Success fee and indemnity premium were taxable

The taxpayer and his colleagues brought a group litigation action against their employer for alleged unpaid overtime and other allowances. They were subsequently paid a global settlement sum under a settlement agreement. This included compensation legal expenses and insurance. The employer made no admission of liability to pay overtime or other allowances.

The taxpayer did not include his share of the settlement in his self-assessment tax return. After an enquiry HMRC raised discovery assessments on his share of the settlement without deducting a share of the success fee or insurance premium.

The First-tier Tribunal agreed with HMRC that the taxpayer was liable to income tax on all the amounts received under the settlement agreement under ITEPA 2003 s 62(2). But the Upper Tribunal allowed the taxpayer’s appeal. HMRC appealed to the Court of Appeal.

Lady Justice Andrews in the Court of Appeal said the case concerned the meaning of...