Pettigrew v Revenue and Customs (INCOME TAX/CORPORATION TAX : Payment by employer : settlement of litigation) [2018] UKFTT 240 (TC)

“[1] [Mr O'Brien] is a retired barrister. He also held part-time judicial office as a recorder appointed under s 21 of the Courts Act 1971, as amended. He claims to be entitled to a pension in respect of his part-time non-salaried judicial work. The case raises questions of domestic law about the status and terms of service of part-time non-salaried judges in England and Wales. They include chairmen and members of tribunals and others exercising judicial functions for remuneration. It also raises important questions of EU law as to which, having sought a preliminary ruling under art 267 of the Treaty on the Functioning of the European Union (OJ C83/47 30.3.2010) ('the TFEU'), the court has now received guidance from the Court of Justice of the European Union. … [5] On 9 June 2005 Mr O'Brien wrote to the Department of Constitutional Affairs requiring that he be paid a retirement pension on the same basis, adjusted pro rata temporis, as that paid to former full-time judges who had been engaged on the same or similar work. He was informed by the Department in its reply dated 5 July 2005 that he fell outside the categories of judicial office holder to whom a judicial pension was payable. This was because the office of recorder was not a qualifying judicial office under the 1993 Act, and because there was no obligation to provide him with a pension under European law as he was an office-holder, not a worker. [6] Mr O'Brien was not satisfied with the reasons he was given. On 29 September 2005 he started proceedings in the employment tribunal in which he claimed among other things that he was being discriminated against because he was a part-time worker. …”

“[10] The effect of the questions that were referred, and of the ruling in response to them, is to divide the issues raised by Mr O'Brien's case into two parts. Firstly, there is the worker issue: whether the relationship between judges and the Ministry of Justice is substantially different from that between employers and persons who fall to be treated in national law as workers. The principles to which the Court of Justice refers are of general application. So although the argument was directed to the position of recorders like Mr O'Brien, the issue is of interest to all part-time judges, not just recorders. Secondly, there is the objective justification issue: whether the difference in treatment of part-time judges is justified by objective reasons. The answer to this issue may differ from one kind of non-salaried part-time judge to another. …”

“Further to my email of yesterday we have received a number of queries and complaints (nearly 50 so far) about TSol's [ie Treasury Solicitor’s Department’s] request for supporting evidence of your non pension claims to TSol; and complaints that TSol have not acknowledged receipt. TSol are slow at responding because they have well over 1,500 claimants to deal with. They will however respond to everyone but it may take time. Please also bear in mind that TSol are only going to pay out on these claims because they are being forced to by this litigation. As with any litigation, claimants have to provide supporting evidence in respect of any claim. If you do not provide them with this information then TSol may not pay. Please do not therefore call or email us to complain about the MoJ's stance. It is extremely time-consuming for us, there is nothing we can do about it and the tribunal is on the MoJ's side in this respect.  … If you do not have complete records or supporting evidence then you should just send them as much as you have. You will then have to wait for the MoJ's response in July as to which claims they accept and which ones they believe will require determination by the tribunal.”

“Further to the recent advices received from my Solicitors, Browne Jacobson, I am writing to enclose details of my claim for underpayments of training fees and daily rates for sitting and other work as a Fee-paid Chairman of Employment Tribunals/Employment Judge.  Please find enclosed ·         Statement summarising personal information ·         Statement of Sitting, Training and other working days ·         Calculation of Claim”

“I write in respect of your claim received by the Judicial Pay Claims team from the Treasury Solicitors on 30th June 2014; I have now had the opportunity to assess your claim and calculated your entitlement as £55.045.42. This letter constitutes a formal offer of that sum in full and final settlement. This offer comprises the following:  Compensation in respect of Non Pension payments Training days. You claimed compensation in respect of all training days undertaken from the 7th April 2000 where only a half day fee was originally paid to you. The records held by the MOJ, which includes data from the Watford Employment Tribunal and the MOJ payment agent, Liberata, show a total of 44 training days were undertaken during this period up until the end of 2013.   As you were incorrectly paid a half day fee for those dates, when you should have been paid a full days fee, the offer contains the balance between what you were paid and what you should have been paid for each year. Sitting days. You claimed compensation in respect of all sitting days undertaken from the 7th April 2000 where fee paid Employment Tribunal Judges were underpaid in relation to the salaries of salaried Employment Tribunal Judges.   The records held by the MOJ which includes data from the Employment Tribunal and the MOJ payment agent, Liberata, and those records received from yourself, show a total of 1,308.5 sitting days/writing days were undertaken during this period up until the end of 2013. As you were paid the incorrect daily fee for those dates, the offer contains the balance between what you were paid and what you should have been paid for each year. London Weighting: You claimed compensation for London Weighting.  London Weighting is a £4,000 annual supplement for Group 7 salaried judges and is only applicable to those who work in London. Fee paid judges are eligible to a pro rata amount of London Weighting based on the number of sittings you sat, and only for the years where you sat at eligible courts.  As a result you are eligible for a further 1,352.5 sitting and training days at the daily London Weighting rate, which is £4,000 divided by the relevant daily divisor (220 days for an Employment Tribunal Judge), i.e. £18.18 per day.   Following the assessment of this data I used the conversion spreadsheet (enclosed) which calculates the difference in the amount you were actually paid and the amount that you should have been paid as a fee paid Employment Tribunal Judge each year, which amounts to £55,045.42. Please note that an interest like element of compensation hasbeen included in this sum based on the Preston index rate, which is the method of interest that has been agreed with the claimant solicitors in the Employment Tribunal Litigation. Please note that the MOJ Judicial Pay Claims team is only obliged to make you an offer based on less favourable treatment post 7th April 2000 and prior to 31st December 2013. In your claim, any under payment/less favourable treatment after 2nd January 2014 is being dealt with separately from this process by HMCTS and the Judicial College. If you accept this offer please confirm in writing to [MoJ] confirming your address, your bank details, your payroll number and national insurance number and I will arrange payment to you. If you reject this offer please set out your reasons to the above email address and be prepared to supply the Ministry with evidence as to why you feel unable to accept this offer.  This offer will be taxed in accordance with HMRC rules. Payments in relation to sitting days, training, sick absence, London Weighting and Statements of Reason will be subject to PAYE and National Insurance payments. Payments in relation to a payment in lieu of a pension will be subject to PAYE. Tax will not be paid on the interest on this amount. Any issues you have with the tax treatment being applied to your offer should be made with your local HMRC office.”

