Murphy v Revenue & Customs (NCOME TAX - dispute with Metropolitan Police concerning over-time payments) [2020] UKFTT 461 (TC)

FTT-Tax

Murphy v Revenue & Customs (NCOME TAX - dispute with Metropolitan Police concerning over-time payments)

[2020] UKFTT 461 (TC) · 2020-02-05

[49]The issue on this appeal is whether the payments constituted "earnings from an employment": see s.9(2) ITEPA. It is conceded that they were "earnings" as defined in s.62(2) if they were from the employment. On that basis, they were clearly an "other profit or incidental benefit" or an "emolument" …. 50. What constitutes an emolument or other benefit from an employment has been the subject of judicial analysis for almost 100 years. As Mummery LJ has explained in his judgment, our task is to apply the statutory test to the facts found and not to apply some other test based on a gloss: see e.g. Hochstrasser v Mayes [1959] 38 TC 673 per Lord Radcliffe at p. 707. But some gloss is inevitable because it is accepted that it is not enough merely to show that the payment was received as an employee and would not have been received if the individual had not been an employee. Something more must be established. This has been expressed in terms of the difference between causa sine qua non and causa causans [3] but it does, on any view, require a sufficient causal link to be established between the payment and the employment.

[51]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. Neill LJ in Hamblett v Godfrey [1986] 59 TC 694 at p. 726 G-H describes those explanations as valuable and authoritative. And what the cases, I think, show is that the question of taxability involves one being able to characterise the payment as one "from employment" if it derives "from being or becoming an employee" and is not attributable to something else such as a mark of esteem or a desire to relieve distress. I take this formulation from Lord Templeman in Shilton v Wilmshurst [1988] 64 TC 78 at p. 105 G-I because this is how the words "from employment" were construed and that decision is, I believe, binding on us in that respect. The same test was adopted by Lord Reid in Laidler v Perry [1966] 42 TC 351 at p. 363 and by Lord Kilbrandon in Brumby v Milner [1975] 51 TC 583 at p. 614.

[52]It must follow from this that, in order to satisfy the s.9 test, one must be able to say that the payment is from employment rather than from a non-employment source. This has certainly been the approach of the courts in most of the decided cases, examples of which are:(i) Viscount Simonds in Hochstrasser v Mayes at p. 705/706 "often difficult to draw the line and say on which side of it a particular case falls";

(ii) Lord Wilberforce in Brumby v Milner at p. 612 "not an easy question to answer";

(iii) Lord Diplock in Tyrer v Smart

[1979] STC 34

at p. 36 c-d: "determination of what constitutes his dominant purpose"; and

(iv) Carnwath J in Wilcock v Eve [1994] 67 TC 233 at p. 232A: where there is more than one operative cause "there is an element of value judgment in deciding on which side of the statutory line the payment falls".

[53]This process of evaluation requires the fact-finding judge to make findings of primary fact based on the evidence as to the reasons and background to the payment and then to apply a judgment as to whether the payment was from the employment rather than from something else. To this extent, I agree with the appellants so far as they submit that having determined the causes of the payment that process of characterisation must then follow. The interpretation of the words "from employment" by the House of Lords in the cases referred to makes that an inevitable step in answering the statutory question. Although this is the only question (see Russell LJ in Brumby v Milner at p. 608), it still has to be answered.”46. There are two more authorities with which I should deal.

47. The first is a decision of this Tribunal in A v Revenue and Customs Commissioners

[2015] SFTD 678

(Judge Raghavan and Ms O’Neill). The employee believed that he had been less favourably treated by his employer in terms of salary and annual bonuses because of his ethnic origin. The employee raised these issues with his employer and eventually agreed to an additional lump sum of £600,000 under a compromise agreement. HMRC considered that the £600,000 payment was chargeable to tax as earnings under section 62 ITEPA. The Tribunal held that where damages were calculated by reference to underpaid earnings, while the discrimination may have manifested itself through the way the employee was remunerated, the damages arose not because the employee was under-remunerated but because the underpayment was discriminatory. An award in those circumstances could not be regarded as a reward for services. The award was paid for some other reason than employment and was not earnings. The Tribunal held at [81]:

“It could be said that where the complaint is of underpayment of remuneration that the damages would not have arisen if it 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 Hochstrasser (Inspector of Taxes) v Mayes [1959] 3 All ER 817 , [1960] AC 376 ). 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 underpaid 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 underpayment 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.)” 48. I think this case is an example of where the taxpayer successfully established that the true source of the payment was not from his employment but from a non- employment source i.e. a breach of his statutory rights. 49. The second authority is the decision of the High Court in Eagles v Levy 19 TC 23. In that case the taxpayer brought an action in the High Court in respect of unpaid remuneration from his position as managing director. The action was settled upon the terms that £45,000 was to be paid by the employer to the taxpayer. The Inland Revenue assessed the taxpayer on the payment of £45,000 as employment income. The taxpayer argued that the payment of £45,000 was an agreed sum to cover his claim for remuneration and his costs and expenses and that the amount of those costs and expenses was not assessable to income tax. The General Commissioners found in favour of the taxpayer, reducing the assessment by the amount of the taxpayer’s costs, although the basis on which they did so was unclear. Finlay J examined what was said to the High Court in respect of the settlement (at page 31): “[Counsel for the employer:] We propose to pay him a sum of £45,000 to include everything…. But [the parties] have now come to what I hope your Lordship will think is the most sensible and proper arrangement; that is to pay that sum to [the taxpayer] and on those terms to put an end to all the proceedings. The sum of £45,000 is a comprehensive sum; there are no costs on either side of the matter.” 50. Finlay J, allowing HMRC’s appeal, said (at page 31): “It seems to me that, when one reads that, one sees that it is quite definite that there is a sum of £45,000 and that, as plainly as possible, costs are excluded from that so as to form no part of it. After all, one cannot entirely neglect this aspect of the matter. If now I were to hold that £5000 or £6000, or whatever it was, was costs of the action, that would mean that the directors pro tanto were paying the costs. That seems to me to be exactly what great pains were taken to prevent. I think, therefore, accepting as I do accept - and this point is the only point which gives me the least difficulty - the test which [counsel for the taxpayer] put to me, and taking, as I do, the view that this was a question of fact upon which, if there was evidence, the Commissioners were entitled to find, I arrive at the conclusion that on the materials before them they could arrive only at one conclusion, which is that this £45,000 did not to any extent represent costs but, on the contrary, was a sum from which costs were, with rather meticulous care, excluded. It therefore results that I am unable to think that the decision of the Commissioners can be supported on either of the grounds, on one of which they must be taken to have made it, and the appeal of the Crown is allowed.”

Discussion 51. The issue in this case is whether the payment of the Success Fee and Temple’s insurance premium, using the language of Lord Reid in Laidler v Perry , arose from Mr Murphy’s employment or from something else. 52. In my judgment the payment of those amounts arose from Mr Murphy’s employment. It seems to me that the terms of the Settlement Agreement make this plain. 53. The definition of “Settled Claim” makes it clear that the Claimants were bringing a claim in respect of unpaid allowances and overtime, to which they claimed they were entitled, against their employer. Had the MET paid the allowances in the first place, it was not disputed that those payments would have constituted taxable earnings. Clause 3.1 provides that the Principal Settlement Sum of £4.2 million plus Agreed Costs (the aggregate amount being referred to as the Global Settlement Sum) was paid in full and final settlement of the Settled Claim. 54. The definition of “Agreed Costs” in clause 1 provided that it covered the legal costs (including disbursements) plus VAT of the Claimants’ solicitors and the legal costs plus VAT of the Claimants’ Counsel incurred by the Claimants in the Dispute (as described in the Recital to the agreement), as assessed by the Court or as agreed with the Defendant. It was common ground that the sum payable in respect of Agreed Costs was not taxable as earnings - it was paid in respect of “something else” i.e. the costs incurred in the action. 55. Clause 8.1 of the Settlement Agreement stated that:

“Other than the Agreed Costs, the Parties shall each bear their own legal costs in relation to the Dispute and this agreement.” 56. The effect of clause 8.1, it seems to me, is that the Principal Settlement Sum of £4.2 million did not include a payment in respect of costs. Instead, it constituted a payment in settlement of the claim for unpaid allowances and overtime which, as I have said, would have been taxable earnings if they had been paid in the first place. 57. Thus, this case closely resembles the facts in Eagles v Levy . In that case the £45,000 paid to the taxpayer was, as Finlay J found, expressly agreed not to include costs. In the present case, as I have said, the effect of clause 8.1 is that the Principal Settlement Sum of £4.2 million similarly did not include costs. 58. I think it follows, therefore, that the amount of £4.2 million was derived from Mr Murphy’s employment and not, as Lord Reid to put it, “from something else.”

