We commented recently on the case of Murphy, saying that if you successfully sue your employer for remuneration owed to you, what you receive is usually taxable as earnings. But we mentioned a potential limited exception to the principle. This note is about the exception and why it’s only a ‘potential’ one.
It’s best illustrated by two cases.
The first is an anonymised First-tier Tribunal (‘FTT’) case [2015] UKFTT 189 (TC).
The appellant (identified as ‘A’) worked for a bank as a currency trader. He was of a different nationality from most of his colleagues and senior management. He asserted that despite his outstandingly successful management of his trading book, and despite repeated promises, he was consistently paid discretionary bonuses at a much lower rate than fellow-traders. He raised a grievance with the bank, complaining that he had been subjected to unlawful discrimination on grounds of his racial or ethnic origin. Essentially, he claimed that the alleged discrimination took (at least mainly) the form of underpaying him.
The bank admitted nothing but paid him £600,000 under a Compromise Agreement.
Plainly if A hadn’t suffered the alleged discrimination and had been paid the right bonus in the first place, it would have been taxable as remuneration. But the FTT held that that wasn’t enough:
If an Employment Tribunal were to award damages for discrimination (whether calculated by reference to earnings or whether they included injury to feelings) these are recompense for the right not to be discriminated against under statute. They are paid because the employer has breached a statutory obligation not to treat the employee in a detrimental way due to his race… 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.
Pretty clear.
However, in [2018] UKFTT 240 TC the FTT had to consider the case of Mr Pettigrew. He was a fee-paid (part-time) Employment Judge. In breach of the Part-time Workers (Prevention of Less Favourable Treatment) Regulations, the Ministry of Justice had underpaid him, and he received compensation (equivalent to the underpayment) of some £55,000.
Mr Pettigrew invoked the decision in the earlier case: he had suffered unlawful discrimination because he was a part-timer, just as A had suffered unlawful discrimination because of his race. He even cited HMRC’s then-current guidance (subsequently changed) to the effect that ‘Any part of the settlement that can reasonably be attributed to discrimination occurring before the termination should be accepted as not being employment income’ in support of his case.
HMRC sought, somewhat confusingly, both to distinguish the two cases and to assert that the earlier case was wrongly decided (as an FTT decision it wasn’t, of course, a binding precedent). It’s not clear which of those views the FTT took: it simply asserted that it ‘does not assist me in determining the current appeal’ and held that Mr Pettigrew’s compensation was subject to income tax as earnings from his employment – essentially on the basis that compensation for underpaid earnings should be treated in the same way as underpaid earnings themselves.
We thus have the unsatisfactory position of two FTT decisions in this important area reaching opposite conclusions on ostensibly similar facts. It will take a higher court at some future date to give a definitive answer.
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As we absorb the events of the past week, we continue to think of Her Late Majesty with gratitude and affection, and of the Royal Family with condolence.