“Whilst I have noted the comments you have made in respect of the payment you received from the Ministry of Justice by way of compensation under the Part-time Workers (Prevention of Less Favourable Treatment) Regulations 2000, I am writing to inform you that all the correspondence relating to these payments has now been reviewed by a HMRC Specialist Officer. I have been advised HMRC views the payment made as making good an accepted past entitlement, and the amounts making up the aggregate payment (if paid at the correct time) would have been chargeable to tax as employment income by virtue of being general earnings from the employment. Therefore, the amount of the corrective payment is chargeable to tax and NICs as employment income.”

“The key point at issue that you raise is whether the lump sum payment of £55,045.42, (of which £6,186.32 was classed as interest), received by you from your employer, as detailed on your payslip dated 18 November 2014 is compensation or employment income, specifically earnings. Employment income is charged to tax under the provisions of Part 2 Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003), all future references to sections in this letter refer to ITEPA 2003 unless specified otherwise. Section 6(1)(a) provides that the charge to tax on employment income under Part 2 is a charge to tax on “general earnings" and section 7(3)(a) states that "general earnings” means earnings within Chapter 1 of Part 3, which consists only of section 62. Section 9(2) provides that the amount charged to tax is the net taxable earnings (calculated in accordance with the formula given by section 11 (1)) from an employment in the year. Consequently, an amount is chargeable to tax as employment income by virtue of being earnings from an employment if it is within the meaning of "earnings", given by section 62 ITEPA 2003, and is from an employment. Section 62(2)(b) states that “earnings” in relation to an employment means any gratuity or other profit or incidental benefit of any kind obtained by the employee if it is money or money's worth. As you clearly received money the critical issue, is whether that payment is "from an employment". There is a long line of case law authority regarding the matter of whether a payment is derived "from an employment" albeit stated in terms of the previous terminology of "emoluments therefrom". Many of the cases demonstrate relatively fine distinctions between payments that were held to be chargeable to tax and those that were not. In particular, Case Law authority has moved on from the classic, but perhaps simplistic, “reward for services" formulation in Hochstrasser v Mayes (38TC693).  The present position is probably best summed up by the brief observation of Lord Reid in Laidler v Perry (42TC351), where he said (at page 363):   "There is a wealth of authority on this matter, and various glosses on or paraphrases of the words in the Act appear in judicial opinions, including speeches in this House. No doubt they were helpful in the circumstances of the cases in which they were used, but in the end we must always return to the words in the Statute and answer the question - did this profit arise from the employment? The answer will be no if it arose from something else."  In Bray v Best (61TC104) Lord Oliver disposed of the “reward for services" point this way: '"In the light of those authorities, I cannot read the phrase "reward for services" as anything more than a conventional expression of the notion that a particular payment arises from the existence of the employer-employee relationship and not, to use Lord Reid's words in Laidler v Perry, from “something else”.”

"An emolument 'from employment' means an emolument 'from being or becoming an employee'. The authorities are consistent with this analysis and are concerned to distinguish in each case between an emolument which is derived 'from being or becoming an employee' on the one hand, and an emolument which is attributable to something else on the other hand. "

“I have now completed my check of your Self Assessment tax return for the year [ended 5 April 2015]. This letter is a closure notice issued under Section 28A(1)& (2) Taxes Management Act 1970. Thank you for your help during my check.   My decision Further to the explanation provided to you in HMRC's letter of 11 May 2016, briefly stated, the lump sum paid to you by the Ministry of Justice was a payment made for the performance of the duties of an Employment Tribunal judge.   The payment recognised the fact that, under the terms of the Part-time Workers (Prevention of Less Favourable Treatment) Regulations 2000, part-time employees were entitled to receive the same level of payment for work done as their full-time colleagues. Payment of the full amount should have been made at the time that the work was carried out and if this had been the case the payment would have been correctly taxed as earnings from the employment. The payment of the lump sum is therefore a payment of earnings within the meaning of section 62 of the Income Tax (Earnings and Pensions) Act 2003 and a tax liability arises accordingly. The correct total amount of pay from all employments for 2014-2015 is therefore £71,169 as shown on the P60 completed by the Ministry of Justice, and not the figure of £16,142 shown on your Self Assessment Tax Return. I have amended your tax return in line with my decision. …”

“Earnings (1)     This section explains what is meant by “earnings” in the employment income Parts. (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. …”

“That which was an emolument under prior legislation remains an emolument under ITEPA.”

