In MT v HMRC (TC03795), the First Tier Tribunal (FTT) held that a payment made to a person making a protected disclosure pursuant to an order for interim relief under section 129 Employment Rights Act 1996 was not an emolument of the employment and, as such, should be exempt from tax up to the £30,000 threshold.
MT (the 'Appellant') received an email informing her that her employment was being unilaterally terminated by her employer with effect from the following day. As a result she applied to the Employment Tribunal for interim relief, claiming that the principal reason for her dismissal was that she had made a number of protected disclosures to her employer under s.43A ERA 1996.
On granting the relief, the Tribunal ordered that the employer should continue to pay the Appellant her normal salary from the date of dismissal until the date of the determination or settlement of her complaint. This order was made even though the Appellant was not expected to continue working for her employer.
The interim relief payments were paid to the Appellant for a period of just over a year, until the Employment Tribunal found that she had been unfairly and wrongfully dismissed.
The Appellant claimed, in reliance on Dowling v M E Ilic Haulage [2004] UKET 0836 03 0203, that the effect of an interim relief order is only to extend the pre-existing contract of employment for the purposes specified in s 130 ERA 96; not for all purposes. On that basis, she argued that the payments received under the interim relief order should not be regarded as 'earnings' within the ambit of s 62 ITEPA, rather they should be regarded as part of her entitlement to compensation for the termination of her employment.
The key question for the FTT to decide was, 'If an employee's contract of employment is 'continued', why should the amounts paid pursuant to that continued employment not be taxed in the ordinary way as earnings of the employment?'
Following a useful summary of the key upper court cases in this area the FTT reached the following conclusions:
- The ERA specifically provides that when an interim relief order is made, the contract of employment doesn't automatically continue but is deemed to continue in force for purposes including pay.
- Despite this, the true question is not whether the payments arise from the contract of employment, but whether they arise from the employment itself.
- The Appellant only became entitled to claim interim relief as a result of the termination of her employment.
- Rights under s 129 and 130 ERA can only arise after an employment has ceased.
As such, and in the absence of any other basis on which the interim payments could be said to amount to emoluments of the Appellant's employment, the payments were found to be 'received… in consequence of, or otherwise in connection with… the termination of [the Appellant's] employment'.
This is an important clarification to the practical application of taxation on interim relief payments granted following the dismissal of an employee.
For more information on this topic or for tax advice generally please contact John Barnett or Nigel Watson.