting that the incident took place but deciding on balance that it was accidental rather than deliberate.(16) Upon legal advice from the law centre which the Appellant consulted throughout this process, the Appellant appealed to the employment tribunal whilst the grievance process was taking place, lodging his complaint with the tribunal on 1 June 2005. The Appellant claimed constructive dismissal, racial discrimination, victimisation and harassment, setting out the history of the incidents in which he had been involved. Pursuant to those proceedings on 16 June 2005 the Appellant submitted a questionnaire to Morgan Stanley under the Race Relations Act 1976.(17) Whilst the grievance process was taking place, the Appellant was advised by his mentor in New York that Morgan Stanley, as an institution, was very concerned about its reputation in the field of discrimination, following a high profile class action in the New York courts by certain of its female traders in the course of which very substantial damages had been awarded against the bank.(18) Following the end of the grievance process, when the Appellant made it clear that he was dissatisfied with the outcome and would continue his proceedings in the employment tribunal, Morgan Stanley and their lawyers began negotiations with the Appellant. The basis of those negotiations was that Morgan Stanley would pay the Appellant £500,000 if he agreed to withdraw his claim before the employment tribunal and all other claims he might have against Morgan Stanley.(19) Concurrently, the Appellant and Morgan Stanley began a mediation process in respect of the complaints made by the Appellant and the Appellant’s dissatisfaction with the grievance process. This process ended without resolution in early October 2005.(20) The Appellant lodged a further complaint with the employment tribunal on 3 October 2005, claiming that he was constructively dismissed on 26 August 2005 as a consequence of the unreliable and biased nature of the grievance process and the decisions of the grievance panel.(21) On 5, 10 and 12 October 2005 the Appellant made formal grievance complaints to Morgan Stanley in New York.(22) On 18 October 2005 Morgan Stanley and the Appellant entered into a Compromise Agreement drafted by Morgan Stanley’s lawyers. The Compromise Agreement runs to twelve pages, and the key provisions relevant to this appeal are as follows: (a) It is recorded that the Appellant’s employment with Morgan Stanley ended on 26 August 2005; (b) The agreement records all the grievance proceedings (UK and US) raised by the Appellant and the various proceedings begun in the employment tribunal. (c) Morgan Stanley agrees, without admission of any liability, to pay the Appellant £500,000 (“the Settlement Payment”) “…as compensation for the termination of the [Appellant’s] employment and in satisfaction of all Claims in respect of the termination of the [Appellant’s] employment, including the [employment tribunal claims] and those other Claims set out in clause 3”. (d) In Clause 3 the Appellant accepts the Settlement Payment in full and final settlement of his employment tribunal and grievance claims, “and all and any Claims of any kind whatsoever or however arising, whether under common law, statute or otherwise and whether arising in the United Kingdom or in any other country in the world…which [the Appellant] has or may have against [Morgan Stanley]…”. There follows a list of statutes (expressed to be without limitation) under which the Appellant may have claims against Morgan Stanley, which claims the Appellant treats as settled in consideration of the Settlement Payment. That list of statutes runs to some twenty-six lines of text, covering a comprehensive range of United Kingdom and United States employment, anti-discrimination and civil rights legislation.(23) The Settlement Payment was paid by Morgan Stanley to the Appellant on 26 October 2005. £30,000 was treated as not liable to income tax, and a deduction at the basic rate of income tax was made by Morgan Stanley in relation to £470,000 of the Settlement Payment (a deduction of £103,400).(24) On 29 October 2009, in an email reply to the Appellant in connection with this appeal, the executive director of the legal and compliance department of Morgan Stanley’s London office wrote:
“I can confirm that [the Appellant] brought an Employment Tribunal claim for Racial Discrimination against Morgan Stanley which was settled under the terms of a Compromise Agreement. Morgan Stanley accepted no liability.”