“Application to offices and office-holders (1)     The provisions of the employment income Parts that are expressed to apply to employments apply equally to offices, unless otherwise indicated. (2)     In those provisions as they apply to an office— (a)     references to being employed are to being the holder of the office; (b)     “employee” means the office-holder; (c)     “employer” means the person under whom the office-holder holds office. …”

“369 Charge to tax on interest (1)     Income tax is charged on interest. … 370 Income charged (1)     Tax is charged under this Chapter on the full amount of the interest arising in the tax year. … 371 Person liable The person liable for any tax charged under this Chapter is the person receiving or entitled to the interest.”

“687 Charge to tax on income not otherwise charged (1)     Income tax is charged under this Chapter on income from any source that is not charged to income tax under or as a result of any other provision of this Act or any other Act.”

“Reg 5 Less favourable treatment of part-time workers (1) A part-time worker has the right not to be treated by his employer less favourably than the employer treats a comparable full-time worker— (a) as regards the terms of his contract; or (b) by being subjected to any other detriment by any act, or deliberate failure to act, of his employer. (2) The right conferred by paragraph (1) applies only if— (a) the treatment is on the ground that the worker is a part-time worker, and (b) the treatment is not justified on objective grounds. … Reg 8 Complaints to employment tribunals etc. (1) Subject to regulation 7(5), a worker may present a complaint to an employment tribunal that his employer has infringed a right conferred on him by regulation 5 or 7(2). … (7) Where an employment tribunal finds that a complaint presented to it under this regulation is well founded, it shall take such of the following steps as it considers just and equitable— (a) making a declaration as to the rights of the complainant and the employer in relation to the matters to which the complaint relates; (b) ordering the employer to pay compensation to the complainant; (c) recommending that the employer take, within a specified period, action appearing to the tribunal to be reasonable, in all the circumstances of the case, for the purpose of obviating or reducing the adverse effect on the complainant of any matter to which the complaint relates. … (9) Where a tribunal orders compensation under paragraph (7)(b), the amount of the compensation awarded shall be such as the tribunal considers just and equitable in all the circumstances (subject to paragraph (8)) having regard to— (a) the infringement to which the complaint relates, and (b) any loss which is attributable to the infringement having regard, in the case of an infringement of the right conferred by regulation 5, to the pro rata principle except where it is inappropriate to do so. (10) The loss shall be taken to include— (a)    any expenses reasonably incurred by the complainant in consequence of the infringement, and (b)   loss of any benefit which he might reasonably be expected to have had but for the infringement. (11) Compensation in respect of treating a worker in a manner which infringes the right conferred on him by regulation 5 shall not include compensation for injury to feelings. (12) In ascertaining the loss the tribunal shall apply the same rule concerning the duty of a person to mitigate his loss as applies to damages recoverable under the common law of England and Wales or (as the case may be) Scotland. (13) Where the tribunal finds that the act, or failure to act, to which the complaint relates was to any extent caused or contributed to by action of the complainant, it shall reduce the amount of the compensation by such proportion as it considers just and equitable having regard to that finding. …”

“… the issue turns … upon whether the fact of employment is the causa causans, or only the sine qua non of benefit.”

“If an emolument is not paid as a reward for past services or as an inducement to enter into employment and provide future services but is paid for some other reason then the emolument is not received ‘from the employment’.”

“Any part of the settlement that can reasonably be attributed to discrimination occurring before the termination should be accepted as not being employment income as it is not “connected” with the termination. However, where the compensation relates only to the consequences of the termination itself, no apportionment will be appropriate. For example, if the compensation is for loss of future earnings (after termination) it is all connected with the termination and Section 401 ITEPA 2003 applies even though the discrimination brought about the termination. If, by contrast, the compensation is for injury to feelings and there was discrimination before termination, then any part of that compensation that is not connected with the termination will not be within Section 401 ITEPA 2003.”

“The payment of the lump sum is therefore a payment of earnings within the meaning of section 62 of the Income Tax (Earnings and Pensions) Act 2003 and a tax liability arises accordingly.”

“In addition to the payment of arrears of £48,859.10, you also received an additional payment to compensate for the fact that your earnings were paid late. Your 18 November 2014 payslip shows this amount as 'Interest Payment £6,186.32'. This payment is not actually interest but is interest-like and calculated as if it were interest. It is taxable in principle as miscellaneous income in the year it is paid. It is not a payment of employment income and therefore was not subject to PAYE. The amount should have been paid gross to you and then you would have been required to declare the income and pay the appropriate tax due through your Self-Assessment return.   I understand there was some confusion about these payments such that the MOJ incorrectly deducted tax under PAYE and paid the 'interest' amounts net to employees as they have in your case. The MOJ has now amended their approach to dealing with these 'interest' payments and will be paying them gross going forward.”

