Norman v Yellow Pages 2010

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08 February 2011

This judgment (given 9 November 2010) in the Court of Appeal clarifies that it is the employee's responsibility to determine the position with HMRC for tax payable on any taxable elements received under a compromise agreement.   

BACKGROUND

The Appellant was employed by Yellow Pages as a sales consultant.   During her employment, she considered that Yellow Pages were in breach of her employment contract and as such she considered her contract to effectively have come to an end. The Appellant then issued proceedings against Yellow Pages for direct sex discrimination, direct race discrimination, victimisation, wrongful dismissal and unlawful deduction from wages, unpaid notice pay and unpaid wages. 

A compromise agreement was reached between the parties in which it was agreed that the sum of £53,000 would be paid to the Appellant in full and final settlement of her tribunal proceedings.  Yellow Pages made a deduction of the basic rate tax at 22% and National Insurance Contributions at source, meaning that the sum of £47,657.34 was paid to the Appellant (Yellow Pages deducted £5,060 income tax and £280.66 NICs on £23,000 (being the excess over the £30,000 tax-free amount)). 

The Appellant issued proceedings for breach of contract, namely for failing to pay her the net sum of the full £53,000.  The Appellant's second claim was that even if the sum of £53,000 was gross, Yellow Pages should not have made the deductions in the manner that they did.  However, it was Yellow Pages' understanding that they were liable to pay to HMRC tax on the sum above £30,000, and that it was common ground that damages for injury to feelings are not generally subject to such a tax deduction. 

JUDGMENT

The District judge upheld the decision of the employer to deduct the basic rate of tax and National Insurance contributions, which the Appellant then appealed.  Permission was granted for an appeal to the Court of Appeal on the single point that the District judge considered there to be a genuine point as to whether it was right for the employer to treat the whole sum in excess of £30,000 as being taxable, rather than considering that the amount ought fairly to be attributed to the injury to feelings claim. 

Court of Appeal

The Appellant argued that Yellow Pages were required to make a fair apportionment within the sum of £53,000 as between injury to feelings, which were not subject to a tax deduction, and on the other hand damages for loss of earnings and other matters, which were subject to tax deduction.  The Appellant also submitted that there was an assumption between the parties when negotiations were conducted that such an apportionment would be made by her employer.  

However, the Court’s findings were that there was no evidence that the question of apportionment was raised during the discussion which led to the compromise agreement.   The judge commented that he was unable to read into the compromise agreement that there was an obligation on the employer to make an apportionment of the sum as between the taxable and non-taxable elements and calculate the payment to HMRC accordingly.  The judge commented that no good reason had been advanced as to why there should be such an obligation, and that such an obligation would tend to operate against the interest of the parties who were anxious to achieve a settlement. 

The Appellant's appeal was therefore dismissed.

ANALYSIS

The Court of Appeal's judgment in this case highlights the importance of apportioning compromise agreement awards between taxable and non-taxable elements upon the termination of an employee's contract, in order to prevent possible litigation arising. However, there is no obligation on the employer to determine the tax position with HMRC for tax payable on any taxable elements. 

It should also be noted that HMRC is not bound by the parties' apportionment of the taxable and non-taxable elements in a compromise agreement and may seek to recover further tax. The parties should therefore ensure that the agreement deals explicitly with who should bear that risk, and that the other party is indemnified against any further claims by HMRC.

If you require any further assistance, please contact Natalie Stoter on natalie.stoter@burges-salmon.com

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