PA Finlay & Co Ltd v Finlay UKEAT/0260/14/BA
Appeal against the award for arrears of pay amd against the grossing up calculation undertaken by the ET. Appeal allowed and corrections made.
The Claimant was awarded £166,318 after his successful claim of unfair dismissal. The sum was grossed up by 40% to £257,196 to account for the tax that would be payable on this sum. The full amount was paid to the Claimant in the tax year 2013/14 and he accounted for it on his self assessment in that tax year. The appeal concerned the grossing up calculation and a separate issue relating to whether the ET was correct (after 2 reconsiderations) to include a sum for arrears of pay in the compensation award where there was doubt as to whether the Claimant was entitled to an increase in pay leading to the supposed arrears.
The EAT allowed the appeal in both respects. First, dealing with the arrears, in the absence of findings on liability on these issues, the ET was not entitled to award a remedy for this alleged loss. Secondly on the grossing up exercise, the EAT agreed that the percentage by which the award should be grossed up would in this case fall within 3 tax bands, so that 3 different percentages should be applied to different elements of the award, instead of a single 40% grossing up calculation. The EAT also confirmed that the tax rate/s to be applied are those in force in the year the award is paid to the Claimant.
Appeal No. UKEAT/0260/14/BA
EMPLOYMENT APPEAL TRIBUNAL
FLEETBANK HOUSE, 2-6 SALISBURY SQUARE, LONDON EC4Y 8AE
At the Tribunal
On 22 March 2017
THE HONOURABLE MRS JUSTICE SIMLER DBE (PRESIDENT)
UKEAT/0260/14/BA & UKEAT/0062/16/BA
P A FINLAY & CO LTD (APPELLANT)
P A FINLAY & CO LTD (RESPONDENT)
Transcript of Proceedings
For P A Finlay & Co Ltd
MR RICHARD REES (Representative)
Peninsula Business Services Ltd
For Mr Finlay
MR ADAM ROSS (of Counsel)
Free Representation Unit
UNFAIR DISMISSAL - Compensation
There were errors in the Employment Tribunal's approach to remedy and to the grossing-up exercise undertaken by it. The errors were corrected.**THE HONOURABLE MRS JUSTICE SIMLER DBE (PRESIDENT)**
- In this Judgment I refer to the parties as they were before the Tribunal for ease of reference. Mr Rees, of Peninsula Business Services, appears for the Respondent appealing a Remedy Judgment and a second Reconsideration Decision. Mr Adam Ross of counsel appears for the Claimant, resisting those appeals and cross-appealing a first Reconsideration Decision. I am particularly grateful to Mr Ross for the assistance he has given as to the changing approach to remedy adopted by the Tribunal and in relation to the incidence of tax on the awards made.
- There are three appeals. They all relate to remedy issues arising from Judgments of the Employment Tribunal (comprising Employment Judge Jones, Mr Wheeler and Mr Quinn) following a Liability Decision in the Claimant's favour. There is no appeal on liability. The three Judgments are as follows:
(1) a Remedy Judgment promulgated on 17 March 2014, whereby a net sum of £166,318 was awarded to the Claimant as un-capped compensation for unfair dismissal, which was grossed-up to £257,196 to take account of the incidence of tax.
(2) There was a first Reconsideration Judgment of the Tribunal's own motion with Reasons promulgated on 13 May 2015 (referred to as the "first Reconsideration Judgment"), which had the effect of deducting an award for arrears of pay of £14,850 and adding back a further sum of £28,000-odd. There was then a further grossing-up exercise. The addition of £28,000-odd is not challenged and was correctly added. The deduction of £14,850 is, however, the subject of appeal and cross-appeal.
(3) There followed a second Reconsideration Judgment, with Reasons promulgated on 11 September 2015 (referred to as the "second Reconsideration Judgment"). This reinstated the sum of £14,850 as part of the award and made a minor correction to the first Reconsideration Judgment of about £5. There was then a further grossing-up exercise.