“[15] Henderson J … correctly observed, at [113]: 'There is no express requirement that the officer must set out or state the reasons which have led him to his conclusions, and in the absence of an express requirement I can see no basis for implying any obligation to give reasons in the closure notice. What matters at this stage is the conclusion which the officer has reached upon completion of his investigation of the matters in dispute, not the process of reasoning by which he has reached those conclusions.' He also observed (again, in my view, entirely correctly), at [115]–[116]: 'There is a venerable principle of tax law to the general effect that there is a public interest in taxpayers paying the correct amount of tax, and it is one of the duties of the commissioners in exercise of their statutory functions to have regard to that public interest. [The judge then considered changes in the tax system and continued] For present purposes, however, it is enough to say that the principle still has at least some residual vitality in the context of s 50, and if the commissioners are to fulfil their statutory duty under that section they must in my judgment be free in principle to entertain legal arguments which played no part in reaching the conclusions set out in the closure notice. Subject always to the requirements of fairness and proper case management, such fresh arguments may be advanced by either side, or may be introduced by the commissioners on their own initiative. That is not to say, however, that an appeal against a closure notice opens the door to a general roving inquiry into the relevant tax return. The scope and subject matter of the appeal will be defined by the conclusions stated in the closure notice and by the amendments (if any) made to the return.'”

“This should not be taken as an encouragement to officers of HMRC to draft every closure notice that they issue in wide and uninformative terms. In issuing a closure notice an officer is performing an important public function in which fairness to the taxpayer must be matched by a proper regard for the public interest in the recovery of the full amount of tax payable. In a case in which it is clear that only a single, specific point is in issue, that point should be identified in the closure notice. But if, as in the present case, the facts are complicated and have not been fully investigated, and if their analysis is controversial, the public interest may require the notice to be expressed in more general terms. As both Henderson J and the Court of Appeal observed, unfairness to the taxpayer can be avoided by proper case management during the course of the appeal. Similarly Dr Avery Jones observed in [D’Arcy v RCC [2006] STC (SCD) 543 (at [13])]: 'It seems to me inherent in the appeal system that the tribunal must form its own view on the law without being restricted to what the Revenue state in their conclusion or the taxpayer states in the notice of appeal. It follows that either party can (and in practice frequently does) change their legal arguments. Clearly any such change of argument must not ambush the taxpayer and it is the job of the commissioners hearing the appeal to prevent this by case management.'”

“[61] There will be cases where a conclusion in a closure notice could be supported by more than one possible reason. That is unaffected by the new provisions. It is therefore quite possible that a reason for a conclusion other than those which originally motivated that conclusion may come to the fore during or after the review. Where this happens after the review it may make the review process, and the taxpayer's opportunity to make representations, otiose in the context of that new reason. The remedy, however, lies in the tribunal's case management powers, and in the obligation of the inspector to be helpful in his closure notice and to set out as precisely as possible his conclusions. We do not find that these new provisions cast much light on the issue before us in the present case. [62] In summary we derive the following principles from the legislation and case law to which we have referred:  (1)     An appeal to the FTT in such a case as this is brought against 'an amendment of a company's return' which is required to give effect to conclusions stated in a closure notice. (2)     The scope of the appeal is defined by and confined to the subject matter of the enquiry, the conclusions and amendments (if any) in the closure notice. An appeal does not permit HMRC to launch a new roving enquiry into a tax return.  (3)     It is the HMRC officer's conclusions/amendments in the closure notice which matter, and not the process of reasoning which has led to them.  (4)     The officer does not need to give reasons for his conclusions.  (5)     The officer has a duty to make the closure notice as helpful to the taxpayer as is possible or appropriate in the circumstances.  (6)     The FTT has jurisdiction to entertain legal arguments which have played no part in the officer's reasoning for the conclusions in the closure notice; any element of ambush or unfairness must be avoided by proper case management.  (7)     It is a matter for the fact finding tribunal (the FTT) to identify the subject matter of the enquiry, the conclusions and, therefore, the appeal.  (8)     In determining these matters the context is relevant and may include, in addition to the subject matter of the enquiry and the contents of the closure notice themselves, any other relevant correspondence.  (9)     In making its determination the FTT should also balance protection of the taxpayer with the public interest in the collection of the correct amount of tax.”

“In summary, three aspects of statutory interpretation are important in determining this appeal. First, the tax code is not a seamless garment. As a result provisions imposing specific tax charges do not necessarily militate against the existence of a more general charge to tax which may have priority over and supersede or qualify the specific charge. … Secondly, it is necessary to pay close attention to the statutory wording and not be distracted by judicial glosses which have enabled the courts properly to apply the statutory words in other factual contexts. Thirdly, the courts must now adopt a purposive approach to the interpretation of the taxing provisions and identify and analyse the relevant facts accordingly.”