The submissions of the parties[15]For the Appellant, Mr Thompson argued that for the Settlement Payment to be taxable under section 410 ITEPA 2003 it must be a payment which is in connection with the termination of the Appellant’s employment. Whilst a small portion of the Settlement Payment, that which relates to the Appellant’s notice period, can be said to relate to the termination of the employment, it is self-evident that by far the greater part relates to the discrimination and harassment claims which the Appellant had made since June 2004 and the injury to the Appellant’s feelings as a result of such incidents: there is no way in which the amount of the payment can be related to the financial loss of the Appellant on the termination of his employment. There was not sufficient connection between the greater part of the Settlement Payment and the termination of the employment.[16]The Appellant relied on the decision of the Employment Appeal Tribunal in the case of Orthet Ltd v Vince-Cain (2004) IRLR 857 , which decides that when an award of damages is made in respect of injury to feelings occurring during the course of the employment, section 6 ITEPA 2003 does not apply, since the award is not made in respect of the employee’s acting as employee, nor does section 401 ITEPA 2003 apply since the payment is not related to the termination of the employment. In the present case there had been discussion of the Appellant’s discrimination claims, and of a large financial settlement in relation to such claims, well before there was any question of the Appellant’s employment being terminated. As evidenced by the October 2009 email from Morgan Stanley, in Morgan Stanley’s mind the Settlement Payment related to a racial discrimination claim, not an employment termination claim.[17]The Appellant’s total period of employment was just over one year and seven months. A termination payment for such a period of employment would not exceed the sum due for the notice period of three months, which in the Appellant’s case amounted to £18,206. The balance of the Settlement Payment was related to the discrimination and harassment claims which were unrelated to the termination of the employment and is therefore outside the income tax charge.[18]For the Commissioners, Miss Parslow acknowledged that, to the extent that any part of the Settlement Payment comprised damages for injury to the Appellant’s feelings as a consequence of discrimination, then that is not taxable under section 6 ITEPA 2003, nor is it taxable under section 401 ITEPA as a termination payment even if it is paid on the occasion of the termination of the employment contract.[19]However, the case of Vento v The Chief Constable of West Yorkshire Police [2002] EWCA Civ 1871 gives guidance that, in proceedings before an employment tribunal, compensation awards for injury to feelings for discrimination (as opposed to awards for pecuniary loss) should not normally exceed £25,000, even in the most serious cases of discrimination. In the present case the Commissioners had been prepared to allow that £28,000 of the Settlement Payment had been in respect of injury to feelings arising out of discrimination (the maximum figure specified by the Court of Appeal in the Vento case, adjusted for inflation). The burden is on the Appellant to show that a larger sum is justifiable in his case.[20]The Commissioners also rely on the case of Walker v Adams (HM Inspector of Taxes) 2002 SpC 344, a decision of the Special Commissioners in Northern Ireland, which held that where the taxpayer’s employment was terminated through religious discrimination, and subsequently the taxpayer was awarded compensation under anti-discrimination legislation in the Province for loss of income, he was taxable under what is now section 401 ITEPA 2003 on that payment, but not for the compensation he received for injury to feelings.[21]In the present case the Commissioners challenged the Appellant’s evidence (which was unsupported by any written evidence) that he had been offered compensation for discrimination before there was discussion of the termination of his employment. The better analysis, in their submission, was that much of the Settlement Payment was received by the Appellant in respect of discrimination which was the cause of the termination of his employment and therefore was in connection with such termination and in consequence within the section 401 ITEPA 2003 charge. Decision[22]As noted, by virtue of section 401 ITEPA 2003 an individual is liable to income tax on any payment he receives where such payment is received directly or indirectly in consideration or in consequence of, or otherwise in connection with the termination of his employment. The dispute in this case concerns how much of the Settlement Payment was so received by the Appellant. For convenience I refer to a payment falling within section 401 ITEPA 2003 as an employment termination payment.[23]The Commissioners accept that at least part of the Settlement Payment (£28,000 in their estimation) was received by the Appellant as damages for injury to his feelings as a result of racial discrimination (and as such is not taxable), but they argue that the balance can only have been received in connection with the termination of the Appellant’s employment (and as such is taxable). They correctly point out that the burden is on the Appellant to prove, on the balance of probabilities, his case that a greater portion of the Settlement Payment was not an employment termination payment.[24]The Commissioners argue that a compensation payment made for discrimination may be taxable within section 401 ITEPA 2003, and they refer to and rely upon the case of Walker v Adams (HM Inspector of Taxes) . In that case the taxpayer agreed to leave his employment in circumstances which amounted to a constructive dismissal based on religious discrimination. He received a severance payment from his employer based on his contractual notice period which was taxed, without dispute, under the predecessor provisions to section 401 ITEPA 2003. The taxpayer was employed in Northern Ireland, and there is legislation in the Province which enables an employee who has suffered religious discrimination to apply to a tribunal for an award of compensation (payable by the employer) in respect of the discrimination. The tribunal made such an award to the taxpayer, which was specified as an award of £12,500 for injury to the taxpayer’s feelings, and £63,946 for future net income loss (after credit for the severance payment received) and loss of pension rights.