APPEARANCES
| For the Appellant |
MR DAVID SOUTHERN
(of Counsel)
Instructed by:
Messrs Dale Langley & Co Solicitors
60 Lombard Street
London EC3V 9EA |
| For the Respondent |
MS CHERIE BOOTH QC
(One of Her Majesty's Counsel)
Messrs Learmond Criqui Sokel LLP Solicitors
28b Hampstead High Street
London NW3 1QA |
SUMMARY
UNLAWFUL DEDUCTION FROM WAGES
A deduction of £65,000 from untaxed bonus earnings of a trader indicated by the HMRC under threat of enforcement is an excepted deduction under Employment Rights Act 1996 s14(3), which applies not simply to formal determinations under PAYE Regulation 80 but to other decisions. The employer was bound to make the deduction which was authorised.
HIS HONOUR JUDGE McMULLEN QC
- This case raises a matter of statutory construction about deductions from pay said to have been made in compliance with income tax obligations. The judgment represents the views of all three members. We will refer to the parties as the Claimant and the Respondent.
Introduction
- It is an appeal by the Claimant in those proceedings against a reserved judgment of an Employment Tribunal chaired by Employment Judge Gumbiti-Zimuto sitting over two days plus a day in private at London (South), registered with Reasons on 29 January 2008. The Claimant is represented by Mr David Southern, different counsel having appeared at the Employment Tribunal. The Respondent is represented by Ms Cherie Booth, QC.
- The Claimant claimed unfair dismissal and that unauthorised deductions had been made from his pay. The Respondent contended the Tribunal had no jurisdiction to hear the deductions point but if it did, the Claimant would fail on the merits. It also denied dismissal.
The issue
- The Tribunal dismissed the unfair dismissal claim. The Employment Tribunal decided in favour of the Respondent on jurisdiction and so did not need to go on to decide the issue lest it be wrong on the merits. The Claimant appeals on the jurisdiction finding alone. Directions sending this appeal to a full hearing were given in chambers by Mr Justice Underhill. The essential issue now is whether or not the deduction was made in accordance with the provisions of the Employment Rights Act 1996.
The legislation
- The relevant provisions of the legislation are found first in employment law and secondly in tax law.
- As to employment law, the Employment Rights Act 1996 provides a right against unauthorised deductions, and exceptions:
"13. Right not to suffer unauthorised deductions:
(1) An employer shall not make a deduction from wages of a worker employed by him unless -
(a) the deduction is required or authorised to be made by virtue of a statutory provision or a relevant provision of the worker's contract or
(b) the worker has previously signified in writing his agreement or consent to the making of the deduction.
14. Excepted deductions
(3) Section 13 does not apply to a deduction from a worker's wages made by his employer in pursuance of a requirement imposed on the employer by a statutory provision to deduct and pay over to a public authority amounts determined by that authority as being due to it from the worker if the deduction is made in accordance with the relevant determination of that authority.
23. Complaints to employment tribunals
(1) A worker may present a complaitn to an employment tribunal –
(a) that his employer has made a deduction from his wages in contravention of section 13 …."
- As to tax, the relevant provision is the Income Tax (Pay As You Earn) Regulations 2003/2682. Being not materially different from the regulations which applied at the time, they contain the following:
"80 (1) This regulation applies if it appears to the Inland Revenue that there may be tax payable for a tax year under regulation 68 by an employer which has neither been –
(a) paid to the Inland Revenue, nor
(b) certified by the Inland Revenue under regulation 76, 77, 78 or 79.
(2) The Inland Revenue may determine the amount of that tax to the best of their judgment, and serve notice of their determination on the employer."
- Also relevant is section 8 of the Social Security Contributions (Transfer of Functions, etc.) Act 1999, which makes parallel provisions regulated by what are described as decisions by an officer of H.M. Revenue & Customs (HMRC) in similar terms to a determination under PAYE Regulation 80.