“Less favourable treatment of part-time workers (1) A part-time worker has the right not to be treated by his employer less favourably than the employer treats a comparable full-time worker— (a) as regards the terms of his contract; or (b) by being subjected to any other detriment by any act, or deliberate failure to act, of his employer. (2) The right conferred by paragraph (1) applies only if— (a) the treatment is on the ground that the worker is a part-time worker, and (b) the treatment is not justified on objective grounds. …” (8)   The issues in Miller that are relevant to this tax appeal were included in “a wide range of issues concerning various elements of the remuneration of salaried judicial office holders which are not replicated in, or are said to be less favourable in, the terms and conditions of fee paid judges” (para 1 of Miller). In relation to sitting fees it was found (indeed, seems to have been agreed) that fee paid tribunal judges should receive a daily fee of 1/220th of the annual salary of a salaried tribunal judge (rather than the lower daily sitting fee paid by MoJ): “Following the O'Brien preliminary hearing the claimants were asked to specify the daily divisor for which they contended in respect of each category of judge and the respondent was asked to indicate whether it took the same point or different points in defending those contentions. The area of dispute turned out to be relatively narrow as the claimants accepted that 220 was the correct divisor for all tribunal judges.” (para 63).  In relation to training fees it was found that differential fees for fee-paid judges constituted unjustified less favourable treatment: “I start from the premise that it is now not seriously disputed that to pay two judges who attend the same training course different amounts is less favourable treatment of the one who is paid less.  If it is, it ought not to be and I shall waste no time dealing with the point.” (para 104).  On London weighting it was found that denying payment to fee-paid judges also constituted unjustified less favourable treatment: “It follows that a fee paid judge who satisfies the eligibility conditions for London weighting with regard to their principle [sic] place of work, is treated less favourably than their full time salaried comparator in the matter of London weighting which treatment cannot be objectively justified.” (para 154).  A declaration of rights was made (sch 2, and see reg 8(7)(a)); there is no express calculation of compensation and that was presumably left for the parties to discuss.  (9)   Reading the Miller judgement as a whole I consider it is clear that the Employment Tribunal considered the infringement was “as regards the terms of his contract” (reg 5(1)(a)).  On the three relevant items (sitting and training fees and London weighting) there is no suggestion that the Employment Tribunal considered a fee-paid judge was “being subjected to any other detriment by any act, or deliberate failure to act, of his employer”

“(i) Interpreting the legislation [35] Income tax on emoluments or earnings is, principally but not exclusively, a tax on the payment of money by an employer to an employee as a reward for his or her work as an employee. As we have seen from the use of the word 'therefrom' in s 19 of ICTA (para [5], above), income tax under Sch E was charged on emoluments from employment. In other words, it was a tax on the remuneration which an employer pays to its employee in return for his or her services as an employee. This concept also underpins the concept of 'earnings' in ITEPA (para [6], above) which in s 9(2) refers to 'taxable earnings from an employment' and in s 62 defines earnings in relation to an employment. Included in that definition in s 62(2)(c) is the catch-all phrase: 'anything else that constitutes an emolument of the employment'. That which was an emolument under prior legislation remains an emolument under ITEPA. What is taxable is the remuneration or reward for services: Brumby (Inspector of Taxes) v Milner, Day (Inspector of Taxes) v Quick [1975] STC 644 at 649–650, [1976] 1 WLR 29 at 35 per Lord Russell of Killowen in the Court of Appeal; [1976] STC 534 at 536, [1976] 1 WLR 1096 at 1098–1099 per Lord Wilberforce in the House of Lords. That is not in dispute.”

“The ways in which that necessary link has been described and analysed in the earlier cases does, I think, have to be respected even though the ultimate question is whether the 'from' question can be answered in the affirmative.”

“My Lords, in respect of his employment the appellant was chargeable to tax on emoluments therefrom. In addition to his salary and to his bonuses he received in each of the years in question a voucher which was worth £10. I cannot doubt that those vouchers were emoluments within the definition of that expression. That being so, they were chargeable to tax if they were emoluments from his employment. While it is clear that the appellant would not have received the vouchers had he not been a staff employee, the facts as found show that he only received the vouchers because he was a staff employee. He received them only in his capacity as a staff employee. The reason why the vouchers were distributed was that the directors wished to maintain a feeling of happiness among the staff and to foster a spirit of personal relationship between the management and staff. The directors believed that a contented staff was "a good thing in itself and likely to be of advantage to the group." The case finds that the "policy" of providing Christmas presents to the staff was followed as "one of several measures" to help to maintain and to foster the desired feelings of happiness and content. Christmas gave the occasion for the distribution of the vouchers, but on the facts as found the reasons for the distribution are to be found in the employer-employee relationship. The vouchers were not distributed to the staff workers on any individual or personal grounds nor were there any special or particular reasons which were peculiar to any of them. Though the impulses of generosity and of kindly and seasonal goodwill were not lacking, the facts as found show that there was manifested that form of gratitude which is "a lively sense of future favours." The directors were planning for good and loyal future service so that the company would prosper and be advantaged. In the result the vouchers were distributed by the employers in their capacity as employers and because they were employers: they were received by the employees in their capacity as employees and because they were employees. In these circumstances the emoluments were from the employment.”