- On each occasion that the Tribunal reconsidered its award, it approached the question of grossing-up de novo rather than by recognising what had gone before. This was unfortunate. As a matter of fact the Respondent paid the Judgment sum awarded at the Remedy Hearing on 12 December 2013, as grossed-up for that tax year, and did so before the end of the tax year of 5 April 2014. The Claimant entered the grossed-up sum of £257,196 on his self-assessment tax return for that tax year, and Her Majesty's Revenue & Customs (HMRC) accepted his calculation of the tax that was due by reference to that grossed-up sum. It is surprising that neither side drew the Employment Tribunal's attention to this fact. I make no criticism of Mr Ross, who was himself unaware of this fact when he made representations on the Claimant's behalf, but it seems to me that much confusion and difficulty caused in relation to the tax position in this case could have been avoided if that simple fact had been drawn to the Tribunal's attention.
- The first question to be addressed on this appeal is whether by reference to the grounds of appeal the second Reconsideration Judgment is correct and can stand. In dispute is the extent to which the Claimant is entitled to the award of £14,850 representing arrears of salary and the correctness of the Employment Tribunal's approach to grossing-up the award for lost earnings in this case.
- The facts relevant to the appeals are in short compass. The Claimant commenced employment on 6 April 2006, and his employment terminated with effect from 4 November 2010. A Judgment on liability was sent to the parties on 4 June 2013. The Tribunal found that the Claimant was unfairly dismissed (among other things) because he made protected disclosures. Remedy was to be addressed separately, and following the Liability Hearing directions were made by the Tribunal for the provision of a schedule of loss by the Claimant with Orders made for the Respondent to provide a counter-schedule thereafter.
- Arrears of salary of £14,850 was awarded as part of the compensatory award in the Remedy Judgment, reflecting arrears of salary said to be owed by the Respondent to the Claimant. In the first Reconsideration Judgment the Tribunal varied the original Remedy Judgment by quashing this award. In its second Reconsideration Judgment the Tribunal reinstated the award. The question on appeal is whether there was any entitlement to this award and whether the Tribunal made an error of law at any of these stages.
- In his original ET1, at a time when he was represented by solicitors, the Claimant identified his salary entitlement of £6,667 per month, which amounts in total to a gross salary of £80,000-odd per annum. He claimed arrears of pay by ticking the box in relation to what he said was owed and by listing arrears of salary under the question, "What compensation or remedy are you seeking?" He did not, however, set out any details about the nature of this claim or how it arose, and he did not explain in his ET1 that he was not receiving that salary entitlement in full or the circumstances as to why that was so. The response form from the Respondent did not challenge the salary entitlement claimed but denied all claims and denied breach of the Claimant's contract or any unlawful deduction from wages.
- There was a case management discussion on 28 November 2011, by which time the Claimant was acting in person, and the issue of arrears of salary was not identified as a separate liability issue at that hearing. The issues that were identified all related to the whistleblowing unfair dismissal claim and other related matters. There is no suggestion, however, that the Claimant formally withdrew his claim for arrears of salary, but the Respondent's case is that he did not pursue it at any stage thereafter up to and including the Liability Judgment. It is unsurprising in those circumstances that the Liability Judgment does not address any allegation that there was a shortfall in payments made by the Respondent to the Claimant by way of salary or that there were unlawful deductions from wages. Though the Claimant relies on paragraphs 73 and 154 of the Liability Judgment as addressing his entitlement, those paragraphs simply reflect his evidence about giving an instruction that his drawings should be left in the Respondent Company insofar as they reflected a salary increase to £80,000, until the Company could afford to pay him. The Employment Tribunal made no findings that the Respondent agreed the increase or the instruction or as to what happened and what was agreed more generally.
