Taxing compensation payments

2 mins

Posted on 12 Jan 2011

In Norman v Yellow Pages Sales Ltd, the Court of Appeal has confirmed that there is no implied duty on an employer to treat a termination payment in a tax efficient manner. 

Ms Norman was dismissed by Yellow Pages and then brought a variety of claims including discrimination and breach of contract for unpaid wages and unpaid notice pay.  She entered into a COT3 agreement whereby Yellow Pages agreed to pay her £53,000.  She received the payment, but net of tax in respect of the amount above £30,000 (which can be paid free of tax).  There was no mention in the COT3 about the tax treatment of the payment. 

Ms Norman issued proceedings for breach of contract, stating that the payment should have been paid tax free as the balance above £30,000 could be apportioned to a non-taxable injury to feelings payment.  She argued that the company had an implied duty to apportion payment fairly.  The Court of Appeal disagreed and found that the employer was entitled to deduct tax on the full amount over £30,000 and pay it to HMRC.  There was no such implied duty.  Any dispute arising over the amount of tax payable was for the employee to resolve with HMRC. 

Evidently it would have been prudent for both parties to agree how the payment was to be taxed prior to agreeing terms, so as to avoid any dispute.

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