“So, in my judgment, the approach that the court should take … is to consider the status of the payment and the context in which it was made. The payment was made to recognise the loss of rights. … The rights, the loss of which was being recognised, were rights under the employment protection legislation, and the right to join a union or other trade protection association. Both those rights, in my judgment, are directly connected with the fact of the taxpayer's employment. If the employment did not exist, there would be no need for the rights in the particular context in which the taxpayer found herself. So, I start from the position that those are rights directly connected with employment. Purely by way of contrast, to underline that approach, if for instance the employers had for some reason or other best known to themselves objected to some social or other activity which their employees or some of them enjoyed, such as joining a golf club or something of that sort (I think Lord Diplock mentioned payments in the hunting field), but whatever it is, activities not connected with the employment, then a payment made by an employer to recognise the voluntary or, indeed, the compulsory withdrawal if the employer had sufficient influence with the committee of the golf club concerned, then that I can readily acknowledge would be a payment made to a person who was an employee but was not made in the circumstances which would satisfy the words of s 181; that is that the payment must arise 'therefrom'. I only mention that analogy to emphasise the point which I seek to make. There is no doubt in this case that the employment protection legislation goes directly to the employment of the taxpayer with the employer. The right to join a union, in my judgment, also falls directly to be considered as in connection with that employment, because without the employment there is no purpose in joining the union except for esoteric or personal reasons which are not relevant in this case. But I can again see a situation in which persons involved in particularly sensitive areas of government service might be required to abandon their right of freedom of speech. In such a case, it would clearly have to be considered on the facts involved in the individual case to see whether the abandonment of that fundamental right was in fact connected and arose on the employment or not, and it would clearly differ from case to case. … This payment is rightly to be assessed under Sch E …”

“It is inevitable that if a payment is made in substitution for a payment, which might, subject to a contingency, have been payable that the nature of the payment which is made in lieu will be affected by the nature of the payment which might otherwise have been made. There will usually be no legitimate reason for treating the two payments in a different way.”

“Where, pursuant to a legal right, a trader receives from another person compensation for the trader's failure to receive a sum of money which, if it had been received, would have been credited to the amount of profits (if any) arising in any year from the trade carried on by him at the time when the compensation is so received, the compensation is to be treated for income tax purposes in the same way as that sum of money would have been treated if it had been received instead of the compensation. The rule is applicable whatever the source of the legal right of the trader to recover the compensation. It may arise from a primary obligation under a contract, such as a contract of insurance, from a secondary obligation arising out of non-performance of a contract, such as a right to damages, either liquidated, as under the demurrage clause in a charter-party, or unliquidated, from an obligation to pay damages for tort, as in the present case, from a statutory obligation, or in any other way in which legal obligations arise.”

“Employment does not have to be the sole cause but it does have to be sufficiently substantial as to characterise the payment as one from employment.”

“Indeed the entire proceedings were based on the claim, upheld by the ET at the liability hearing, that the employees had been unfairly dismissed. Nor is it artificial to treat the dismissal as having occurred. The Council, in the absence of the agreement of the employees, could not change the terms of employment so as to take away their contractual right to [the allowance]. That is why the Council terminated their contracts of employment and offered new contracts which did not contain that right.”

“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 … 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 …: 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.”

“The existence of a claim for discrimination may be relevant if the discrimination is unconnected with the termination of employment but it does not change the question to be addressed. In our view, the question remains is there the necessary connection between the payment and the termination of employment? The issue does not become whether the payment is compensation for financial loss caused by termination merely because other claims, such as for discrimination, may have been included in the settlement. We consider that, when determining whether a payment received in connection with the termination of employment falls within s 401 ITEPA there is no distinction between non-pecuniary aspects of the award, such as injury to feelings, and pecuniary aspects such as financial loss. In our view, Oti-Obihara was wrong on this point and should not be followed.”

“The Upper Tribunal reviewed the case law on the taxability issue at [25] to [42] of the UT Decision. For reasons which I need not elaborate, they convincingly explained why certain earlier decisions at Special Commissioner or FTT level had been mistaken in so far as they held, or appeared to hold, that amounts paid in connection with the termination of employment fall within the scope of section 401 only to the extent that they represent compensation for financial losses. The most influential of those cases was Oti-Obihara v HMRC [2010] UKFTT 568 (TC), [2011] IRLR 386, where the FTT had concluded that £165,000 of the £500,000 settlement payment received by Mr Oti-Obihara represented financial losses caused by the termination of his employment by a US investment bank in London, but the balance was attributable to non-pecuniary loss (notably his claim for racial discrimination) and was not taxable. As the Upper Tribunal pointed out at [38], this approach could not be supported because it ignored the clear statutory wording of section 401. The relevant question is always whether there is "the necessary connection between the payment and the termination of employment".”