- In his schedule of loss the Claimant identified two claims that are potentially relevant to this issue: first, an unlawful deduction claim of £400; and secondly, a sum of £14,818.39 said to have been withheld pay. It is his case that once he learned that his sister and her husband's joint salary had been increased to £80,000 in May 2009 he asked the Respondent to put his salary onto the same level, with his own partner, Lisa Jones, and asked that this should be with effect from 1 April 2009. However, at the same time, given his understanding of the then current financial position of the Company, he agreed to the ongoing receipt of a reduced sum of salary and asked that the shortfall be treated as an accrual and retained within the Company until such time as it was in a position to make the payments to him. That was the factual foundation for the arrears claim, but, as I have already indicated, no liability findings were made on this issue. The Claimant maintained before the Tribunal and maintains before me that the claim for arrears of salary forms part and parcel of his compensation for unfair dismissal and did not arise under any separate head of liability so that the Tribunal was entitled to treat that claim as encompassed in the award of compensation for unfair dismissal.
- The Tribunal dealt with the claim in the Remedy Judgment at paragraphs 25 to 33 and 47, implicitly accepting the Claimant's case that there was an increase in pay to £80,000 but a shortfall in payments actually made to the Claimant and finding that the Respondent accordingly withheld pay of £14,850 between May 2009 and November 2010 when the Claimant was dismissed. The award was made for that sum as part of the Claimant's compensatory award for unfair dismissal.
- In the first Reconsideration Judgment, the Tribunal recognised that the arrears claim was a disputed issue at the Remedy Hearing. It noted that the arrears claim was not part of the original ET1 claim form and was not one of the issues that had been determined at the Liability Hearing. It therefore concluded that it did not have jurisdiction to make the award. In particular, the Tribunal concluded no finding of failure to pay the Claimant his full salary for the relevant period nor any finding that the Respondent was in breach of contract had been made by it. At paragraph 14, accordingly, the award was quashed.
- In its second Reconsideration Judgment the Tribunal reinstated the award, addressing the issue at paragraphs 6 to 9. It held that the gross wages reflected in the ET1 of £80,000 per annum had not been disputed in the ET3. It referred to the fact that the Claimant's actual wages were £55,000 until April 2009, when his salary was increased to £63,500, and that there was accordingly a shortfall established by those facts that the Tribunal regarded as undisputed fact. The Tribunal referred to the claim for arrears of salary in the ET1 and concluded that it did have jurisdiction to make a finding in relation to those arrears. So far as the Respondent's contention that it had not been permitted to lead evidence on this question at the Remedy Hearing, the Tribunal concluded that the Respondent had an opportunity to put its case, having been made well aware beforehand that this was an issue at the remedy stage and having not prepared any witness statements or evidence to rebut this aspect of the remedy claim. In all the circumstances, the Tribunal concluded that the arrears claim should be reinstated.
- The Respondent's challenge to the second Reconsideration Judgment in relation to this award is that in the absence of any finding on liability relevant to this issue the Tribunal was simply not entitled to make the award; it was impermissible and made without jurisdiction. Mr Rees contends that the Tribunal could not do so as part and parcel of the compensatory award. For his part, Mr Ross disagrees. He contends that there was an agreement that the Claimant be paid £80,000 per annum with a further agreement that he would receive a sum limited to the £63,500 salary that was actually paid but he would accrue the difference and that accrual would be retained within the Company until such time as the Company could afford to pay. Mr Ross accepts that no demand for payment has ever been made by the Claimant, nor in answer to my question during the course of the hearing was he able to say that the Company is now in a position to pay. Nevertheless, as a matter of practical fairness he submits that had the Claimant not been unfairly dismissed the accrued money would have been paid to him. The fact that he was dismissed meant that the payments were not made and he was therefore entitled to claim such payments as part of his compensatory award.
- There is no dispute as to the jurisdiction of a Tribunal to make an award for compensation for unfair dismissal. Such an award is made pursuant to the Employment Rights Act 1996, section 123. This provides that tribunals may award such amount as is considered just and equitable in all the circumstances having regard to the:
"(1) … loss sustained by the complainant in consequence of the dismissal in so far as that loss is attributable to action taken by the employer."
The section makes clear that such loss is to be taken to include expenses reasonably incurred in consequence of the dismissal and having regard to the loss of any benefit that a complainant might reasonably be expected to have had but for the dismissal.
