HM Inspector of Taxes v Clayton

The Court of Appeal dismissed the Crown's appeal against the General Commissioners and the High Court. The central legal questions were whether a £5,060 payment made under an Employment Tribunal consent order was taxable as an emolument under s.19 Income and Corporation Taxes Act 1988, taxable as a benefit under s.154 ICTA, or fell within s.148 ICTA as a payment in connection with termination of employment.

The court held that the payment was not an emolument from employment for the purposes of s.19 because it was not a reward for past services, an inducement for future services, nor otherwise referable to the duties of employment; rather it was paid to compensate for unfair dismissal pursuant to the consent order (which expressly referred to the basic award under s.119 Employment Rights Act 1996).

The court further held that s.154 did not apply because the payment resulted from an arm’s-length compromise or "fair bargain" settling hostile litigation; following the reasoning in Mairs v Haughey, such genuine compromises are not treated as taxable benefits under s.154. Finally, the payment did fall within s.148 as received in connection with termination, but because it did not exceed the £30,000 threshold it was not chargeable to tax under that section.

Background and facts:

• Mr Clayton was an employee of Birmingham City Council who lost an Essential Car User Allowance (ECUA) when the Council changed terms and offered re-employment on new contracts. He did not agree to the change and his contract was terminated and he was immediately re-employed on the revised terms.
• Multiple employees and trade unions brought claims to the Employment Tribunal. The ET found unfair dismissal and breach of the s.188 duty to consult. The parties reached a global compromise recorded in a consent order dated 12 July 2000 which ordered, inter alia, reinstatement under s.114 ERA, payment of basic awards pursuant to s.119 ERA and payment of remuneration lost in respect of ECUA.
• The Council paid Mr Clayton £5,060 pursuant to the consent order. He did not include it as taxable income; the Inspector amended his self-assessment to include it and Mr Clayton appealed.

Procedural history:

• The General Commissioners allowed Mr Clayton's appeal, treating the payment as a s.148 receipt not exceeding £30,000 and therefore not taxable under that section.
• The Crown appealed to the High Court (Patten J.), who dismissed the Crown's appeal and held the payment fell within s.148 and was not chargeable.
• The Crown obtained permission to appeal to the Court of Appeal; this judgment is the Court of Appeal's determination.

Nature of the application and issues:

• The Crown sought to challenge the Commissioners' decision and contended the payment was taxable either as an emolument under s.19 ICTA or as a benefit under s.154 ICTA, and alternatively that it was not a payment "in connection with" termination for s.148 purposes.
• The Court also considered a late Crown contention that the compromise was void for non-compliance with s.203 ERA; the court declined to decide that issue as it was not pleaded or factually explored and it was unnecessary to the tax issues decided.

Court's reasoning and conclusions:

- On s.19: The court applied the established test (payments must be referable to the employment, i.e. reward for past services or inducement for future services). The payment was not an emolument because it was made to compensate for unfair dismissal as part of a settlement and was not paid as consideration for services.

- On s.154: The court accepted (following the Special Commissioner and the Northern Ireland Court of Appeal in Mairs v Haughey) that genuine arm’s-length compromises or fair bargains reached to settle disputes are not treated as taxable "benefits" under s.154. The consent order evidenced such a compromise and there was no evidence the payment was a gratuitous benefit; accordingly s.154 did not apply.

- On s.148: The court held the payment did fall within the wide sweep of s.148 as a payment in connection with termination, but because it did not exceed the £30,000 exempt amount it was not chargeable to tax under that section.

Subsidiary points:

• The court expressed procedural and factual concerns about the Crown advancing an argument under s.203 in the Court of Appeal, noting lack of factual exploration and that it was unnecessary to decide that point for the tax issues.

Disposition: The Crown's appeal was dismissed and the Crown was ordered to pay the respondent's costs of the appeal.

Appeal dismissed. The Court of Appeal concluded that the £5,060 payment was not an emolument under s.19 ICTA because it was not a reward for past services nor an inducement for future services; s.154 ICTA did not apply because the payment resulted from an arm’s-length compromise (a "fair bargain") settling the unfair dismissal claim; the payment did fall within s.148 ICTA as received in connection with termination but, being below £30,000, was not chargeable to tax. A late argument under s.203 ERA was noted but not decided as unnecessary.

General Commissioners: Mr Clayton's appeal against the Inspector's amendment of his self-assessment was allowed (Case Stated). Crown appealed to the High Court (Patten J., CH2003APP0697) where the Crown's appeal was dismissed. The Crown obtained permission to appeal to the Court of Appeal, which dismissed the appeal in [2004] EWCA Civ 1657.