“[40] The case of A [2015] concerned a race discrimination claim brought by an employee, A, against his employer, a bank. A worked as a trader in the bank from 2003. He believed that, between 2004 and 2007, he was treated less favourably than other employees in relation to salary and annual bonuses because of his race. In November 2007, A wrote to the bank setting out his grievances. At that time, redundancies were imminent because the bank had been acquired by a larger bank. The grievances were investigated but not resolved to A's satisfaction. In March 2008, A's solicitor served a questionnaire in relation to race discrimination under the former statutory procedure. Some two weeks later, the bank told A that he was to be made redundant. The bank offered A statutory redundancy pay of £1,650, an ex-gratia redundancy payment of £48,898 and an additional lump sum of £600,000 in settlement of all outstanding and potential claims. A accepted and signed a settlement agreement. [41] HMRC took the view that the £600,000 payment was taxable as earnings within s 62 ITEPA and amended A's self-assessment tax return for 2008/09. A appealed to the FTT on the ground that the sum was compensation in respect of his threatened race discrimination claim. At paras [59] and [60] of A [2015], the FTT observed that issue was a narrow one of whether the settlement payment of £600,000 compensation to settle a threatened race discrimination claim was taxable as 'earnings' within s 62 ITEPA. The FTT held that it was not. [42] The FTT noted that 'HMRC do not make any argument that the payment is in any way “in connection with” the appellant's termination of employment so as to fall within the provisions of s 401 ITEPA' as HMRC agreed that the payment to A did not fall within the section. It is not clear why HMRC did not seek to argue that s 401 applied in A [2015]. It may be because, as the FTT in that case noted at para [60], it was common ground that the £600,000 payment related to alleged discriminatory treatment during the course of A's employment. For that reason, we consider that the decision in A [2015] provides little, if any, assistance in determining the issues in this case. We note that the FTT in A [2015] did not regard Walker or Oti-Obihara as relevant to the question of how to interpret s 62.”

“81. If an Employment Tribunal were to award damages for discrimination (whether calculated by reference to earnings or whether they included injury to feelings) these are recompense for the right not to be discriminated against under statute. They are paid because the employer has breached a statutory obligation not to treat the employee in a detrimental way due to his race. They are treated in like manner to a tort claim. It could be said that where the complaint is of underpayment of remuneration that the damages would not have arisen if were not for the fact the claimant was an employee but it is clear that it is not enough. That sort of wide test of causation (a “but for” test) is insufficient (see Hochstrasse [sic] v Mayes). When we pose the question: “Why did the employee receive the payment?” the answer is not that it was in return for the employee’s services but because it has been determined that the employer has acted unlawfully by discriminating against the employee. Where damages are calculated by reference to under-paid earnings, while the discrimination may have manifested itself through the way in which the employee was remunerated, the damages arise not because the employee was under remunerated but because the under payment was discriminatory. An award in these circumstances cannot in our view be described as a reward for services. The award is paid for some reason other than the employment and is not earnings. (The extent to which the non-taxability of the damages is taken account of in determining the amount of the compensation award would of course be a matter for the Employment Tribunal making the award to determine in accordance with the relevant law.)”

“[55] We acknowledge that … there appears to be an anomalous distinction between payments of compensation for discrimination before termination, which in A [2015] were held not to be taxable as earnings under s 62 ITEPA, and such compensation paid in connection with termination which, on our view of s 401, counts as earnings. However, in our judgment, that is a consequence of such payment being deemed to be earnings by s 401. It is true that this may require an amount of compensation to be apportioned between events which occurred before and after termination so that they can be treated differently for tax purposes. But we do not consider that such apportionment would be impossible or excessively difficult. The need to carry out such an exercise does not, in our judgment, compel a different construction of the words of s 401, which are clear.”

“But in the end I think it is right to base my decision on the wording of the statute.  It is clearly not enough that the payment was received from the employer. The question is, was the payment an emolument from the employment? In other words, was the employment the source of the emolument?  It was argued by counsel for the taxpayer in the course of his cogent submissions that the rights lost by the taxpayer were mere personal rights, and that indeed, this was a stronger case from the taxpayer's point of view than the Hochstrasser case since the rights given to the employee in that case were part of a composite contract.  With respect, I find it impossible to accept this argument. As the Special Commissioners held, the rights had been enjoyed within the employer/employee relationship. The removal of the rights involved changes in the conditions of service. The payment was in recognition of the changes in the conditions of service. I have been driven to the conclusion that the source of the payment was the employment. It was paid because of the employment and because of the changes in the conditions of employment and for no other reason. It was referrable to the employment and to nothing else. Accordingly, in my judgment, the £1,000 was a taxable emolument.”

“That sum is chargeable to income tax under the miscellaneous income charging provisions in Part 5, Chapter 8 of [ITTOIA] (that is to say, s.687); alternatively as interest under Chapter 2, Part 4 of ITTOIA.”

“an interest like element of compensation has been included in this sum based on the Preston index rate, which is the method of interest that has been agreed with the claimant solicitors in the Employment Tribunal Litigation.”

“Following the European Court of Justice and House of Lords’ rulings in 2000/2001 in favour of part-timers gaining retrospective access to occupational pension schemes, provided they meet the necessary legal requirements, the Preston factors (Earnings and Interest factors) are provided for employers.  The factors are used to provide those entitled to reinstatement, an opportunity to gain pension service at no cost to them, which as far as possible makes these individuals no better and no worse off than if they had paid contributions to the scheme when they were originally employed.”

“In addition to the payment of arrears of £48,859.10, you also received an additional payment to compensate for the fact that your earnings were paid late.”