[25]The question for the Special Commissioner was whether any part of the compensation paid as a result of the tribunal’s award was taxable under what is now section 401 ITEPA 2003. It was held that although the compensation was paid for the infringement of the statutory rights enjoyed by the taxpayer not to be discriminated against in the workplace (and not pursuant to a contractual entitlement), the discrimination had caused the termination of the taxpayer’s employment, which in turn had caused the financial losses recompensed by the tribunal award of £63,946. It was therefore the case that the compensation of £63,946 was a payment received directly or indirectly in connection with the termination of the taxpayer’s employment, and as such taxable under the employment termination payment provisions. The award of £12,500 for injury to the taxpayer’s feelings was not taxable under the employment termination payment provisions.[26]Thus a compensation payment made by an employer to an employee for discrimination is taxable under those provisions if the discrimination is the cause of the termination of the employment, and then only to the extent that the compensation meets financial loss caused by the termination of the employment.[27]The Appellant was in protracted dispute with his employer, Morgan Stanley, in relation to matters which in themselves did not relate to, or constitute, actual termination of the Appellant’s employment, namely claims made by the Appellant that he was humiliated and harassed by comments and actions of Morgan Stanley employees which were racially-motivated and therefore discriminatory. Those claims were first made in June 2004, some four months after the Appellant began his employment with Morgan Stanley and some fourteen months before the Appellant’s employment terminated on 26 August 2005. In time those claims resulted in Morgan Stanley’s London office applying its extensive grievance procedure to assess the validity of the claims, and in further time the Appellant, upon advice, pressed his claims more vigorously by beginning proceedings in the employment tribunal and (after his employment had been terminated but before the Settlement Payment had been agreed) by lodging a grievance complaint with Morgan Stanley’s head office in New York.[28]In this protracted dispute there is no evidence that, until the later stages, the question of the termination of the Appellant’s employment was an issue – on the contrary, both parties were intent on the Appellant remaining employed, so that he was first sent to New York for three months, he was not included in the redundancy process when changes were made to his work group, and there was discussion about his being transferred to another office. It appears that it was only when the Appellant began proceedings in the employment tribunal, in early June 2005, that the question of constructive dismissal was raised. Thereafter matters did proceed in a trajectory which resulted in the termination of the Appellant’s employment and the subsequent negotiation of the Compromise Agreement in which the Appellant withdrew all his various claims in consideration of Morgan Stanley making the Settlement Payment.[29]The Appellant’s evidence is that his manager at Morgan Stanley discussed the possibility of a compensation payment of $1 million before the grievance procedure was initiated and before the question of constructive dismissal arose in order to deal with the matter confidentially and in the context of the continuing employment of the Appellant. Whilst there is no evidence beyond the word of the Appellant that such a discussion took place, I see no reason to doubt that evidence: as I mention below, an employer such as Morgan Stanley would be very mindful of its reputation in an area such as this, and would, no doubt, be eager to settle claims promptly and perhaps even generously in its desire to act responsibly and perhaps also in its desire to keep the matter from public airing.[30]Despite these factors, I do not accept the Appellant’s argument that the discrimination suffered by him was unrelated to the termination of the employment. Matters may have developed over a period exceeding a year, and initially both the Appellant and Morgan Stanley may have intended that any discrimination should be dealt with in the context of continuing employment. That proved not to be possible, and the Appellant eventually claimed in his appeal to the employment tribunal that he had been constructively dismissed. In due course that led to an agreed termination of the employment. The Appellant and Morgan Stanley had each lost trust in the other such that the relationship of employer and employee could no longer be sustained. This was so because the Appellant claimed his position was untenable because of the alleged discrimination and his feeling that his case had not been fully acknowledged in the grievance process. But for that the employment would not have been terminated.[31]If the nexus between the discrimination and the termination of the employment is established, the Walker case shows that a compensation payment made on the occasion of the termination of employment for discrimination is taxable to the extent that it is compensation for financial loss suffered by reason of the termination of the employment – only to that extent is a payment received in connection with the termination of the employment. Any other amount received by reason of discrimination represents compensation for the infringement of the right not to be discriminated against, not compensation for the termination of the employment. In the Walker case that distinction was clearly made in the terms of the relevant tribunal award. In the present case there is no comparable award, and we have to look at such evidence as there is to discern such a distinction.