England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM WINCHESTER COUNTY COURT
(HIS HONOUR JUDGE IAIN HUGHES QC)

		Royal Courts of Justice Strand, London, WC2A 2LL
		9th November 2010

Lord Justice Pill:

1. This is an appeal against a judgment of HHJ Hughes QC sitting at Winchester County Court on 28 August 2007, whereby he dismissed an appeal against a judgment of District Judge Freeman sitting at Poole County Court on 8 December 2006. Judge Freeman dismissed a money claim by Ms Donna Norman, the appellant, against her former employers, Yellow Pages Sales Limited, the respondents. This is a second appeal, permission having been granted on a single ground by Lloyd LJ following an oral hearing.
2. The appellant was employed by the respondents as a sales consultant from 1 June 2004 to 28 January 2005. On that date the appellant wrote to the respondents stating that she considered the respondents to be in breach of her employment contract and she considered her contract effectively to have come to an end. On 7 March 2005 the appellant issued proceedings against the respondents at the Southampton Employment Tribunal. The claim was for direct sex discrimination, direct race discrimination, victimisation, wrongful dismissal and unlawful deduction from wages, unpaid notice pay and unpaid wages. The later sums were calculated as coming to a total of £778.49.
3. The parties sought to compromise their differences and a compromise agreement was reached under the auspices of ACAS. The appellant was legally represented at the relevant meeting. The settlement was approved by the Employment Tribunal on 17 August 2009. The agreement was in a standard form used by ACAS, COT3, and included the following terms:

"1. Without prejudice of liability, the Respondent will within 14 days of receipt from the Claimant of a signed copy of this form pay to the Claimant the sum of £53,000 (Fifty three thousand pounds) by way of compensation ("the Settlement Terms"). Payment is to be made directly to the Claimant's bank account.

2. The Claimant accepts the Settlement Terms in full and final settlement of her tribunal proceedings commenced in the Employment Tribunal under case number 3100570/2005 (the Proceedings) and of any claim she has or may have against the Respondent or any of its officers, staff or agents arising out of her employment or its termination including as non-exhaustive examples, any claim for unfair dismissal, wrongful dismissal, breach of contract however arising, discrimination, harassment or victimisation of any kind, equal pay, redundancy pay and unlawful deductions from wages."

It was also agreed that the parties would "keep the Settlement Terms, and the circumstances giving rise to them, as strictly confidential."

4. In purported discharge of the agreement, the respondents paid the sum of £47,657.34 to the appellant. That left a shortfall of £5,342.66 from the sum of £53,000 mentioned in the agreement. The deduction was made by the respondents on the ground that they were required to make a deduction of basic rate tax of 22 per cent, £5,060, and National Insurance, £280.66 at source. On 31 October 2005 the appellant issued proceedings for breach of contract, namely for failing to comply with the terms of the COT3 and in failing to pay the appellant the full sum of £53,000.
5. It was argued before District Judge Freeman, first, that the compromise agreement required payment of £53,000 to the appellant. Any tax on that sum was payable by the respondents over and above that sum. The District Judge rejected that argument. He stated:

"I have to say that, having considered that carefully, there is absolutely no justification for such a statement at all. The sum is £53,000. There is no suggestion that anything in addition is payable and that part of the claim must fail."

That finding was upheld on appeal and there is no permission to appeal to this court against it. This judgment is not authority for any proposition that the sum stated in an agreement such as this is a gross rather than a net sum in tax terms. That point has not been argued before this court.

6. The appellant's second claim was that even if the sum was gross, the respondents should not have made the deductions they did. The respondents base their understanding of their obligation to HMRC on documents received from HMRC. In a faxed document dated 5 September 2005, guidance was given relating to taxation of termination payments. It stated that there were three categories of payment: those taxable in full, those taxable over £30,000, and tax-free. In a further faxed document of 5 October 2005, and this was addressed to the appellant, it was stated:

"…I confirm that I was asked by YELL to provide them with the source of their authority for operating PAYE on a lump sum payment over £30,000.

