Joshua Carey leading Sam Way successful in Court of Appeal employment tax “profit” appeal
The Court of Appeal has handed down its judgment in HMRC v Keith Murphy [2022] EWCA Civ 1112. The Court unanimously allowed HMRC’s appeal against the decision of the Upper Tribunal (Tax and Chancery Chamber).
Mr Murphy was one of a number of Metropolitan Police officers who had settled litigation against the Met Police arising from allegations that they had not been paid the proper amount of overtime and other allowances due under their contracts of employment. Those officers engaged solicitors and counsel under a Damages Based Agreement (“DBA”), and took out after the event insurance. The Met applied PAYE to those sums. Mr Murphy submitted a return on the basis that his proportion of the sums paid in respect of the DBA and insurance premiums were not liable to tax and hence he sought repayment of those sums.
On appeal to the First-tier Tribunal, Mr Murphy argued that those sums were not from his employment, and that those sums reduced the “profits” Mr Murphy had obtained from the litigation as they were sums that had been “necessarily” incurred in order to obtain the settlement agreement.
The First-tier Tribunal refused Mr Murphy’s appeal. The Upper Tribunal allowed Mr Murphy’s appeal, holding that “profit” in s62(2)(b) ITEPA meant “net profit” rather than “gross profit”, and that the payments made under the DBA and insurance premium did not form part of the “net profit” Mr Murphy had received from the settlement agreement.
The Court of Appeal robustly rejected this analysis, noting that such an analysis has the effect of circumventing the statutory deductions regime, and that the present case was on all fours with the case of Eagles v Levy [1934] 19 TC 23, in which a case was settled on terms that required the taxpayer to meet his own legal costs from the principal settlement sum which was taxable in its entirety as employment income. Lady Justice Andrews also provided a definition of “profit” in s62(2)(b) as being “a material benefit derived from a property, position, etc; income, revenue.”
The decision restores the orthodox position that prevailed before the Upper Tribunal’s decision in this case as to the manner in which employment income is charged to tax. Unless a payment from an employer is either not “from” employment, or falls to be deducted under the statutory regime, it is chargeable to tax as employment income. It is a decision of some significance given the wide reaching ramifications that the Upper Tribunal’s decision had including potentially allowing s62(2)(b) to be deployed for the purposes of artificially increasing a person’s earnings under the guise of “necessity” with the consequent effect that they were then excluded prior to calculating the “net taxable earnings”.
The judgment is available here.
Joshua Carey and Sam Way appeared for HMRC. They accept a broad range of instructions for direct and indirect tax both for taxpayers and HMRC.
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