Police get fair tax treatment on compensationby
An out of court settlement paid to police officers for unpaid overtime and hardship allowances should not have been taxed as if it entirely consisted of employment income.
The Upper Tribunal (UT) has been called upon to settle yet another case regarding the taxability of compensation settlements.
Keith Murphy UT/2020/0093 was a test case for a number of police officers who sued the Metropolitan Police Service (the Met) for unpaid overtime and hardship allowances. Rather than take the matter to court, the Met entered into a damages-based agreement (DBA) with the officers, resulting in a pay-out of £4.2m plus costs.
HMRC chose to subject the entirety of the settlement to income tax and NIC, based on the premise that the underlying source of the payment was employment income. If that income had been paid on time and without litigation it would have been subject to both PAYE and NIC.
The whole truth
The agreement was that the Met would pay, in full and final settlement of all claims:
- A “principal settlement sum” of £4.2m, plus
- Agreed costs, defined as “the legal costs and disbursements plus VAT of the claimants’ solicitors and counsel as assessed by the court or as agreed with the Met”.
The principal settlement sum and agreed costs together made up the “global settlement sum”.
The manner in which the Met’s payment was made was settled in the DBA as follows:
- The solicitors (SMB) and counsel were due a success fee of 30% of sums recovered, capped at £1.2m. This would be paid by the Met as the very first step, upon receipt of an invoice from SMB addressed to the claimants but stated to be payable by the Met.
- An insurance firm had charged a £50,000 premium to insure the claimants against the risk of having to meet any of the Met’s costs in the event of an unsuccessful claim. The Met would settle this charge out of the balance of the global settlement sum.
- The residue of the global settlement sum was to be apportioned between the claimants in accordance with a spreadsheet prepared by SMB. Payments would be subject to withholding of income tax and NIC.
Nothing but the truth?
The first-tier tribunal (FTT) ruled in favour of HMRC. The FTT’s judgment hinged on the question: “whether the payment of the success fee and the insurance premium arose from Murphy’s employment or from something else”.
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