I was not provided with nor did I seek any name or specific information relating to the circumstances of payment. For that reason my response, which you have seen, is very broad. Had I been asked for a formal opinion it would have been necessary to see all the documentation including employment contract, compromise agreement, meeting notes and any other correspondence relating to the payment. My response would have reflected my considered opinion based on the facts. But that was not was asked of me and I do not know the facts other than your broad outline."

The respondents' understanding was that they were liable to pay to HMRC tax on the sum above £30,000 and they made their calculation and payment on that basis. It is common ground that damages for injury to feelings are not generally subject to such a tax deduction. It is to be recognised that a significant part of the appellant's proposed case to the Tribunal was based on injury to her feelings by the alleged conduct of the respondents' employees.

7. Dealing with the second basis of claim, District Judge Freeman stated:

"Any money which is payable to the claimant here is payable to her as a Schedule E employee and, therefore, any tax which is correctly payable should be deducted by the employer and paid to the Revenue, as has happened here."

At paragraph 6 of the judgment, the District Judge said:

"One needs to look wider than that, however, because there is an issue as to whether or not tax is payable on this sum. It is compensation in relation to the employment and the normal rule is (a) that the first £30,000 of any compensation payable is free of tax in this and any other case, and that in fact is what happened here because the money which has been deducted gives credit for that first £30,000, and the tax which has been deducted is the tax on the balance of £23,000; and (b), more importantly, tax is not payable on compensation if it is for injury to feelings. Mrs Norman says this is all about sex and race discrimination; it is in relation to injury to feelings. It is not to do with loss of earnings or anything like that and thus no tax is payable on it.

7. Regrettably, and perhaps by omission, the COT3 does not say anything about what it is payable for. It would certainly assist my decision if it did. It might well mean that this case would never have been necessary if it had so said. All it says is that the claimant will pay to the defendant £53,000, not what it is for [that is clearly a transposition of the claimant and defendant in that sentence].

8. Can I read into the fact that it is for injury to feelings, if it does not say so? I do not think I can. It may well be that this money is for injury to feelings, but that is a matter about which the claimant would have to satisfy the Inland Revenue. On the documentation that I see before me, I merely see a direction that money be paid by way of compensation and, in those circumstances, without some other agreement with the Inland Revenue, tax must be paid on the relevant proportion, on the £23,000."

8. On 28 August 2007, as I have said, an appeal against those findings was dismissed in the Winchester County Court. On 8 May 2009 the appellant orally renewed an application for permission to appeal to this court. Lloyd LJ first dealt with the first point I have mentioned. He stated:

"9. […] On this point, I have to say that I do not accept Ms Norman's submissions. It seems to me that the judges below were undoubtedly right. It is just as if an employee is engaged at a salary of, let us say, £20,000, and one knows that what the employee receives is not £20,000 in his or her bank account but a net amount after deduction of tax and national insurance contributions, and the employed is paid in respect of those amounts by the tax and NIC, which is his or her obligation to pay to the revenue, being paid over as it were on his or her behalf by the employer to the revenue. I do not accept that there is any difference between that situation and the £53,000 or whatever lump sum would have been payable under an agreement of this kind. So on this first point I would refuse permission to appeal.

10. The second point is this. In a case where there is a perfectly genuine claim in any Employment Tribunal for injury to feelings, and where the COT3 form does not appropriate any particular amount to that claim, it seems to me that there is a genuine point as to whether it is right for the employer to treat the whole sum in excess of £30,000 as being taxable rather than considering, whether in negotiations or after negotiations, the amount that ought fairly to be attributed to the injury to feelings claim."

Lloyd LJ decided to give permission to appeal on this single point, and added:


"I formulate the ground of appeal as being to the effect that the district judge was wrong on the face of the COT3 form not to accept that some appropriate part of the compensation agreed to be paid ought to be allocated to the claim for injury to feelings so that that would not be subject to deduction of tax."

