Termination triggering discrimination claims: taxation

The Upper Tribunal has confirmed that the test as to whether a payment is taxable on the basis it is received directly or indirectly in consequence of, or otherwise in connection with, the termination of employment is a wide one and not restricted to situations where there the payment is as a result of the termination: Mathur v HMRC [2024] UKUT 38.

In this case, a global settlement sum reached after negotiation and in return for withdrawing Employment Tribunal appeals based on the termination and other discriminatory treatment was clearly made both indirectly in consequence of and in connection with the termination.

Background

The appellant (M) was an employee at Deutsche Bank (DB). In 2015, DB entered into a negotiated settlement with the New York State Dept of Financial Services (DFS) which included a consent order which required DB to terminate the employment of several employees regarded as having been involved in misconduct, including M. As a result, DB terminated the employment of the appellant, offering her £82,000 compensation.

M did not accept the offer and commenced Employment Tribunal proceedings for unfair dismissal and including various claims based on discriminatory treatment, covering both the period before her dismissal and the dismissal itself. The FTT noted that M had been deeply reluctant to pursue claims of discrimination whilst still employed, but the termination transformed this situation. Following mediation, a settlement agreement was reached pursuant to which DB paid the appellant £6m to withdraw her claims.

HMRC considered that the whole of the £6m payment was made directly or indirectly in consequence or otherwise in connection with the termination of M’s employment and fell to be taxed by virtue of ITEPA 2003 s.401. The appellant sought to argue that the payment she received was not in connection with her termination but rather as a result of her moral claim against DB for discrimination, which she had managed to monetise through its nuisance value.

The FTT rejected that argument, considering that the payment was made either indirectly in consequence or otherwise in connection with the termination. In particular, B’s termination had been central to her discrimination claims before the ET. The FTT also rejected the argument that it should apportion the settlement payment between an amount in connection with the termination and a non-taxable sum, given that the settlement payment was a single undifferentiated lump sum.

M appealed arguing that the FTT had (a) erred in its interpretation of s.401 and its application to these facts and (b) should have apportioned the sums received.

Decision

The Upper Tribunal has upheld the earlier decision of the FTT that the payment received by the appellant fell within the scope of s.401. The UT rejected the arguments that there must be a close and strong nexus between the payment and the termination. Section 401 is to be construed broadly and can be wider than a standard causative link.

The FTT had looked at the tests in s.401 of “indirectly in consequence of” and “otherwise in connection with” separately, but the UT noted that a holistic approach could equally be taken and a composite test applied.

The FTT considered that M’s termination was central to her claims in the ET, which the settlement compromised. The FTT had noted that M had clearly argued before the ET that the discrimination was also central to the termination. The FTT rejected M’s evidence before the FTT that termination was a “co-incidence” as regards the settlement payment. Rather it was the trigger and catalyst for bringing the ET proceedings which lead to the settlement payment. There was ample evidence to support the FTT’s finding as to the centrality of the termination to the discrimination claims in the ET.

On these facts, the UT agreed that the FTT was entitled to find that the payment was not simply made as a result of M making herself a nuisance. Quite the opposite, the parties believed there was substance to the ET claims and termination was central to the grounds of the claim in those proceedings. Even though a close causal nexus is not necessary for s.401, there was in fact such a connection here and, although there were two links in the chain between termination and settlement payment, the FTT were entitled to conclude that there was a clear and obvious connection between payment and termination.

The UT also rejected the argument that the negotiations to settle the ET appeal broke the link between the termination and the payment. This argument was not only inconsistent with the width of s.401 construed correctly, but also inconsistent with s.413A (which provides an exception for legal costs of proceedings and would be unnecessary if a settlement sum negotiated to settle ET proceedings did not satisfy the connection in s.401).

Finally, the UT rejected M’s argument that the FTT should have apportioned the £6m between the termination payment and non-taxable payments. The payment was a single undifferentiated lump sum and M had failed to advance any positive case to support an apportionment.

Comment

The decision is another which highlights the very wide scope of section 401 and its application to any payments made in connection with the termination of employment. In this case, it was sufficient that the termination was, essentially, the trigger for other discrimination claims based on activities that had occurred prior to the termination. Ultimately, in this case, the appellant had argued that the termination was part of that discriminatory treatment before the ET and the tribunal was not open to the appellant’s revised arguments in the context of these separate tax appeal that the termination was simply a co-incidence.

In addition, the case demonstrates that it will always be difficult to split an undifferentiated lump sum settlement where there is no evidence of allocation to different claims.