The facts
- The facts are accepted to be common ground and can be adopted from Mr Southern's argument:
(a) Bonus payments made to Mr Patel in the tax years 2002/2003 and 2003/2004 were 'wages' for employment law purposes but 'dividends' for income tax purposes.
(b) Those payments were accordingly outside the PAYE system.
(c)The Respondent made a deduction from wages $131,000 in December 2006.
(d)The deduction was made because the Respondent was concerned that it might be liable to PAYE income tax in respect of Mr Patel's bonuses for 2002/2003 and 2003/2004.
(e) If Employment Rights Act 1996 s 14(3) applies, the deduction is an 'excepted deduction' and the Tribunal cannot determine its lawfulness under s 13.
(f)There has been no Reg 80(2) determination.
- The Claimant began working for the Respondent as a trader in November 2001 and was entitled to basic pay and a substantial bonus. In December of each year a bonus was paid. For the tax years 2002/2003 and 2003/2004, bonus was paid by dividends on shares distributed to employees through an employee benefit trust. This was a recognised scheme operated in certain sectors of commerce.
- However, on 12 December 2006 an officer of HMRC wrote to the Respondent indicating that dividends were earnings for tax purposes giving rise to additional PAYE liability and requesting a payment. The effect was that, either in December 2006 or January 2007, a sum representing roughly £65,000 was withheld from the Claimant's entitlement to bonus for the relevant year. He complained about this by a grievance letter and decided to leave on 13 April 2007. The essential issue was whether the Respondent was right to make the deduction.
Legal argument and conclusions
- We will take the submissions of Counsel and our conclusions upon them in the sequence in which they have been raised. There is one simple proposition: a determination under s14(3) means exclusively a determination under Regulation 80 of the PAYE Regulations. Since there has been none, there is no entitlement in the Respondent to make a deduction from the Claimant's salary: thus the issue is one of statutory construction.
- The path was paved to the deduction by the Respondent in correspondence issuing from HMRC, which was eventually taken over by an investigator in Manchester, Mr R D MacKenzie, who wrote to the Respondent on 25 October 2006:
"HM Revenue and Customs does not accept that the payments made necessarily avoid PAYE and NIC. Before formally issuing determinations under Regulation 80 Income Tax (Pay As You Earn) Regulations 2003 and making decisions under Section 8 Social Security Contributions (Transfer of Functions etc) Act 1999 I need information. My colleague Mrs Webster asked for this information informally. However, I have decided to put this on a more formal basis.
As your client did not take up the offer by the deadline of 28 April 2006, HM Revenue and Customs will resolve this issue through litigation. To help inform me I enclose copies of letters issued to your client today. These are letters under S20B TMA 1970 to
- Marquette Partners (UK) Ltd
- Marquette Investments 2002
Alternatively, your client can settle this by payment of
- the full tax due under PAYE and
- National Insurance Class 1 Employee primary contributions and
- National Insurance Class 1 Employer secondary contributions
on the amount of the net dividends plus interest on their late payment."
- That did not elicit a payment and so Mr MacKenzie wrote again on 12 December 2006 indicating that the Respondent had allowed both deadlines for settlement to pass and thus the position was encapsulated in this way:
"HMRC has always maintained that the amounts paid represented earnings and therefore seeks:
- The full tax due under Pay as You Earn and
- National Insurance Class 1 Employee Primary Contributions and
- National Insurance Class 1 Employer Secondary Contributions.
on the amount of the net dividends paid to the employees. There will also be interest on the late payment of this money.
If your client is not prepared to pay this amount voluntarily then I will proceed along a formal line by issuing the appropriate determinations and decisions and taking any subsequent appeals before the Special Commissioners."
- Specific sums were set out in respect of the relevant employees requiring in the Revenue's view a payment by the Respondent of £2,344,003.29 and further steps were set out for compliance.
- The short point advanced by Mr Southern is that, as the officer himself says, "An appropriate determination has not been made in this case". These letters were short of that and there was no legal obligation imposed upon the Respondent until a determination.