“[21] … It is therefore common ground on this appeal that statutory interest is 'interest' within the meaning of s 874 and that the administrators' argument that it is not 'yearly interest' turns on the meaning and effect of the word 'yearly'. The point is in any event concluded by authority because in Riches v Westminster Bank Ltd [1947] 1 All ER 469, [1947] AC 390 the House of Lords decided that a sum of money awarded as interest under s 3(1) of the Law Reform (Miscellaneous Provisions) Act 1934 (now re-enacted as s 35A SCA 1981) as part of a judgment sum was 'interest of money' within Sch D of the Income Tax Act 1918 so as to be payable under deduction of tax under r 21 of the All Schedules Rules of the Act. [22] The argument for the taxpayer in Riches was that the sum awarded by way of statutory interest under the 1934 Act was in reality damages for the wrongful detention of the money. The judgment had been obtained in proceedings for an account of the profits made by the deceased defendant from a sale of shares which he was contractually obliged to pay to the judgment creditor. That argument derived some support from an obiter dictum statement of Wright J in Re National Bank of Wales Ltd [1899] 2 Ch 629 at 651 but it was rejected by the House of Lords. The analysis in the speeches in the Appellate Committee is instructive and I will return to them later in this judgment when I come to the question of what constitutes 'yearly' interest. For the moment, however, the following extracts explain why a compensating payment could nonetheless be 'interest of money' for the purposes of Sch D. [23] Viscount Simon dealt with the point ([1947] 1 All ER 469 at 471, [1947] AC 390 at 398): 'Counsel for the appellant advanced a further argument that the added sum was not in the nature of “interest” in the sense of that expression in the Income Tax Acts because the added sum only came into existence when the judgment was given and from that moment had no accretions under the order awarding it. (Interest on a judgment debt is, of course, a separate matter and counsel did not challenge the view that this latter interest was subject to tax). But I see no reason why, when the judge orders payment of interest from a past date on the amount of the main sum awarded (or on a part of it) this supplemental payment, the size of which grows from day to day by taking a fraction of so much per cent. per annum of the amount on which interest is ordered, and by the payment of which further growth is stopped, should not be treated as interest attracting income tax. It is not capital. It is rather the accumulated fruit of a tree which the tree produces regularly until payment.' [24] Lord Wright (beginning [1947] 1 All ER 469 at 472, [1947] AC 390 at 399) said: 'The contention of the appellant may be summarily stated to be that the award under the Act cannot be held to be interest in the true sense of that word because it is not interest but damages, that is, damages for the detention of a sum of money due to the respondent from the appellant and hence the deduction made as being required under the All Schedules Rules of the Income Tax Act, 1918, r 21, is not justified because the money was not interest. In other words, the contention is that money awarded as damages for the detention of money is not interest and has not the quality of interest. Evershed J, in his admirable judgment, rejected that distinction. The appellant's contention is, in any case, artificial and is, in my opinion, erroneous because the essence of interest is that it is a payment which becomes due because the creditor has not had his money at the due date. It may be regarded either as representing the profit he might have made if he had had the use of the money, or, conversely, the loss he suffered because he had not that use. The general idea is that he is entitled to compensation for the deprivation. From that point of view it would seem immaterial whether the money was due to him under a contract, express or implied, or a statute, or whether the money was due for any other reason in law. In either case the money was due to him and was not paid, or, in other words, was withheld from him by the debtor after the time when payment should have been made, in breach of his legal rights, and interest was a compensation whether the compensation was liquidated under an agreement or statute, as, for instance, under the Bills of Exchange Act, 1882, s 57, or was unliquidated and claimable under the Act as in the present case. The essential quality of the claim for compensation is the same and the compensation is properly described as interest.' [25] Finally, there is Lord Simonds (beginning [1947] 1 All ER 469 at 476, [1947] AC 390 at 406): 'I come then to the second stage and ask: What is the character of interest allowed under the Act of 1833, s 28? Here the argument is that, call it interest or what you will, it is damages and, if it is damages, then it is not “interest in the proper sense” or “interest proper,” expressions heard many times by your Lordships. This argument appears to me fallacious. It assumes an incompatibility between the ideas of interest and damages for which I see no justification. It confuses the character of the sum paid with the authority under which it is paid. Its essential character may be the same, whether it is paid under the compulsion of a contract, a statute, or a judgment of the court. In the first case it may be called “interest”, and in the second and third cases “damages in the nature of interest,” or even “damages,” but the real question is still what is its intrinsic character, and in the consideration of this question a description due to the authority under which it is paid may well mislead. … Perhaps the position may become even clearer if for “damages” the word “compensation” is substituted. It would be difficult, I suppose, in a case where a man, being deprived of the use of his money, was awarded interest by way of compensation, to say that what he was awarded was not interest but something else. That is the very language of equity: cf Vyse v Foster. In that case, as James LJ, points out (L R 8 Ch App 328) the executors or trustees had committed a breach of trust by allowing trust money to remain outstanding on the personal security of persons engaged in trade. They were bound, therefore, to make good the trust funds and interest. The language that James LJ, employs is illuminating. He says (p 333): “This court is not a court of penal jurisdiction. It compels restitution of property unconscientiously withheld; it gives full compensation for any loss or damage through failure of some equitable duty; but it has no power of punishing anyone.”