[32]It is to the Compromise Agreement that we need to turn as the primary document and evidence to determine what, at least as between the parties, the Settlement Payment was made for. Its relevant terms are summarised in paragraph 14(22) above.[33]According to Clause 2.3 of the Compromise Agreement, the Settlement Payment was paid for three purposes:(i) as compensation for the termination of the Appellant’s employment;(ii) in satisfaction of all Claims (as defined) in respect of such termination, including the Appellant’s claims made in employment tribunal proceedings; and(iii) in satisfaction of the other Claims itemised in Clause 3. The Claims in Clause 3 are possible claims arising in the United Kingdom or in any other country, and, particularly, under an extensive list of United Kingdom and United States specific statutory provisions relating not only to employment, but also to anti-discrimination and civil rights.[34]It is clear, therefore, that the Settlement Payment is in part made in connection with the termination of the Appellant’s employment, but it is also in part made in relation to claims the Appellant had, or might have had, for violations by his employer of a number of rights of the Appellant which were additional to those connected with the termination of his employment.[35]There is nothing in the Compromise Agreement which in any way apportions the Settlement Payment as between, on the one hand, the employment termination payment (that is, compensation for financial loss arising from the termination) and, on the other hand, damages or other compensation for infringement of rights which do not represent financial loss arising from the termination. The only evidence which the Appellant was able to give at the hearing as to the way in which the parties reached the figure of £500,000 was that it was the approximate sterling equivalent of the figure of $1 million raised with him some months earlier, and it was agreed to stick with that sum, notwithstanding that the exchange rate had moved adversely to the Appellant (i.e. at the time of the Compromise Agreement the sterling equivalent of $1 million was materially in excess of £500,000).[36]To have a sense of making such an apportionment on a reasonable basis we have to look to the wider context, which is what both the parties attempted to do in arguing their respective cases, although they approached the task from opposite directions.[37]The Commissioners’ approach was to take a figure which they considered was a reasonable amount of damages for injury to feelings resulting from discrimination, being £28,000, and then to argue that the balance of the Settlement Payment, £472,000, must be an employment termination payment. The figure of £28,000 they take from what one might call the tariff for such payments stipulated by the Court of Appeal in the Vento case.[38]For the reasons I give below, I consider that the Commissioners have approached this question from the wrong direction. But even if this approach were in principle correct, the figure of £28,000, in the context of this case, is largely irrelevant, for the following reasons.[39]First, the tariff set out by the Court of Appeal is by way of guidance in the case of awards made by employment tribunals, and as such does not directly relate to payments negotiated by parties (although it will, of course, influence what the parties agree if employment tribunal proceedings are the only background to their negotiations).[40]Secondly, in its decision the Court of Appeal makes it clear that if the case warrants aggravated damages, then such damages must be assessed by reference to the particular circumstances of the case, and such damages are outside the tariff (see [2002] EWCA Civ 1871 at [67]).[41]Thirdly, and significantly, in this case the Appellant made racial discrimination and harassment claims against a United States employer which might have resulted in his receiving damages payable under United States legislation had the matter been dealt with in the New York courts. In the list of particularised legislation included in Clause 3 of the Compromise Agreement prepared by Morgan Stanley’s lawyers, the United States legislation is a significant component. The Appellant had not commenced action against Morgan Stanley in the New York courts, but he had lodged a formal grievance complaint at the New York head office, indicating, no doubt, that he was not prepared to have the matter adjudicated solely in London.[42]Fourthly, and again significantly, the employer in this case may well have been motivated to make a generous settlement to protect its reputation and to maintain privacy, having regard to other discrimination claims to which apparently it had been subject in the United States. In this regard it is relevant that the Appellant’s manager at least could talk in terms of a $1 million compensation payment solely to compensate the Appellant for the alleged discrimination at a time before termination of the employment was an issue (so that such a payment was not discussed in the context of assessing the Appellant’s financial loss on termination of the employment).[43]The Appellant’s approach was to take a figure which represented the loss arising from the termination of the employment and to argue that that amount (£18,206) is taxable as an employment termination payment, with the balance being compensation for discrimination and other infringements of rights not relating to financial loss flowing from the termination of the employment.[44]In my judgment the Appellant’s approach is in principle the correct one, even if his conclusions on the numbers cannot be upheld. His approach is correct because it is necessary for the purposes of section 401 ITEPA 2003 to identify whether a payment is received in connection with the termination of the employment, so that the proper starting point is the amount which can be identified as such a payment and not, as the Commissioners have approached this case, the amount which can be shown as being for some other purpose.