Payment from a former employer in settlement of Employment Tribunal proceedings was taxable as employment income (Mathur v HMRC)

In Mathur, the First-tier Tax Tribunal (FTT) dismissed the taxpayer’s appeal, finding that a payment from a former employer in settlement of Employment Tribunal proceedings was taxable as employment income because it was received by the taxpayer ‘indirectly in consequence of, or otherwise in connection with’ the termination of her employment.

Shivani Mathur v HMRC UKFFT 88 (TC)

This was principally about whether a payment of £6m from her former employer in settlement of employment tribunal (ET) proceedings was received by the appellant (M) in consequence of, or otherwise in connection with, the termination of her employment (as required by section 401 to the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003). If so, the payment would be chargeable to income tax as earnings, subject to the exemption for the first £30,000. M had been dismissed from her position with a bank for alleged misconduct and was offered £82,135 in compensation which she refused. M took the matter to the ET but eventually reached a settlement under which she received £6m. PAYE was applied to all but £30,000. M’s contention before the FTT was that the settlement payment arose from negotiations based on the discrimination and victimisation she had experienced during her employment with the bank and the wish of the bank to avoid the embarrassment of publicity. HMRC had agreed to an exemption of £44,000, with this figure being chosen because it was the top of the upper band (the most serious cases) ET awards for injury to feelings (the so-called ‘upper Vento range’), but had taxed the remainder as employment income within section 401.

The FTT dismissed M’s appeal. They accepted that the settlement payment was not received by M in consideration of the termination of employment, and nor was it received directly in consequence of the termination. Rather, it was received in consideration of, and directly in consequence of, her settling. The questions were whether it was received indirectly in consequence of, or otherwise in connection with, the termination, and these were questions to be decided objectively. The FTT answered them in the affirmative.

The FTT identified two significant flaws in the version of events put forward by M in the instant proceedings. Firstly, it significantly underplayed M’s arguments in the ET proceedings that the termination was itself discriminatory—indeed, the culmination of the alleged longstanding discriminatory conduct over the course of her employment. The second flaw was that M’s version of events overlooked the importance of the termination as the trigger point, catalyst and enabling event for her bringing proceedings in the ET 3½ months later, and settling them about 9 months after that. The FTT identified that there had been deep-seated reluctance on M’s part to take formal action against the bank for discrimination, right up to the time of the termination. It was the termination that transformed the position. M then positioned herself as a ‘nuisance’ to the bank and negotiated the settlement payment as the price to make her ‘go away’. This negotiating stance would, as a practical and realistic matter, have been difficult, if not impossible, without the termination.

The FTT agreed that £44,000 was an appropriate amount to allocate to injury to M’s feelings.

Why it matters

The decision is an object lesson on the importance of looking at matters holistically from the outset so there is a consistent approach to both the tax and employment law aspects. This is not to say that a different result would have occurred here if that approach had been adopted, but it is certainly possible that the final outcome would not have been quite so black and white.

Case details

• Court: First-tier Tribunal (Tax)
• Judges: Judge Zachary Citron and Noel Barrett
• Judgment date: 9 March 2022

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