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Taxation of settlement money

Posted on 13th November 2013
Case law

In this case the High Court considered if a settlement sum paid under an agreement was the gross sum to be paid to the employee or was subject to deductions for tax before payment to the employee.

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a ‘settlement sum’ means the total sum ‘for which Mr Barden was agreeing to settle his claims’, including his tax liability

Barden v Commodities Research Unit and others [2013]

Background

Mr Barden and his former employer, Commodities Research Unit (CRU), agreed a settlement sum of £1.35 million following mediation. The settlement was recorded in an agreement signed in the early hours of the morning by both parties. The settlement agreement provided that CRU would ‘pay £1,350,000’ to Mr Barden. Both parties recognised the payment was taxable but the agreement did not deal with the tax treatment of it.

Mr Barden argued that the settlement sum was the sum he should actually receive. CRU should, therefore, pay the income tax liability (a further £1.35 million) on top.  CRU argued that the settlement sum was the total sum they should pay. Mr Barden should receive £676,822.84 and HMRC £673,177.16. 

The decision

The High Court sided with CRU. The court thought Mr Barden’s position was a 'commercial absurdity'!

In reaching its decision, the court took into account that:
  • the parties agreed that income tax was payable on the settlement sum.
  • Mr Barden was ultimately liable to pay the income tax.
  • CRU was responsible, as the former employer, for deducting and accounting to HMRC for the tax.
The court also considered the description of the sum as a ‘settlement sum’. It took this to mean the total sum ‘for which Mr Barden was agreeing to settle his claims’, including his tax liability.

Comment

This case is a reminder of the importance of careful drafting of settlement agreements.  This claim, the legal costs and time associated with it could have been avoided by careful drafting of the settlement agreement. The agreement could (and should) have made it clear that tax would be deducted from the payment to Mr Barden.

CRU will undoubtedly be breathing a sigh of relief, but employers should not sit too comfortably. It cannot be guaranteed that all agreements silent on the tax treatment of payments will be decided in favour of the employer.

If you would like one of our specialist employment law solicitors to help you prepare any settlement agreement please contact us.

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