- The question that arises in those circumstances is whether the shortfall in pay (to the extent found proved in the period leading up to the Claimant's dismissal) can properly be regarded as a loss sustained in consequence of the dismissal. Notwithstanding Mr Ross' submissions, I do not consider that it can be. This asserted loss has nothing to do with the Claimant's dismissal and arises, if it does, entirely independently of it. There is real doubt on the facts as currently known as to whether in light of the agreement reached by the parties the conditions for entitlement to receive the money are even met, quite apart from establishing the facts of the agreement relied on by the Claimant in the first place. To establish this claim, the Claimant would have to prove the mutually agreed increase in his salary to £80,000, together with a failure to pay what was mutually agreed when the payment fell due. The mere fact that the Claimant was dismissed does not lead to the conclusion that the payment fell due in circumstances where, on his own case, it was mutually agreed that he would only be entitled to receive the money when the Company is in a financial position to pay it.
- In the absence of findings on liability on these issues, it seems to me that the Employment Tribunal was not entitled to award a remedy for this alleged loss. That leads to the conclusion that the second Reconsideration Judgment was in error in reinstating this award and Judgment for this sum cannot stand.
- In the Remedy Judgment, the Employment Tribunal grossed-up the compensatory award at a rate of 40 per cent. That figure was revised downwards in the first Reconsideration Judgment but upwards to a significantly higher figure in the second Reconsideration Judgment, principally because rates of tax for later tax years were adopted for the whole sum (together with other small changes in the Tribunal's approach). The Respondent's appeal challenges the Tribunal's approach to grossing-up by reference to rates adopted but does not expressly take the point that the vast majority of the Judgment award was paid, and tax assessed and paid by reference to the tax year 2013/2014 tax rates. Nevertheless, Mr Ross properly concedes that the grossing-up exercise should, if it is found to be in error, be put on a proper footing to reflect what has actually occurred.
- As stated earlier, the award of £160,318 (grossed-up to £257,196) was paid on or before 5 April 2014. The Claimant entered that sum (less the £30,000 tax free element) in his tax return for the tax year ending 5 April 2014. The tax rates applicable for that tax year were 20 per cent on the first band up to £32,010, 40 per cent on the next band up to £117,990 and 45 per cent on the excess above that sum. The tax position so far as payments received in respect of awards of compensation is agreed to be as follows. A payment of compensation for unfair dismissal does not have the character of general earnings pursuant to section 7(3) or section 62 of the Income Tax (Earnings and Pensions) Act 2003 ("the 2003 Act"). However, Part 6, Chapter 3 of the 2003 Act deals with payments and benefits received on termination of employment. A payment that falls within this part of the 2003 Act counts as employment income and is taxable to the extent that the payment exceeds £30,000. The charge to tax catches payments and other benefits that are received directly or indirectly in consideration, in consequence of or otherwise in connection with the termination of a person's employment (see section 401 of the 2003 Act), and in this case there is no suggestion that sums received were not caught by this provision, or were otherwise chargeable to tax under some other provision, of the 2003 Act.
- Section 403(2) defines the relevant tax year as the tax year in which the payment or other benefit is received. In those circumstances, given that the payment was received in the tax year 2013/2014, the relevant tax year for the purposes of any grossing-up calculation was the tax year 2013/2014. Mr Ross contends that the fact the Tribunal reconsidered its award subsequently in later tax years means there is a real possibility that HMRC will seek to tax the Claimant on the whole sum in a later tax year, giving him credit for what was paid earlier. Mr Ross could identify no authority for that proposition and relied on section 403(3)(a) of the 2003 Act, which identifies that a cash benefit is treated as received either when it is paid or a payment is made on account of it or when the recipient becomes entitled to require payment of or on account of it. He submits that there is a risk that HMRC could take the point that the Claimant only became entitled to the full sum at the time of one of the Reconsideration Judgments and might lose out subsequently if the 2013/2014 tax rates are now treated as applicable.