- On behalf of the Respondent it is contended that determination in s14(3) does not mean only a determination by an officer of HMRC pursuant to PAYE Regulation 80 but has a wider meaning.
- The broad principles advanced by Mr Southern as to the attributes of a determination for s14(3) purposes are accepted. These are:
(1) a compulsory legal obligation to pay a specific sum to a third party;
(2) this sum was referable to wages;
(3) a public authority was involved acting under its statutory powers;
(4) when the sum was received, in this case by the Revenue, it would be credited to the worker to discharge the worker's personal liability;
(5) a demand for payment will give rise to a right to dispute.
- The necessity for the fourth attribute arises from the suggestion that in the statute the money is due from the worker and it is at all times the case that it is the worker's liability to pay the tax which is relevant. In cases where the Revenue is chasing the Respondent, it is the Respondent's liability to account for the tax. There may be some disagreement between Counsel as to whether the demand gives rise to a right to dispute it.
- This problem has not been encountered directly in the Employment Appeal Tribunal but analogous situations have arisen. In S.I.P. (Industrial Products) Ltd v Swinn [1994] ICR 473 Mummery P and members were dealing with one of the exceptions under s14 which deals with the repayment of an employee's expenses. The case arose under the Wages Act, which was the ancestor of Part II of the Employment Rights Act and is substantially the same in relation to the exceptions found in s14 of the 1996 Act. The President summed up in the following way st p477:
"Conclusions - the legal position
The appeal tribunal have reached the conclusion that the appeal must be allowed on the short ground, not specifically argued before the industrial tribunal, that they had no jurisdiction to entertain the employee's complaint. The position is briefly as follows. (1) Prima facie the industrial tribunal had jurisdiction to hear a complaint that the employers had made a deduction from the employee's wages in contravention of section 1(1) of the Act of 1986: see section 5(1)...a). If, however, the deduction fell within one of the six categories set out in section 1(5), the industrial tribunal had no jurisdiction to hear a complaint about such a deduction. In the six cases listed in section 1(5)(a ) to (f), the restriction contained in section 1(1) against deductions does not apply and, if it does not apply, it cannot be contravened so as to entitle the worker to present a complaint to the industrial tribunal. In cases where section 1(1) is disapplied the appropriate procedure is not to make a complaint about the deduction to an industrial tribunal but to institute appropriate proceedings in the civil courts for alleged breach of contract and recovery of the sum deducted.
(2) Section 1(5)...a) to (f ) covers cases of the kind described whether the deduction is lawful or unlawful. Section 1(5) disapplies the provisions of section 1(1) in cases where there is "any deduction", lawful or unlawful, falling within any of the specified categories. In those cases the industrial tribunal have no jurisdiction to inquire into or determine the issue of lawfulness or unlawfulness of the deduction: see Sunderland Polytechnic v. Evans [1993] ICR 392, which did not follow an earlier decision of the appeal tribunal in Home Office v. Ayres [1992] ICR 175. The industrial tribunal in the present case could not have been aware of the decision in Sunderland Polytechnic v. Evans, since it was not reported until after the decision of the industrial tribunal."
- The reference in that case to Sunderland [1993] ICR 392 is a reflection on the slightly different situation, but nevertheless one which was covered by the exception, arising in relation to deductions for taking part in industrial action. In that case the approach of the EAT was legitimately informed by reference to Hansard under established canons of construction. It will be noted from paragraph 26 of the judgment given by Wood P for the EAT that the relevant Minister was making clear that what became s13 of the Employment Rights Act "will not apply to tax deductions".
- In our judgment, Ms Booth QC is correct when she argues for a wider construction of s14(3). An easy solution to this is to look at the way in which the section covers not simply determinations in relation to PAYE but also decisions in relation to National Insurance contributions. Thus, if a narrow approach were taken, requiring a perfect match between the language of s14(3) and a determination under Regulation 80, there would be no scope for exceptions of decisions made in relation to National Insurance contributions. Clearly they go hand in hand.