9. Following the grant of permission, the Inland Revenue repaid a sum of £5,060 to the appellant. That payment was made in September 2009 when the Revenue had been supplied with a copy of the judgment of Lloyd LJ. One source of the appellant's grievance is the inability of the respondents to supply satisfactory evidence that they had in fact paid the sum withheld from her to the Inland Revenue. It is clear that the Inland Revenue now accept that the appropriate payment was made by the respondents. From what I have seen of the papers the evidence about payment is not satisfactory, but nothing turns on that owing to the way in which the case has developed.
10. In a letter of 18 August 2009 addressed to the appellant, HMRC set out a calculation following which it stated that a refund of £5,338.92 is due. It was also stated that, when making the repayment, an interest supplement totalling £799 was to be paid. It has to be said that the repayment was as generous as it could be, because it appears the Revenue have been prepared to allocate the entire sum, above £30,000, to the injury to feelings claim.
11. The appellant now puts her claim in this way. She is still entitled from the respondents to a sum of £393.54 in respect of the National Insurance payments withheld from her, that is, £280.66 plus interest from 31 October 2005, to make up the balance to £393.54. It is further claimed that outstanding interest on the full amount deducted should be made. That is calculated at £786.93, which is £1,585.93 less the sum of £799 received from the Revenue. The total sum now claimed is therefore £1,180.47.
12. On behalf of the appellant, Mr Robinson puts his submissions succinctly, as it can be put. There was, he submits, at the time of the compromise an implied term for deciding what should be deducted and paid to HMRC by the respondents. The respondents were required to make a fair apportionment within the sum of £53,000 as between injury to feelings, which was not subject to tax deduction, and on the other hand damages for loss of earnings and other matters, which were subject to tax deduction. Mr Robinson submits that there was an assumption between the parties when negotiations were conducted that such an apportionment would be made by the respondents. He has referred to the case of Orthet Ltd v Vince-Cain [2004] IRLR 857, where an employment tribunal was itself prepared to make an apportionment, but that was following an award which had been made. Mr Robinson also relies on a table in Harvey on Industrial Relations and Employment Law where it is stated under the heading "Tax on Awards and Compromises":

"It is hoped that consideration of the items in the following summary table will usually give the correct answer as to the incidence of tax and PAYE on sums of the various characters which may be payable under judgments, awards and compromises."

A table follows. Box 5 poses the question:

"Is it a payment genuinely in compromise of a dispute?"

"TREATMENT"

"Not earnings. If paid on termination, it is potentially employment income and taxable as a termination payment under s.401, if it exceeds £30,000. If so, it is subject to PAYE, at basic rate if employment has ended. Just apportionment between the compromise sums attributable to the taxable and non-taxable elements of the original claim."

A different situation is proposed in item 6 of the table. That too includes the expression:

"A just apportionment is appropriate for compromise sums of mixed character."

Mr Robinson submits that the presence of that table and that guidance supports his submission that a term should be implied. Claimants, he submits, are entitled to clarity when making compromise agreements such as this.

13. There is no evidence that the question of apportionment was raised during the discussion under the auspices of ACAS which led to the compromise. The appellant was legally represented in that discussion. An apportionment may of course be a term of a compromise. In this case it was not. In the absence of such a term, I am unable to read into the agreement by which the claim was compromised in a lump sum an obligation on the employer to make an apportionment of the sum as between taxable and non-taxable elements and calculate the payment to HMRC accordingly.
14. No good reason in my view has been advanced as to why there should be such an obligation. Such an obligation would tend to operate against the interest of the parties, who are anxious to achieve a settlement. An employer may, without an admission of liability, be prepared to make a lump sum payment. If he had to acknowledge, for example, that he was liable, and/or if he had to acknowledge that a substantial part of the sum was for injury to feelings, settlement would in many cases not be possible.
15. The essence of a compromise such as that reached in this case is that neither party has had to make admissions. The wish of the parties, as evidenced by the terms of the agreement which I have cited, is to dispose of their claim without having to go before a tribunal. It would not be open to the appellant to go to the Employment Tribunal to seek an apportionment.
16. A second consideration operates. The obligation of employers to HMRC must be borne in mind. They will naturally seek to avoid suggestions that they are neglecting their duties and avoiding payment of tax due. They would be anxious to avoid a suggestion that apportionment had so been framed to the advantage of the employee, and accordingly to the disadvantage of the Revenue, if that were not the true position.
17. We have been referred in the respondents' skeleton argument, received only this morning, to the Income Tax (Pay As You Earn) Regulations 2003. To the extent that payments on termination are liable to tax under any provisions including section 401 referred to by Harvey, they are taxable as "employment income". So under regulations 4 and 21 of the 2003 Regulations, they are "relevant payments". Regulation 21 provides:

