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 must be assessed on a net-of-tax basis: the claimant is entitled only to the net sum they would have received after tax, not the gross pre-tax figure. To award gross earnings as damages would over-compensate the claimant, since the lost earnings would themselves have been subject to income tax had they been earned. The principle applies wherever the lost income would have been taxable and the damages themselves are not. In employment tribunal proceedings, Gourley underpins the obligation to gross up awards where compensation will be taxable on receipt, working from the intended net figure back to the gross sum needed to produce it.
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 jurisdiction. The EAT held that a tribunal must take account of the claimant's actual tax position when deciding whether and how to gross up a compensation award. Where the claimant is not subject to UK income tax, for example because they are resident and working abroad, it is wrong to gross up the award on the assumption that UK tax will be deducted. The obligation to gross up exists only to the extent that the award will actually be taxed; applying a UK grossing-up exercise to a claimant outside the UK tax net over-compensates them.
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.