- The scheme of the Act we perceive to be this: disputes arising in specific fields should be determined by the specific designated authorities, thus tax matters should be determined under the aegis of the tax regime and statutory sick pay should be determined under the social security regime; see, for example, Taylor Gordon & Co Ltd v Timmons [2004] IRLR 180. The statute exempts payments which are taken from a worker's wages for six specific reasons. It may well be that the right, granted universally by s13(1), and which is then itself subject to exceptions in respect of deductions made by virtue of a statutory provision or worker's contract, contains some duplication. So if a payment deducted under, let us say, a PAYE requirement is exempt under s13(1)(a) so it would be under s14(3).
- Mr Southern's answer to this is that s13(1)(a) exempts deductions made in the ordinary way by PAYE requirements and s14 deals with the later stage when, for example, an issue has arisen as to whether a proper payment is made or should be made and a determination in the formal sense is required.
- We do not accept that the PAYE scheme, as outlined to us by Mr Southern, begins with the general law that the HMRC may call for the collection of taxes and that the obligation on an employer is to deduct tax for which the worker is liable and to make it over to the Revenue. The amount of tax begins with the Notice of Coding as, to put it neutrally, notified by the Revenue to the employee, generally speaking following the assessment or self-assessment of his or her tax liabilities for the previous year. That then is followed by a communication to the employee's employer by way of schedules indicating what deductions should be made over to the Revenue.
- In our judgment that system constitutes a determination. An employer who makes a deduction following a communication from the Revenue to make deductions according to the employee's Notice of Coding, will be making it in a way which is authorised by reason of s14(3). The purpose, as indicated by Mummery P in the SIP case (above), is to keep all disputes about these six excepted categories out of the Employment Tribunal. They are simply not justiciable.
- In respect of a dispute about tax there is a statutory regime for resolving it. We have already indicated that Mr Southern's specific approach to the wording of s14(3) fails to encompass decisions made under s8 Social Security Contributions (Transfer of Functions, etc.) Act 1999 and yet they too constitute in a broad sense determinations.
- In our judgment, 'determination' is not directed exclusively to determinations in PAYE Regulation 80 but is apt to include all decisions by which a direction is given to an employer by a public authority. This direction was given by HMRC in its letter of 12 December 2006 to the Respondent. This rehearsed its earlier stance. That stance itself contained decisions. The decisions were that if the deadline for payment were not met the Revenue would operate on a more formal basis and the Respondent must provide relevant material to it. When those deadlines passed, the officer of the Revenue then decided that since the matter was not concluded by voluntary payment he would proceed along lines to a determination and a decision under the respective statutory provisions. This included the specific figures to be paid over and those figures are referable to the payments made to the Claimant and his co-workers. Thus, an obligation was imposed upon the Respondent to make the payment or to face, as the officer said, litigation, which means a determination and the right of appeal. Pursuant to those injunctions by the Revenue the deduction was made.
- The correct answer was given by the Employment Tribunal in relation to jurisdiction. The dispute over the correctness of the deduction is not one which is triable before an Employment Tribunal. It relates to a deduction of money in accordance with a decision made by an authority that the sum specified should be paid over to it by the Respondent. We are told that the Revenue directs taxpayers by other forms - notices, for example - and we have seen decisions and direction notices under PAYE Regulation 81. It seems likely they would be determinations under s14(3).
- We thus agree with Ms Booth that s14(3) is not directed exclusively to determinations made under the PAYE Regulations but is apt to include decisions made under s8 of the 1999 Act and, broadly speaking, directions by a public authority in accordance with statute to an employer to make a deduction of a relevant figure.
- It has been agreed by both Counsel that it is not therefore necessary for us to consider the validity of the point on the merits should it be justiciable under s13 Employment Rights Act 1996 nor the contract point sought to be argued under a Respondent's answer.
- We would very much like to thank both Counsel for their concise submissions. The appeal is dismissed.
