HM Inspector of Taxes v Clayton

A payment made by an employer is not taxable as an emolument merely because the recipient is an employee. The payment must arise from the employment, requiring a causal link with services rendered or future services. A direct cash payment may constitute a benefit under ICTA 1988, but an arm’s-length payment made to settle a dispute or release rights is not thereby a taxable benefit. Payments connected with termination are within the wide scope of section 148 if they are not otherwise chargeable, whether or not they could have been ordered under the employment protection legislation. A consent order combining reinstatement with a basic award did not prevent the payment from being connected with the earlier termination.

The Crown appealed by way of case stated from the General Commissioners’ decision concerning a £5,060 payment made by Birmingham City Council to an employee following unfair-dismissal proceedings. The employee had been dismissed in 1997 and immediately re-employed on terms removing an essential car user allowance. The Employment Tribunal later found the dismissal unfair and, by consent, ordered reinstatement with restoration of the allowance and payment of a basic award under sections 114 and 119 of the Employment Rights Act 1996.

The Commissioners held that the payment was not chargeable under sections 19 or 154 of ICTA 1988 and fell within section 148. The central issues were whether the Tribunal lacked jurisdiction to make the basic award, whether the payment was an emolument or benefit, and whether it was received in connection with termination.

1. The appeal was dismissed. The Tribunal could not, after a contested remedy hearing, both order reinstatement and award compensation. The consent order nevertheless recorded a contractual settlement reached in the context of the unfair-dismissal proceedings.

2. An order under section 114 of the Employment Rights Act 1996 restores lost pay and benefits and adjusts future employment terms. It does not create a period of service between dismissal and reinstatement. The employee’s original contract had ended in 1997; the car allowance arrears were remuneration under the reinstatement order, but the basic award was not.

3. Under section 19 of ICTA 1988, the payment had to be shown to arise from the employment. The authorities, including Hochstrasser v Mayes [1960] AC 376, require more than the fact that the payment was made by an employer to an employee. There was no evidence that the £5,060 was a reward for past services or an inducement to future services. It resulted from negotiated settlement of the unfair-dismissal dispute.

4. A direct cash payment can be a benefit within section 154, following Wicks v Firth [1982] Ch 355 and Mairs v Haughey 66 TC 273. However, section 168(3) does not make every arm’s-length settlement payment taxable. A payment for disposing of rights or settling a dispute is not a benefit merely because the parties remain employer and employee.

5. Section 148 applied. The payment was received in connection with, and in consequence of, the 1997 termination. The section is not confined to payments available under the 1996 Act and its reference to all payments is broad. The £30,000 threshold therefore prevented liability to tax.

High Court (Chancery Division): Mr Justice Patten dismissed the Crown’s appeal by way of case stated from the General Commissioners for Income Tax for Birmingham, who had allowed the taxpayer’s appeal against the Revenue’s amendment of his self-assessment.