Richard Grogan: Tax appeals throw settlement tax relief practices into disarray
Employment law solicitor Richard Grogan of Richard Grogan & Associates looks at two recent tax appeal cases which have thrown existing practices to claim tax relief on employment awards into disarray.
This issue arose in the Tax Appeals Commission in the case of an Appellant and the Revenue Commissioners 13TACD2020. The decision is dated 18 December 2019.
The Settlement Agreement provided in part 1:
- Without admission of liability the Employer agrees to pay to the Employee a total of €340,000 (three hundred and forty thousand euro) gross, subject to statutory deductions as are required in respect of the following:
- Damages for personal injury €45,000;
- Special damages of €95,000
- Ex gratia termination payment of €60,000
- Contribution to legal costs of €140,000 inclusive of VAT (referred to as the “Legal Costs”).
The Tax Appeal Commissioner considered sections 192 and 123 of the Taxes Consolidation Act 1997.
The Appellant contended that the sum of €95,000 was a compensation payment and claimed within the provision of section 192A(6). The Revenue contended that the special damages of €95,000 represented remuneration. The issue was looked at in relation to the exemption which applies.
It was held that the purpose of an award of damages is to place the injured party in a position as close as practicable to that which the party would have enjoyed but for the injury caused by the other party. General damages are broadly viewed as being for pain and suffering (non-pecuniary loss) and special damages as pecuniary loss.
It was held that the documentary evidence did not support the submission that the payment of €95,000 was a compensation payment. The agreement described the payment as special damages and the schedule of the special damages referred to loss of earnings for past and future losses. The schedule for special damages took a deduction for the income earned by the appellant for her part-time employment in setting the loss of earnings.
It was held that the schedule of special damages was a calculation to place the appellant as close as was practicable to that which the appellant would have enjoyed had the appellant had the earning capacity of full-time employment.
The Appeal Commissioner looked at the statutory language in section 192A(5)(A) and said it had been broadly drawn as it uses the words “however described”. The special damage for loss of earnings was calculated by reference to the income that the appellant would have earned in full-time employment. It was held that if the appellant had been able to earn that income, that income would have been taxable and it was held that €93,000 of the payment was in remuneration and was subject to tax.
A further case of this arose under An Appellant and the Revenue Commissioners 12TACD2020 which issued on 12 December.
This related to a payment of €65,000 to an employee inclusive of Statutory Redundancy Clause 5 of the relevant severance agreement provided that there was no admission of liability. There was a provision in respect of getting independent legal advice in the sum of €10,000 inclusive of VAT was to be contributed to the employee’s legal costs.
Again, sections 192A and 123 of the Taxes Consolidation Act 1997 were referred to.
In the decision, it was held that the severance agreement made no reference to the payment being made for breach of an employment right arising from a complaint of bullying. It was described as a termination payment.
The provisions of section 192A(3) provides that a payment may be exempt from tax if it is made in accordance with a settlement arrived under a mediation process provided for in a relevant Act. It was pointed out that there was no evidence that a claim was made by the appellant to a relevant authority, which in this particular case would have been the Labour Relations Commissioner but now would be the Workplace Relations Commission.
It was pointed out that the mediation process between the appellant and the employer was not identified as a mediation process which had its origin in the relevant Act. It was held that for the provisions of section 192A(3) to apply the settlement should be arrived at under a mediation process provided for in a relevant Act which is the WRC Mediation Service.
The Appeal Commissioner pointed out that section 192A(4) provides:
“that a payment may be exempt from tax if it is made under an agreement between unconnected persons which is evidenced in writing and being in settlement of a claim which, had the claim been made to a relevant authority, would have been a bona fide claim under the provisions of a relevant Act and, had the claim not been settled by the agreement, is likely to have been the subject of a recommendation, decision or determination by a relevant authority. The requirements in subsection (4) specifically refer to a statement of claim. The Revenue Commissioners submit that for a settlement to be considered an ‘out of court’ settlement it must be advanced to the point where there is a real prospect that the matter will be presented to a court for decision. There is no reference in section 192A(4) to ‘out of court’ settlements. This wording appears in a leaflet published by the Revenue Commissioners and in the Notes for Guidance on the Taxes Consolidation Act, 1997. While it may be wording which is a convenience of language, it is important that a consideration of whether section 192A(4) applies is by reference to the wording of the section. As regards the Appellant, no statement of claim has been produced. There is no evidence that a claim was made by the Appellant to a relevant authority. As regards the requirements in section 192A(4), the respective position of the parties at the date of the Severance Agreement is the employer had a report of an external investigator which did not uphold the Appellant’s complaint of bullying and the Appellant has engaged legal representation to appeal the findings of the report of the external investigator.”
In this case it was held that the payment was subject to tax. These two cases raised important issues for practitioners.
The first case is one where it is vitally important that where an agreement is being entered into that the appropriate wording is used. Solicitors and barristers putting in place any settlement document have a duty to properly describe matters.
If something is for loss of earnings, then it is a loss of earnings and should not be described in any other way. If, however, it is compensation for other than loss of earnings, then describing it as a loss of earnings is incorrect and can result in something that should not have been taxed being taxed. In relation to the first case, it would appear that these were properly classified as loss of earning sand therefore should have been subject to tax.
In respect of the second case, it is extremely important for practitioners. It now appears that where a claim is to be brought and compensation is sought under a piece of employment legislation, a complaint will need to be submitted to a relevant authority, which could be either the Courts or the Workplace Relations Commission.
Under section 192A TCA97, it is not possible to settle a matter without prejudice and claim the exemption from tax. Where the tax exemption is being claimed, it requires the parties to set out that the compensation agreed is likely to have been the subject of a recommendation, decision or determination by a relevant authority.
If either party is not prepared to do that, and this is usually the employer, then in those circumstances the payment will be subject to tax. This will apply even in a situation where a complaint had issued and where it was clear that, for example, the employee would win the case, but where these words “without prejudice” are used or “without admission of liability” then in those circumstances the tax exemption will not apply.
The second decision refers to mediation. The only mediation is that in the WRC. In reality, in many cases because of delays in getting on to mediation or in significant claims, parties will want to use an outside mediator. The process in the WRC, while called mediation, is not really mediation in the true sense. If parties are going to go through mediation in those circumstances, there is still a provision to enable matters to be settled and this is not a settlement under a mediation agreement. This is one where mediation outside of the WRC will be treated as a settlement so it cannot be without admission of liability.