- I do not accept Mr Ross' submission. The relevant tax year for these purposes is the tax year in which the award was received by the Claimant. Had the Tribunal been told the payment had already been made, it is inevitable that any reconsideration award made would have been dealt with by adding or deducting any smaller amount found due or overpaid from what had already been paid, rather than by re-awarding a full award in place of the original award. Any such differential would of course have to be grossed-up by reference to the year in which it is (or was) paid. The Tribunal's error (as a result of the failure by the parties) was to approach the grossing-up exercise by reference to tax rates applicable to a later tax year.
- The correct calculation in order to gross-up a net award of £166,318 in the tax year 2013/2014 is reflected in the calculation produced on behalf of the Respondent by Peter Nicholas Swift of the Institute of Chartered Accountants in England and Wales on 29 September 2016, as follows:
"5. The Income Tax due as calculated on the Tax Return for the year 2013/14 was £88,336.20. Therefore, the net amount received by the Claimant was £257,196.00 less Income Tax of £88,336.20 which equals £168,859.80. This is £2,541.80 higher than the Award of £166,318.00 …
6. The Grossing Up calculation performed in the Judgment on Remedy was incorrect because it applied an overly simplistic tax rate of 40% when, in fact, the actual tax rate is a blended rate based (in 2013/14) on three tax rates applicable to different bands of earnings - the rates of tax are 20%, 40% and 45%. Mr Finlay is not eligible for the normal nil% rate of tax because his gross earnings in the tax year in question were over £150,000.
7. The correct calculation to gross up the net Award of £166,318.00 in the tax year 2013/14 is as follows:
|**Tax bandings**||**Gross**||**Income Tax**||**Net**|
|Up to £32,010 @ 20%||32,010.00||6,402.00||25,608.00|
|Next £117,990 @ 40%||117,990.00||47,196.00||70,794.00|
|Earnings over £150,001 @ 45%||72,574.55||32,658.55||39,916.00|
|Total per amended Tax Return||222,574.55||86,256.55||136,318.00|
|Add: tax free amount||30,000.00||0||30,000.00|
|Total Award Grossed Up||252,574.55||82,256.55||166,318.00|
8. The correct figure for the Grossed Up amount is £252,574.55. This is £4,621.45 less than the amount calculated by the Employment Tribunal. The blended rate on Income tax for Mr Finlay in 2013/14 was 38.75%. This results in a net amount after tax receivable by Mr Finlay of £166,318.00, exactly the amount Awarded by the Employment Tribunal." (Original emphasis)
- That reflects the grossing-up exercise so far as the award made in the Remedy Judgment is concerned. However, there is as a consequence of the first Reconsideration Judgment a shortfall. The shortfall is the sum of £12,883.92 net (and must be grossed-up). That sum remains owing and must be paid by the Respondent.
- The sensible course to adopt and one that was agreed by both parties in those circumstances is to quash both Reconsideration Judgments and to reinstate the original Remedy Judgment. In addition, in exercise of my powers under section 35 of the Employment Tribunals Act 1996, I direct that the Respondent must pay the shortfall of £12,883.92 (after grossing-up) within 28 days. The grossing-up exercise cannot be conducted today, because account will have to be taken of any other earnings the Claimant has in the current tax year, 2016/2017. The £30,000 tax free element is inapplicable, because that has already been used and the Claimant does not have a second entitlement to it.
- The parties are to agree the grossed-up sum that must be awarded to produce a net payment of £12,883.92 in the Claimant's hands after tax has been paid, within the next 28 days. If agreement is not possible within that time, the parties are to make written representations to the EAT to reach me within that 28-day period. By 4.00pm on 19 April, the parties are either to agree the grossed-up sum that must be paid by the Respondent or alternatively, if such agreement cannot be reached, produce written representations served on one another and lodged with the Appeal Tribunal by the same date setting out their respective positions as to the grossing-up exercise. If there is agreement, there must be payment within 14 days thereafter. If no such agreement can be reached, written representations will be required by 19 April as already indicated. The EAT will then consider what Order to make in relation to grossing-up and payment.
- To the extent indicated, the appeal is allowed. The Reconsideration Judgments are both quashed and the Remedy Judgment is reinstated together with the further award of £12,883.92 (net) to be grossed-up and paid by the Respondent to the Claimant.
Published: 18/05/2017 10:33