The case concerned a payment for a restrictive undertaking. Consideration was given to ITEPA 2003, s. 225 (Payments for restrictive undertakings) and s. 401 (application of ITEPA 2003, Pt. 6, Ch. 3 – Payments and benefits on termination of employment, etc.)
In applying for a substantial tax refund, the taxpayer wrote to HMRC as follows:
“I wish to enquire as to whether I should have been taxed in the manner I have, as this does not seem right, given the fact the payment was not related to my employment.
I understand that the employer has fulfilled its obligations to HMRC by initially taxing me for the majority of this payment, but they took it upon themselves to attribute a very small portion of the payment to injury to feelings and therefore making the decision that my payment was for employment, when in actual fact it was a payment to prevent me from discussing the situation, as it was tied to an NDA.
The employer made the payment through their processes, but it was payment from an individual who wanted the subject to be kept quiet.”
In dismissing the taxpayer’s appeal, the FTT made the following points (at para. 67 – 70 of the case report):
“In our view it is clear from the terms of the Settlement Agreement that the payment was, at the very least, in consequence of or otherwise connected with the termination of Mrs A’s employment. The preamble (called ‘Background’) to the Settlement Agreement states that it sets out the arrangements relating to, among other things, the termination of Mrs A’s employment. Clause 4.1.2 states explicitly that the Compensation Sum is paid as compensation for the termination of Mrs A’s employment. Clause 4.5.3 refers to the amount of the Compensation Sum in excess of £30,000 as taxable as a termination award.
There was no evidence to suggest that the position described in the Settlement Agreement was inconsistent with reality. Indeed, in answer to a question from Mr Carey, Mrs A agreed that Compensation Sum related in part to the termination of her employment although she maintained that it was primarily to avoid litigation and consequent bad publicity for the Employer and the Owner. We accept Mrs A’s evidence and find that the Compensation Sum was a payment that had more than one purpose. It was consideration for her undertaking not to say anything about the grievance and the Employment Tribunal proceedings but it was also related to the termination of her employment. It may be, as Mrs A said, that the Compensation Sum would not have been paid if she had not agreed to withdraw her claim in the Employment Tribunal and enter into the confidentiality and non-disclosure obligations. That, however, does not mean that the payment of the Compensation Sum was not received by Mrs A directly or indirectly in consequence of or otherwise in connection with the termination of her employment.
We accept that the payment of the Compensation Sum under the Settlement Agreement was, in part, consideration for Mrs A entering into the confidentiality and non-disclosure clauses in the Settlement Agreement. However, that additional purpose or effect does not mean that there was no connection with the termination of her employment. It seems to us that the contractual position is clear from the words of the Settlement Agreement and, looking at all the evidence in the round, there was a connection between the payment of the Compensation Sum and the termination of Mrs A’s employment. It follows that, if we are wrong to conclude that the Compensation Sum is chargeable to tax under section 225(3), the Compensation Sum (excluding the amount of £30,000 exempted by section 403(1)) falls to be taxed as Mrs A’s employment income under section 403.
We have considered whether the Compensation Sum could be apportioned between elements that relate to the termination of Mrs A’s employment by the Employer and other elements. In our view, that is not possible in this case. The Settlement Agreement already provides for apportionment between the Tribunal Claim Compensation Sum, the Compensation Sum and the Monthly Compensation Sum. The Compensation Sum is a single, undivided amount. The Settlement Agreement does not provide for any further apportionment of the Compensation Sum and there is no evidence on which such an apportionment could be made.”