Nicky Howard-Ravenspine’s is another of those disturbing cases in which an unrepresented taxpayer understood the law better than HMRC but had to undergo the delay and stress of appearing before the First-tier Tribunal (‘FTT’) to prove it ([2023] UKFTT 471 (TC)). It’s not good enough.
After suffering some years of ill-health, the lady in question agreed in April 2016 to the termination of her employment. She received a payment comprising several itemised elements, by far the largest of which was expressed to be in relation to her inability to continue working on health grounds. Having visited HMRC’s website and done some research, she realised that that element qualified for exemption from tax as a payment provided ‘on account of injury to, or disability of, an employee’. She invited HMRC to repay to her the tax that had been deducted from that element, and she received a repayment. There was no covering letter or computation, but she assumed (probably correctly) that the repayment was in respect of the disability payment. So far so good.
Ms Howard-Ravenspine had claimed Child Benefit for 2016/17. In 2019 she received a ‘nudge letter’ from HMRC asking her to reconsider whether she was liable to the High Income Child Benefit Charge (‘HICBC’) as having taxable income in excess of £50,000. She contacted HMRC and explained the background: yes her income was over £50,000, but not if you exclude the disability payment which she understood HMRC had agreed was not taxable.
Aha, said HMRC. A ‘disability’ payment is tax-free only if that’s all you receive. You received other elements at the same time (basic salary, holiday pay, severance payment) which were not only taxable in their own right but which also tainted the (much larger) disability payment. That’s what it says in our manuals because that’s what the High Court said in Horner v Hasted. So your income exceeds £50,000 and we’d like £2,500 HICBC please.
No, said the FTT: that isn’t what the High Court said at all. As the FTT put it:
‘To the extent that a taxpayer can establish (and the burden of proof is, as in the case of this appellant, on the taxpayer to establish this) that some element of payment which would otherwise be taxable under section 401 ITEPA falls within the disability exemption, then that element is exempt from tax by virtue of that exemption. It is not an all or nothing situation. Simply because other elements of the payment fall outside the disability exemption does not disqualify those elements which fall within it, from benefiting from that exemption.’
Furthermore, HMRC’s Employment Income Manual (albeit in a paragraph which HMRC did not cite before the FTT – odd thing, that) agrees:
‘Many terminations are dealt with by a compromise agreement … and will refer to claims that the employee has made against the employer before an Employment Tribunal or the Courts. Since the compromise agreement will “settle all claims” it settles those claims and some of them may relate to issues other than disability. It follows that some part of the payment must be apportioned to those claims and taxed accordingly.’
The decision records that HMRC, having been challenged to that effect by the FTT, took instructions over the hearing’s lunchtime break and returned in the afternoon to concede the case and apologise to Ms Howard-Ravenspine for HMRC’s having wasted her time.
There should be some very shame-faced people at HMRC.
For more information, please get in touch with your usual BKL contact or use our enquiry form.
