In 2015, a senior Deutsche Bank employee sacked in the fallout of the 2012 Libor rigging scandal, received £6m in compensation for unfair dismissal. The Upper Tribunal (UT) confirmed that the amount was taxable under PAYE and rejected the taxpayer's claim that the payment was received as a result of discrimination and was outside employment income.

  • In 2015 Deutsche Bank AG was found guilty of the part it played in a major banking scandal involving manipulating the banking system’s LIBOR rates.
  • The New York State Department of Financial Services ordered it to terminate the employment of seven key employees.
  • Shivani Mathur, a senior employee, found herself sacked. The bank offered her in termination of her employment £82,135.
  • Denying any culpability, she made a claim to the Employment Tribunal. Her 'grounds of claim' included complaints of:
  1. Inequality of terms (for work of equal value) under the Equality Act 2010.
  2. Harassment related to sex under the Equality Act 2010.
  3. Direct discrimination on grounds of sex under the Equality Act 2010.
  4. Victimisation under the Equality Act 2010; (5) whistleblowing detriments under the Employment Rights Act 1996.
  5. Automatically unfair dismissal because she made protected disclosures under the Employment Rights Act 1996.
  6. Ordinary unfair dismissal under the Employment Rights Act 1996.

The bank agreed an out of court settlement of £6 million. Her employer treated it as follows:

  • The first £30,000 was tax-free.
  • £2,677,460 was taxed as a Termination Payment under PAYE.
  • £40,000 was tax-free paid for injury to feelings.
  • A balance of £400,000 including VAT, was paid in costs, in respect of her legal fees.

Ms Mathur appealed against the deduction of tax to the First Tier Tribunal (FTT) and her main argument was that she had received compensation as a result of being a thorn in the side of the bank and for her unfair dismissal and discrimination claim.

The FTT disagreed they confirmed that her compensation was received indirectly following the terminations forced on the bank after the Libor scandal and was therefore in consequence of, or otherwise in connection with, the termination of her employment for the purposes of s.401(1)(a) ITEPA 2003.

She appealed this decision to the UT on the basis that the FTT had erred in law.

The UT reviewed the FTT's findings and it found that:

  • The FTT was entitled on the evidence to conclude that despite there having been two links in the chain, from termination to ET proceedings to settlement, there remained a clear and obvious connection between the termination and the compensation payment.
  • The FTT had noted that there was a key inconsistency between the appellant’s evidence in the FTT proceedings with the Employment Tribunal documentation. 

The UT confirmed that the FTT had been entitled to conclude that the settlement sum was paid, at least, 'in connection' with the termination of the appellant’s employment and so, irrespective of the Bank’s motivation for paying, was wholly taxable under s.401; save to the extent it fell within any of the relevant exemptions, ie. the £30,000 exemption in s.403; the £40,000 agreed between the parties for injury to feelings (s.406) and the £400,000 legal costs which was paid without deduction under s.413A.

A further argument had been raised to the extent that the FTT should have apportioned the compensation. The UT found:

(a) There was no factual evidence before the tribunal to support an apportionment.

(b) Apart from arguing that the whole of the disputed amount should be apportioned as not falling within s.401 (which the FTT rejected) “the appellant produced no persuasive evidence or arguments to support any other” apportionment.

Useful guides on this topic

Termination, redundancy and leaving payments
How are redundancy and termination payments taxed? What amounts can be paid tax-free? What amounts are taxable as earnings?

Employee Shares: the Employment-Related Securities rules
What are the tax consequences when a company gives shares to an employee or director? What are employment-related securities? What is best: shares or share options? How do you set up a share scheme?

Closure notices
When does HMRC issue a Closure Notice? Can a taxpayer demand one? Are there appeal rights? 

How to appeal an HMRC decision
Disagree with an HMRC decision? How to appeal, what type of decision can you appeal and what are your different options when you disagree with HMRC? What are the key steps in making an appeal?

External links

Shivani Mathur v HMRC UT [2024] UKUT 00038