The payment of £1.2m under clause 3.3(a) represented employment income which was paid away in the discharge of Mr Murphy’s (and the other Claimants’) liability to JMB and Mr Davies under the Damages-based Agreement. 59. I appreciate that clause 8.1 did not apply to Temple’s insurance premium. Nonetheless, I do not read the Settlement Agreement as meaning that the amount of £4.2 million was paid, at least in part, in respect of the insurance premium or in respect of costs. As I read clause 3.3, which provided for the way in which the Global Settlement Sum should be paid, it simply set out an order of priority in which (and clarified to whom) the sums therein mentioned should be disbursed. It did not, in my view, alter the underlying character of the amounts of money being paid by the MET to or for the account of the Claimants. 60. Furthermore, I do not think my conclusions are altered by appeals to “substance”. I recognise and accept that the question whether Mr Murphy received earnings within the meaning of section 62 ITEPA is one of substance rather than form, as Viscount Simonds held in Hochstrasser. Nonetheless, I think that the Settlement Agreement, as I have analysed it above, did indeed represent the substance of the arrangement between the MET and the Claimants, including Mr Murphy. 61. Finally, although many of the older authorities referred to emoluments being derived “from” the employment, section 62(2)(c) refers to emoluments “of” an employment. It was not suggested to me, rightly in my view, that anything turned on this minor difference in wording. In any event, section 9(2) provides that the amount of general earnings to be charged to tax is the net taxable earnings “ from an employment” in the year, putting the matter beyond doubt. 62. For these reasons, the appeal is dismissed. Right to apply for permission to appeal 63. 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. GUY BRANNAN TRIBUNAL JUDGE Release date: APPENDIX Terms of Settlement Agreement The material provisions of the Settlement Agreement were as follows:

“ 1. DEFINITIONS AND INTERPRETATION … Agreed Costs : the legal costs (including disbursements) plus VAT of the Claimants’ solicitors being Simons Muirhead & Burton [the “Firm”] and the legal costs plus VAT of the Claimants’ Counsel being Jonathan Davies, incurred by the Claimants in the Dispute, as assessed by the Court or as agreed with the Defendant. Apportionment Spreadsheet : a spreadsheet containing the gross sums payable to the Claimants, which represents their individual pro-rated entitlements in relation to the balance of the Global Settlement Sum after first deducting the Success Fee. … Settled Claim : being only the claims for payment of Away from Home and Hardship allowances from the period of 1 April 2012 until the date of issue of the claims; and the claims for declarations regarding the entitlement to the payment of unpaid overtime and Away from Home and Hardship allowances; and any claim for the payment of overtime from the date of issue of proceedings until the date of settlement; and any claim for the payment of Away from home and Hardship allowances from the date of issue of proceedings until the date of settlement. Success Fee : the global sum of £1.2 million payable to the Firm and Counsel pursuant to the funding arrangement in place between the Claimants, the Firm and Counsel. … 3. PAYMENT 3.1 In exchange for the Claimants agreeing to the full and final settlement of the Settled Claim, the Defendants shall pay to the Claimants a total sum of: (a) £4.2 million (“ Principal Settlement Sum ”); plus (b) Agreed Costs. 3.2 The total of the Principal Settlement Sum plus Agreed Costs is referred to below as the “ Global Settlement Sum ”. 3.3 The Defendant agrees to pay the Global Settlement Sum as follows: (a) The Firm will raise an invoice in the total sum of £1,200,000 (“being the Success Fee ”) addressed to the Claimants but stated to be payable by the Defendant, which will identify the amount payable to the Firm and to Counsel as agreed with the Claimants pursuant to the funding arrangement in place with the Claimants. Only once the Defendant has received this invoice will it pay the Success Fee by electronic transfer to the Firm’s office account (using account details: sort code [ redacted ] and account no: [redacted]) within 12 days of the date on which this agreement is signed by both Parties or the Defendant receives the invoice, whichever is later; (b) from the balance of the Global Settlement Sum, the Defendant will deduct £50,000 representing the insurance premium payable to Temple Legal Protection Limited (“ Temple ”) pursuant to an insurance contract between each of the Claimants and Temple. The Defendant will agree to pay this sum to Temple within 12 days of the date on which this agreement is signed by both Parties or the Defendant receives a letter from Temple confirming the amount of the insurance premium due, whichever is later; (c) from the remaining balance of the Global Settlement Sum, the Defendant will pay to each of the Claimants as contained in an Apportionment Spreadsheet sent to the Defendant by the Firm, such sums to be subject to the withholding of income tax and National Insurance contributions. For the avoidance of doubt, the said withholdings are to be made on the basis of the Principal Settlement Sum and not the balance of the Global Settlement Sum. The payments to be made pursuant to this clause 3.3(c) are to be made in the first monthly payroll which follows receipt by the Defendant of the Claimants’ Apportionment Spreadsheet. … 4. STAY OF ACTION The parties hereby consent to, and shall take all necessary steps to obtain an Order in substantially the form of the draft Consent Order in Annex A. [4] 5. RELEASE 5.1 This agreement is in full and final settlement of, and each party hereby releases and forever discharges, all and/or any actions, claims, rights, demands and set-offs, whether in this jurisdiction or any other, whether or not presently known to the Parties or to the law, or whether in law or equity, that it, its Related Parties or any of them ever had, may have or hereafter can, shall or may have against the other party or any of its Related Parties arising out of: the Dispute; the Settled Claim (collectively the “Released Claims”) 7. PROMPT CO-OPERATION FROM THE DEFENDANT 7.1 The Defendant agrees to provides prompt co-operation with any of the Claimants listed in Schedule 1 to this agreement or their representatives in the event that any of the Claimants wish to dispute the Defendant’s proposed tax treatment of the Principal Settlement Sum, such co-operation to include, non-exhaustively, providing access to relevant paperwork at no cost to the Claimant(s) and answering questions raised by the Claimant or their representatives or Her Majesty’s Revenue & Customs (“HMRC”) relating to the taxation of the Principal Settlement Sum. Such co-operation to be provided by or on behalf of the Defendant promptly and without unreasonable delay. … 8. COSTS 8.1 Other than the Agreed Costs, the Parties shall each bear their own legal costs in relation to the Dispute and this agreement. 8.2 This clause 8 supersedes and overrides any and all previous agreements between the Parties and any court order regarding the legal costs in relation to the Released Claims and in relation to this agreement (including the implementation of all matters provided by this agreement). … 11. NO ADMISSION This agreement is entered into in connection with the compromise of disputed matters and in the light of other considerations. It is not, and shall not be represented or construed by the Parties as, an admission of liability or wrongdoing on the part of either party to this agreement or any other person or entity.” [1] a committee established from amongst the Claimants [2] Cited with approval in Shilton v Wilmhurst 64 TC 78 and Brumby (Inspector of Taxes) v Milner [1976] UKHL. [3] the use of this terminology was heavily criticised by Lord Simon of Glaisdale in Brumby v Milner [1975] 51 TC 583 at p. 614. With respect to Lord Simon, in Hochstrasser v Mayes , where this terminology was used, the House of Lords was faced with the question whether it was enough to establish taxability if the payment would not have been made but for the fact that the taxpayer was an employee. It seems to me that the judgment in Hochstrasser v Mayes and in particular the use of the words causa causans was simply an attempt to establish whether the employment was the true source of the payment or whether the payment was attributable to "something else". [4] A consent order was obtained in the following terms: “1. The Claimant and the Defendant having agreed to the terms set out in the Confidential Schedule, IT IS ORDERED THAT all further proceedings in this claim be stayed except for the purpose of carrying such terms into effect. 2. Liberty to apply as to carrying such terms into effect. 3. Costs to be subject to detailed assessment if not agreed.”