[45]The Appellant argues that since he was contractually entitled to not more than three months’ notice to terminate his employment, only a sum equal to three months’ pay at his basic salary rate is the portion of the Settlement Payment representing his financial loss on termination of his employment. That is too narrow a view in this case.[46]It is reasonable to assume that in any negotiations for a settlement payment in a case such as this the employer would recognise that the dismissal brought about by his acts of discrimination could result in the employee being out of comparable work for a period beyond his mere notice period. This may be especially so in the relatively restricted employment “marketplace” of City traders, where there is undoubtedly fluidity of movement between jobs, but also where, however unfairly, there may be some reluctance on the part of an employer to engage as an employee someone who has left his previous employment by reason of claims of discrimination. Without the benefit of evidence, which was not available in this case, it is not possible to be exact, but in my judgment it would be reasonable to assume that for someone in the Appellant’s position, with under two years of service, a payment representing loss of earnings for a period of eighteen months would form part of a settlement agreement. Such a settlement would take into account not just basic salary, but an estimate of the bonus which might be anticipated in a situation where an annual bonus is discretionary but in reality an expected and significant part of the total remuneration package. The Appellant’s employment offer letter shows that he enjoyed certain benefits in kind, including membership of Morgan Stanley’s life assurance and medical insurance plans, and that he also participated in the bank’s UK group pension plan. The value of these benefits for the eighteen-month period would also form part of a settlement which it is reasonable to assume would be negotiated in circumstances such as this.[47]Applying this to the Appellant’s situation we can arrive at the following calculation: his basic annual salary at the date his employment ceased was £74,000; in the previous year he had received a bonus of approximately £20,000, but it is reasonable to assume that, had he continued in employment, his advancement would have merited an increased bonus, say £25,000; the annual value of the employer’s contribution to his pension plan would have been in the order of £7,000; and the annual value of his benefits in kind in the order of £4,000. This gives an annual total figure of £110,000, and, for an eighteen-month period, £165,000. In my view it is therefore reasonable to conclude that of the Settlement Payment of £500,000, £165,000 can be apportioned to compensation for financial loss resulting from the termination of the Appellant’s employment by reason of the discrimination he claimed, and that such amount is the payment he received in connection with the termination of his employment. That amount (less the deduction of £30,000 provided for in section 403 ITEPA 2003) is the amount which is chargeable to tax under section 401 ITEPA 2003 in the Appellant’s case.[48]The corollary of this is that the balance of the Settlement Payment (£335,000) is outside the income tax charge. That might be seen as a large amount by way of settlement for non-pecuniary loss as a result of alleged discrimination and harassment. However, this case has to be seen in its particular and untypical circumstances. For the reasons I have already given, namely the Appellant’s likely rights under United States legislation and the employer’s likely concerns as to its reputation and privacy in a matter such as this (see paragraphs 41 and 42 above) a settlement payment out of the ordinary magnitude (at least in a purely UK context) might not be quite so surprising. In support of that view I note the evidence to the effect that compensation of an amount equating to the whole of the Settlement Payment was discussed in general terms with the Appellant in relation to his claims when both parties were contemplating that his employment would continue. I also note Morgan Stanley’s email summary of the matter given to the Appellant in his preparation for this appeal (see paragraph 14(24) above): too much weight should not be attached to what was likely to have been a quick and brief email reply, but it is perhaps indicative of the significance which Morgan Stanley attached to the situation that they refer to the Appellant’s claim for racial discrimination rather than to his claim for constructive dismissal.[49]I need to deal briefly, for completeness, with two further points. As mentioned at the outset, the general income tax charge on employment earnings arises under section 6 ITEPA 2003. The Commissioners have not suggested that any part of the Settlement Payment should be taxed under that provision, and they are right in holding that view: there is no question of the Settlement Payment comprising “earnings” for the purposes of the income tax charge. Secondly (and again the Commissioners have not suggested otherwise) it is in my view immaterial to the question as to the true nature of the Settlement Payment that the employer in this case deducted basic rate tax from the whole of the Settlement Payment (other than the first £30,000) when paying it to the Appellant, applying to that payment regulation 37 of the PAYE Regulations of 2003. They did so, no doubt, from an abundance of caution in circumstances where there was no analysis of the nature of the payment when agreeing the Settlement Payment, leaving it to the Appellant to argue with the Commissioners the true nature of the payment.[50]I leave it to the parties to make the necessary amendments to the Appellant’s self-assessment return and, if necessary, to take the procedural steps required to repay to the Appellant any excess income tax withheld, so as to give effect to my decision that the sum of £135,000 is chargeable to income tax under section 410 ITEPA, the parties having leave to apply to the tribunal should that be necessary to determine these matters finally. Right to appeal[51]This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice. EDWARD SADLER TRIBUNAL JUDGE RELEASE DATE: 15 November 2010

Cited in 6 later judgments