.png)
.png)
The taxpayer was employed by a US investment bank in London. His employment ceased in 2005. He claimed constructive dismissal and made formal grievance complaints to the New York office.
Subsequently, he and the bank entered into a compromise agreement whereby he waived all legal claims he might have against the bank and he received £500,000, from which the bank deducted income tax of £103,400.
In his self assessment tax return, the taxpayer did not include the payment on the grounds that it was not income from his employment or a termination payment.
HMRC amended his return to include the sum (less £28,000 as damages for injured feelings), claiming that it was subject to tax under ITEPA 2003, s 403. The taxpayer appealed.
The First-tier Tribunal said it was necessary for the purposes of s 401 to decide whether a payment was received in connection with the termination of the employment.
In circumstances as the present, it was reasonable to assume that the employer would recognise the employee would be out of comparable work for some time, particularly as he had left in part claiming discrimination.
In light of the employee’s relatively short length of employment (less than two years), potential bonus payments, and benefits in kind, the tribunal concluded that £165,000 of the payment related to termination of employment.
This amount, less the £30,000 exemption, would be liable to tax under s 410.
The balance, £335,000, was outside the tax charge. This might be seen as a substantial amount, but had the employee gone to court in the USA claiming racial discrimination by the bank, he would have been likely to have received substantial damages.
The tribunal said that the instant case had to be seen in those circumstances, thus a settlement that seemed unusually large in the UK context, was less surprising.
The taxpayer’s appeal was allowed in part.
