In Equity Advisory Ltd & Craig Allan Mellor v HMRC [2024] TC09334, the First Tier Tribunal (FTT) found that 'a capital sum' declared as compensation was a payment of earnings and was not capital after all. It was liable to Income Tax and National Insurance Contributions (NICs).
Mr Mellor, a director of Equity Advisory Ltd (EAL), declared £4,367,496 on his self-assessment return as a capital payment exempt from taxation. He thought it was ‘obtained by way of compensation or damages for any wrong or injury suffered by an individual in his profession or vocation’.
HMRC disagreed issued a PAYE Regulation 80 Determination, holding EAL liable as Mr Mellor's employer for the outstanding PAYE of £1,954,387.
A further assessment held EAL liable for Class 1 and 2 National Insurance Contributions (NICs) totalling £693,747 and Mr Mellor personally liable for Income Tax of £1,960,708.
EAL and Mr Mellor raised appeals.
- Mr Mellor, a qualified chartered accountant worked for Opal Property Group Ltd (OPGL), part of a larger group of companies.
- Mr Mellor was a director but not a shareholder of OPGL. The company was owned by Mr Wall.
- In 2013 OPGL went into administration as a result of an earlier deal with the bank on an ‘Interest Rate Hedging Product’ (IRHP)
- Days after the administration of OPGL, EAL was incorporated. EAL was owned by Juvanesco Ltd of which Mr Mellor and his wife were the only shareholders.
OPGL issued a claim to the bank for misselling the IRHP. Mr Wall owned the rights and interests in this claim. Neither EAL nor Mr Mellor raised claims against the bank.
In 2017, Mr Wall and EAL entered into an agreement with regards to the litigation of the claim. The agreement:
- Was signed by Mr Mellor as director of EAL, rather than in a personal capacity.
- Engaged ‘the consultant’ (named as EAL) to assist with the preparation and presentation of the claim against the bank.
- Outlined a ‘contingent advisory fee’ payable to EAL as a percentage of the claim proceeds.
Mr Mellor and EAL then entered an agreement whereby EAL disposed of its interest in the potential outcome of the claim to Mr Mellor.
The claim was settled in August 2017 between the bank and Mr Wall. Mr Mellor was not party to the settlement agreement.
The payment was made directly to Mr Mellor despite Mr Wall’s solicitors noting the sum as due to EAL.
HMRC argued that:
- The payment was liable to tax and NICs deriving from Mr Mellor’s employment.
- If it was not an income payment, it was a distribution from the company.
- The payment was not linked in any way to the wrongdoing by the bank.
EAL and Mr Mellor argued:
- It was a one-off capital sum paid for damages, not an income payment.
- It reflected Mr Mellor’s career which had been lost due to the company going into administration.
- The transfer of the financial benefit was made to Mr Mellor as he suffered the loss.
The FTT found:
- EAL, not Mr Mellor, was providing services to Mr Wall.
- The payment was paid as remuneration for Mr Mellor’s services to EAL or ‘put differently, as a reward for his services to EAL’.
- PAYE and NICs should have been paid by EAL.
- The agreement engaged EAL, not Mr Mellor and agreed to pay EAL a contingent advisory fee.
- The payment was not a payment to compensate for damages, specifically, Mr Mellor was not the claimant of these damages.
The appeals were dismissed.
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Equity Advisory Ltd & Craig Allan Mellor v HMRC [2024] TC09334
