Adjusting an award so that the claimant retains the intended net sum after tax. British Transport Commission v Gourley; Hall v Durham County Council and ors.
Damages; taxation; the Gourley principle. The House of Lords held that damages for loss of earnings are assessed on a net-of-tax basis: the claimant recovers what would have been received after tax and National Insurance, not the gross figure, because an award of gross earnings would leave them better off than if the dismissal had not occurred. The principle runs the other way too. Where an award will itself be taxed on receipt, as the excess over £30,000 is under ss.401 to 403 ITEPA 2003, the tribunal grosses up so that the tax does not leave the claimant worse off. It works from the net loss, deducts any unused part of the £30,000 exemption, then increases the balance to the gross sum that yields it after income tax; National Insurance is not levied on compensation [Principles for Compensating Pension Loss, 2.36-2.39].
Damages; wrongful dismissal; taxation; grossing up. The QBD applied the Gourley principle to damages for wrongful dismissal of a senior executive. The employee's liability to income tax on the award was not too remote to be taken into account when estimating his actual loss, and the damages themselves were taxable in his hands. It followed that the court was required to estimate the net sum the employee would have received after deduction of income tax from his gross income, and then to gross up that net figure to produce a sum which, after the tax payable on the award, would leave him with the intended net compensation. Shove is the leading authority in the employment context for grossing up calculations where the compensatory or damages award exceeds the £30,000 tax-free threshold.
Remedies; grossing up; correct methodology. The tribunal erred by adding tax on top of the award it intended to make, producing a windfall. Langstaff P confirmed the correct approach: first determine the net figure the tribunal intends the claimant to receive; then calculate the gross pre-tax sum which, when tax is deducted at the applicable rate(s), yields that net figure. Grossing up does not mean adding a tax sum to an already-intended award, it means working backwards from the intended net to the necessary gross.
Remedies; grossing up; gross figures already used. The EAT held that where a tribunal assesses future loss of earnings by reference to gross figures throughout, comparing gross earnings against gross state benefits, the resulting award already represents a pre-tax sum and no further grossing up is required. Grossing up arises only where the tribunal has arrived at a net loss figure and must convert it to a gross equivalent. Applying a grossing-up exercise to a figure already expressed in gross terms over-compensates the claimant.
Remedies; grossing up; banded tax rates. Simler P held that applying a flat 40% grossing-up rate to the entire net loss was wrong. The correct method requires the tribunal to apply the appropriate marginal tax rate to each successive slice of income in accordance with the prevailing income tax bands, reflecting the progressive structure of the tax system. A single blended rate ignores the distinction between basic-rate (20%) and higher-rate (40%) bands and produces an inaccurate. And generally excessive, result.
Remedies; grossing up; foreign tax. The employer appealed a compensatory award grossed up under UK tax law, arguing that US law was the proper law under the UK-US Double Taxation Convention 2001. The EAT rejected the appeal. The employer had refused to cooperate in instructing a joint expert, had taken no steps until the eleventh hour and, when ordered to provide grossing-up calculations after an adjournment was refused, had produced only a UK-law calculation, none under US law or under UK law with foreign service relief. It had only itself to blame. A party contending that another country's tax law governs the grossing up must give the tribunal the information needed to apply it; without it the tribunal could not be faulted for grossing up under UK law.
Grossing up; ACAS uplift; proportionality. On grossing up, where the tribunal receives no assistance from the parties it is not necessarily an error to start from gross figures as regards the claimant's loss and thereafter not to gross up further; but where the treatment of the first £30,000 might result in over-compensation it is not a sufficient answer to leave the parties to apply for a reconsideration. On the uplift, at [102] to [104], it is an error not to consider the absolute financial value of an uplift where the underlying award is large, there being inevitably a punitive element to a s.207A adjustment. Read with Slade v Biggs at [73] to [75].
Grossing up; statutory cap; order of operations. The tribunal must gross up the figure before it applies the statutory cap on the compensatory award, not afterwards.
Grossing up; taxation of awards. Only the taxable elements of a compensation award are grossed up. Pension loss is taxable and must be grossed up. The rate is the claimant's marginal rate of income tax in the tax year in which the compensation is ordered, and the tribunal must make findings of fact about the claimant's actual tax position rather than applying a flat rate. The case decides nothing about the statutory cap; on the order of grossing up and the cap see Hardie Grant London Ltd v Aspden.