FTT determine correct tax treatment of £6M LIBOR-related termination of employment payment
In Mathur v HMRC, the FTT has given guidance on the approach to determining the correct tax treatment of a payment made to settle employment tribunal proceedings. Ms Mathur was terminated by her employer DB Group Services (UK) Ltd (“the Bank”), following an investigation by the regulators into Libor-rigging. Ms Mathur commenced proceedings in the Employment Tribunal against the Bank, and some individuals, alleging unfair dismissal, whistleblowing detriment, sexual harassment, unequal pay and victimisation.
The parties ultimately settled the dispute in the sum of £6M (see City AM article). The Settlement Sum was expressly paid subject to reductions for tax as may be required, and setting aside £30,000 which was paid without deductions for income tax and National Insurance. The FTT found that the Settlement Sum was arrived at following “a day of “horse trading” negotiation; it was not broken down into further amounts or paid by reference to any specific heads of Ms Mathur’s claims …”.
The principle issue for the Tribunal was decided by reference to s401 of the Income Tax (Earnings and Pensions) Act 2003. The question was whether the Settlement Sum was received by Ms Mathur indirectly in consequence of, or otherwise in connection with the termination of her employment. Ms Mathur said that if it was not, then the sum was not taxable except to a very limited extent, but accepted that if it was then the entire Settlement Sum was taxable.
The Tribunal found that the difficulty in the Appeal arose from the fact that the statutory question posed in s401(1)(a) of ITEPA had not been addressed in the Settlement Agreement or other contemporaneous documentation; the £6million payment was simply identified as damages. The Tribunal stated that the statutory question was to be answered objectively noting that whether a payment or other benefit was received in a prescribed manner is not to be decided exclusively from the perspective of either payer or recipient but on an assessment of all the evidence in the round.
The Tribunal ultimately concluded that the requisite connection between the payment and the termination was made out in that (i) the termination allowed Ms Mathur to take a “nuisance claim negotiating position” against the Bank, and (ii) the termination was central to significant claims made by Ms Mathur in the Employment Tribunal proceedings (including her claims based on discriminatory conduct by the Bank). The FTT also concluded that it could not apportion the disputed sum because the Settlement Sum was undifferentiated, there was no factual evidence before the Tribunal to support apportionment and there was no expert evidence before the Tribunal to permit apportionment.
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