An employee has lost his case that the Court of Appeal (CoA) after the Upper Tribunal (UT) had ruled in his favour by overturning the First-tier Tribunal’s (FTT) decision. The employee taxpayer had been employed by the Metropolitan Police Service (the Met) but he had taken the Met to court to claim unpaid overtime and certain other allowances. Eventually the Met agreed to settle the case.
In bringing the legal action against the Met, the taxpayer had employed solicitors who agreed to work on a success basis and the employee took out an insurance policy in case the Met were awarded costs or other damages via the litigation. When the settlement payment was made the Met applied PAYE against the whole settlement but didn’t apply PAYE on the costs that it agreed to pay to the taxpayer’s solicitors. The success fee that the taxpayer’s solicitors earned was paid directly to the solicitors by the Met and in a similar manner the insurance premium was also paid by the Met directly to the insurance providers. The Met had applied PAYE to the whole settlement, being the gross amount before the payments to the solicitors and insurance providers.
The taxpayer thought that he should only be taxable on the net amount as the success fee and insurance premium were necessarily incurred in obtaining the payment of earnings from the Met. HMRC disagreed as did the FTT, but the UT overturned the FTT’s decision holding that the net profit was the amount that should be taxable.
HMRC appealed the CoA who have held that the UT had erred in law by overturning the FTT’s decision. The CoA found that while the payment of the success fee and insurance premium were necessarily incurred in obtaining the payment from the Met the payments were not incurred in the performance of the employee’s duties, say travelling or accommodation expenses. Only expenses incurred in the performance of duty are deductible for employment income. The CoA found that the word profit in the legislation had to be construed as profit as calculated under the same legislation and expenses of solicitor success fees and insurance premiums were not incurred by the employee in the performance of his duties. The Met had been correct to apply PAYE on the gross amount of the whole settlement.
The decision can be found at: The Commissioners for HMRC v Keith Murphy – Find case law (nationalarchives.gov.uk)
Please let us know if you have any questions on employment taxation and the operation of PAYE. In this case PAYE was operated correctly but if it hadn’t been the liability would have remained on the employer.