"(1) On making a relevant payment to an employee during a tax year, an employer must deduct or repay tax in accordance with these Regulations by reference to the employee's code, if the employer has one for the employee.

(2) The employer must deduct or repay tax by reference to the employee's code, even if the code is the subject of an objection or appeal."

Payments which are taxable under those regulations are also liable to National Insurance contributions pursuant to the Social Security (Contributions) Regulations 2001 as amended, to which reference today was made, since earnings for earnings-related contributions are calculated on the basis of gross earnings from the employment. Clearly there was in this case, where there was an allegation of wrongful dismissal, a potentially valuable claim for future loss of earnings.

18. Even if the parties had themselves reached an agreement as to apportionment, which in this case they did not, the Revenue would not be bound to accept it. Guidance to officers of HMRC is provided in an Employment Income manual which states, with a heading "Termination Payments and Benefits":

"When an employment comes to an end, an employee often receives a package that includes a variety of different elements. Examples include unpaid salary, damages, a payment in lieu of notice, a payment for a restrictive covenant, compensation for loss of office and the provision of a non-cash benefit after termination. The correct label is not always applied to each.

There is a logical sequence to follow when looking at a termination payment or benefit. "

This further guidance appears:

"Finding the facts may involve interviewing those involved as well as seeing all the documents and notes of meetings."

19. The issue of apportionment was not raised in negotiation and I am unable to hold that there was an obligation on the employers to apportion, which would present the difficulties to which I have referred. The tables in Harvey are an indication of the different tax regimes which apply and the steps which may be taken to achieve a result which is both lawful and fair. The table does not begin to create a contractual duty on an employer to make an apportionment on a compromise settlement. The parties may of course take a very different view of how the sum should be apportioned, and, in the interest of achieving settlement, there is not a requirement to do that.
20. As to the National Insurance claim, Mr Robinson accepts that this is not a separate claim. It stands or falls with his claim in relation to the implied term. The court is not able to say on the material before it, nor is its duty to say, whether the appellant is entitled to return and indeed does not know whether a return has been made. No satisfactory evidence has been produced of any claim for return. If there is no return, the point is made that the payments would have been credited to the appellant's social security account. In any event that is between her and the authorities.
21. I understand the appellant's feelings of grievance, especially when it was not made clear to her that the tax deducted had been paid to the Revenue, but no breach of contract is in my view established. That being so, the claim to interest must fail. It is at least comforting to the appellant that the Revenue have taken the most favourable view they could as to what refund they could make to her. Their making the refund does not create an obligation in the employer years before to have withheld the sum. If there is a further claim to interest, and that appears to me to be most unlikely, it should be addressed to HMRC and not the respondent.
22. For those reasons I would dismiss this appeal.

Lord Justice Longmore:

23. I agree. The result of this appeal in my view is that, if a compromise is agreed and it does not itself apportion its award between taxable and non-taxable elements, it is for the employee, not the employer, who pays the employee's tax on behalf of the employee, to sort out the position with Revenue and Customs. It follows that in my view the District Judge was not wrong not to accept that some appropriate part of the compensation ought to have been allocated by himself, the District Judge, to a non-taxable element.
24. This appeal must therefore be dismissed.

Lord Justice Jacob:

25. I agree with both judgments. I would only add this, that if the Revenue has failed to pay interest which ought to have been paid on sums which were paid to them years ago, I cannot see any reason why the appellant should not be able to claim that from the Inland Revenue. She certainly cannot claim the interest from her former employer.

Order: Appeal dismissed.