UT corrects FTT over termination payment tax
Taxpayer Heather Jones fought her own case all the way to the upper tribunal (UT) to get HMRC to agree that sufficient tax had been deducted by her former employer from her termination payment.
Jones left her employer, Doubletake Studios Limited (DTS), on 31 October 2010, and agreed to a redundancy payment of £36,700. Payment was to be made in four equal instalments of £9,175.
Under s403 ITEPA 2003, the first £30,000 of a redundancy payment is exempt from tax, if certain conditions are met. The remaining £6,700 of Jones’ payment should have been subject to tax at the higher rate of 40%.
Jones received three payments of £9,175, and a final payment of £6,515.04, which on the face for it indicates that deductions totalling £2,659.96 were made from that final payment.
Jones was not provided with a final payslip from DTS, and had no documentation from them to show what the payment of £6,515.04 comprised, save for an email chain discovered after the first tier tribunals’s (FTT) decision.
As a P45 form had been issued to Jones before she received her final instalment of the termination payment, DTS was required to deduct 20% tax (£1,340) from the taxable portion of her termination payment (£6,700) under PAYE Reg 37, and this is what it reported to HMRC under RTI.
DTS subsequently went into liquidation, and HMRC was unable to glean any further information from the liquidators.
Jones did not declare the taxable part of her redundancy payment (£6,700) in her 2011 tax return.
In April 2015, HMRC raised a discovery assessment in respect of the balance of the tax due of £1,351.20. This was made up of: £1,340 (20% x £6700) plus 310.40 under deduction less £299.20 credit.
However, Jones was convinced that tax of £2,659.96 had already been deducted from her final payment, so she shouldn’t have to pay a further £1,340 in tax for the year. She therefore appealed against the assessment to the first tier tribunal.
Jones represented herself at the FTT hearing [TC06267] in April 2016, following which she was given the opportunity to obtain further evidence to show that tax at 40% had been deducted.
The taxpayer reached out to DTS’ liquidators but was told that the company’s records, stored in some 740 boxes, had been archived and would not be reviewed. Jones’ request to issue a witness summons to the liquidator was denied by the FTT.
In December 2017, the FTT dismissed Jones’ appeal, concluding that she had not discharged the burden on her to show that the figures in HMRC’s assessment should be reduced or the assessment set aside.
What was the correct amount of tax?
Following the FTT’s decision, Jones discovered an email chain when clearing out her inbox. In it, she queried why her final payment had been £6,515 and not £9,175. The emails confirmed that the difference was down to tax.
Jones applied to have the FTT’s decision set aside in January 2018. The FTT refused, arguing that the email chain was not sufficient to justify confirmation of the amount of tax deducted: 40% of £6,700 was £2,680, but the deduction taken in this case was £2,660 [39.7% x £6700].
In October 2019, the FTT granted Jones permission to appeal to the UT.
Appeal to upper tribunal
Jones also argued her own case at the UT saying the FTT had erred in law on the following grounds:
- The FTT had been wrong to conclude that the email chain did not add anything to her case, and had focused too heavily on the assumption that a 40% tax rate must have been applied to the £6,700 in order for the deduction to have related to tax;
- The FTT’s findings of fact contained errors relating to her bank statements;
- The FTT’s refusal of her application for a witness summons to the liquidator unjustly denied her access to crucial evidence in support of her case.
In terms of the email chain, the UT noted that it was clear DTS’ explanation for the deduction was that it was solely for tax. As a result, the email chain was highly relevant. By dismissing evidence which so clearly went to the essence of the issue under appeal, the FTT had erred in law.
The UT also noted that it was not clear why there had been an assumption that the deduction had to be precisely 40% for it to relate to tax, given potential other factors at play, including the fact that the payment was made outside of the normal payroll cycle.
The FTT had mistaken a transfer out of Jones’ bank account of £9,175 as a payment into her account, and this was not in dispute. This meant the FTT had again erred in law, as it had made an unsupported finding of fact on a relevant matter, which then led it to positing a wrong assumption about the nature of the subsequent payment of £6,515.04.
The UT concluded that the FTT had not erred in law in refusing an application for a witness summons for the liquidators.
Discovery assessments not valid
To support the discovery assessments, HMRC had to show that there had been a discovery leading to a loss of tax and that this had been brought about by the carelessness or deliberate action of the taxpayer.
There was nothing in HMRC’s statement of case to show how Jones had acted carelessly or deliberately, and no similar discussion was provided in the FTT’s decision. There was no suggestion Jones had made any concession that the discovery assessment was valid.
The UT declined to remit the case back to the FTT, as it would not have been in the interests of justice to allow HMRC to make a case that it ought to have made the first time round.
Accordingly, the UT remade the decision and allowed the appeal on the basis that HMRC had not discharged the burden on it to show the discovery assessments were valid.
The UT also highlighted a core issue during this appeal: whether Jones was entitled to take into account the amount deducted in excess of 20% in calculating her own liability to tax (given that DTS was only entitled to deduct tax at the basic rate). Alternatively, was Jones left with a claim against DTS rather than a credit for tax deducted at source on her self-assessment?
The FTT did not raise this point and, due to the UT’s determination that HMRC’s discovery assessments weren’t valid, we did not hear the UT’s comments on this issue.