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. A civil engineer seriously injured in a railway accident claimed damages for lost earnings. Because the award would not itself be taxed, the House of Lords held that the damages must take account of the income tax and surtax he would have paid on the earnings he lost, reducing that head from £37,720 to £6,695: an award of the gross sum would leave him better off than if he had earned it.
Damages; wrongful dismissal; taxation; grossing up. The High Court (Sheen J) applied the Gourley principle to damages for the wrongful dismissal of a chairman and managing director. The employee's liability to income tax was not too remote to be taken into account when estimating his actual loss, and the damages would be taxable in his hands. The court was therefore required to estimate the net amount he would have received after deduction of income tax from his gross income, and then add an amount equivalent to the tax due on the damages. Net losses of £60,729 produced an award of £83,477. The EAT has since confirmed that the reasoning applies equally to compensation for unfair dismissal.
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References found in the judgments’ text, with the number of paragraphs in which each case is mentioned. Not a classification: how a case was treated is recorded under Later history.
Remedies; grossing up; correct methodology. The tribunal correctly stated the principle: it must calculate the sum which, after tax, leaves the claimant with the amount to which she is entitled [26], [72]. It did not apply it. It asked what tax would be payable on the intended award and added that tax to the award; but tax falls on the whole payment, so the claimant would be left with less than the tribunal intended [27], [72]. Langstaff P's example: adding tax of £20 (25%) to an £80 entitlement gives £100, which taxed at 25% leaves £75 [72]. The taxable elements must be grossed up by assessing what sum will, when taxed, produce the intended amount [74]. The claimant's appeal on grossing up was allowed [79]. On the employer's appeal, at a preliminary hearing, only the finding of a 100% chance of headship by age 50 and a pension multiplier point went to a full hearing [70], [79].
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.