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United Kingdom Employment Appeal Tribunal
You are here: BAILII >> Databases >> United Kingdom Employment Appeal Tribunal >> International Petroleum Ltd & Ors v Osipov & Ors  UKEAT 0229_16_2707 (27 July 2017)
Cite as:  UKEAT 0229_16_2707
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|At the Tribunal|
25 & 27 July 2017
THE HONOURABLE MRS JUSTICE SMILER DBE (PRESIDENT)
(2) MR F TIMIS
(3) MR A SAGE
(2) DR S LAKE
(3) MR S MATVEEV
Transcript of Proceedings
APPEAL AND CROSS-APPEAL
|For the Appellants and
Second and Third Respondents
|MR SIMON FORSHAW
Clyde & Co LLP
The St Botolph Building
|For the First Respondent||MR BRUCE CARR QC
(One of Her Majesty's Counsel)
Brahams Dutt Badrick French LLP
24 Monument Street
PRACTICE AND PROCEDURE
There was no error of law by the Employment Tribunal in proceeding with the grossing up exercise for tax purposes, on the basis of the schedules provided by both parties, which set out the position under UK tax law only. The Respondents had only themselves to blame for failing to produce the necessary material that would have enabled the Employment Tribunal to determine the questions raised under the Double Tax Convention with the USA, and whether they made a difference to the calculation of the tax due.
There is a strong public interest in the finality of litigation, and this principle applies even in a case decided on a basis of law that may prove to be wrong.
THE HONOURABLE MRS JUSTICE SMILER DBE (PRESIDENT)
(i) that the Tribunal grossed up according to UK law, when the proper law was US law pursuant to articles 14 and 22 of the UK/US Double Tax Convention ("the Double Tax Convention"); alternatively,
(ii) if the UK tax regime was the appropriate regime in principle, then the Claimant was entitled to foreign service relief in respect of the compensatory awards, which would otherwise fall to be taxed under Part 6 of the Income Tax Earnings and Pensions Act 2003 ("ITEPA 2003").
The Relevant Chronology
"157. During the course of the hearing the Employment Judge raised with the parties the matter of how remedy should be dealt with if Mr Osipov was successful. All parties agreed that the Tribunal should determine remedy but requested a provisional determination without grossing up. Mr Osipov's loss is the net amount that he would have received, but he will have an obligation to pay US and/or UK taxes on any award made, as a result of which any net award will have to be grossed up to take into account that tax liability which, at present, Mr Osipov is unable to quantify. The award made by the Tribunal is therefore a provisional award based on the figures provided in the schedule of loss and the written submissions of Mr Carr. It is for the parties to attempt to agree the tax position, with liberty to apply for a short additional hearing in the event that they are unable to do this and provided that they have the necessary information in order for the Tribunal to undertake the grossing up exercise."
"28. The Tribunal notes that the Claimant's solicitors, Brahams Dutt Badrick and French ("BDBF") wrote to Clyde and Co, the Respondents' solicitors, on 26 April 2016 (481) stating amongst other things:
"We consider that if the parties take a co-operative approach there should be no need for a further hearing to deal with the tax position. Accordingly, in order to avoid unnecessary costs, on Monday 18 April 2016 our Gareth Brahams proposed to your Chris Duffy that the parties instruct a US accountant on a joint basis to determine the issue.
Mr Duffy confirmed he would take your clients' instructions on our proposal and would revert to us but we have heard nothing further since that time."
29. By a letter dated 27 April 2016 (485) Clyde and Co wrote to BDBF requesting full details of all income, earnings and other awards Mr Osipov had received directly or indirectly in an individual capacity and through any service companies for the period from 6 April 2012 to that date in USA, Russia, the UK and any other jurisdiction in which he had performed work.
30. On 4 May 2016 (493) BDBF responded again suggesting the appointment of a joint expert and also stating:
"As we have explained, our client is resident in the United States for tax purposes. As we understand it, personal income in the US is taxed in the year it is received. As such, it is only the current tax year that is relevant for the computation of tax. Therefore, there is no basis for your clients to ask to be provided with information and tax documents of our client in relation to prior tax years.
We confirm that in the current tax year for federal and state taxes being the calendar year 2016 our client has earned no income at all. …"
31. On 9 May 2016 (506) Clyde and Co wrote to BDBF stating:
"The damages awarded by the Tribunal cover a long period including historical payments and therefore International Petroleum Limited needs to understand your client's tax position as per our letter dated 27 April 2016. As you are aware any shortfall or wrong computation of tax may result in the tax authorities in the UK, US and Russia pursuing International Petroleum Limited. …"
32. On 17 May 2016 BDBF wrote to the Tribunal (517) as follows:
"As we understand it, whether it is the US or UK tax rules that apply to the provisional net award or both, it is the tax position of the Claimant in the tax year of his receipt of the grossed up award that determines the amount of tax payable. Consequently, there is no basis whatsoever for the Respondents to say that any information and documentation relating to prior tax years is needed for the grossing up calculations to be performed.
Furthermore, as we have stated to the Respondents our client has earned no income in the current UK or US tax years.
Thus, there is no reason to delay a hearing on the issue of grossing up on the basis that the Respondents contend or [at] all. …"
33. By a letter dated 27 May 2016 from Clyde and Co to BDBF (523) it was stated:
"You have confirmed that your client is a US tax resident. As you may be aware the tax year for federal income tax for individuals in the US is a calendar year, with the income tax return due on 15 April of the year following the end of the calendar year.
In light of the above we believe it is necessary for your client to provide details of his taxable income in the US (on his worldwide earnings) for the calendar years 2012-2015. …"
34. On 10 June 2016 BDBF wrote to Clyde and Co (545) stating:
"… As US tax is accrued on cash basis the years the entitlements fell due (2012-2015) are irrelevant. It is only the year in which the payments would have been made (2016) that count.
Accordingly, it is only the current tax year that is relevant for the purposes of grossing up of the Tribunal's award. Your clients do not therefore require information about the income earned by our client in the tax years 2012-2015 or our client's US income tax returns in respect of those years."
35. There then followed a period of inactivity. On 26 October 2016 BDBF notified Clyde and Co that it was likely that the Claimant would submit an expert opinion on the tax position and was informed that the Respondents had not made their decision on the matter at that stage. This was confirmed by Mr Wilcox of BDBF in an email to Clyde and Co of 31 October (602).
36. On 10 November 2016 BDBF sent Clyde and Co a draft index for this hearing, including a reference to expert evidence, to which Mr Duffy responded:
"Reviewing the position and will revert shortly." (604)
Mr Duffy confirmed on 11 November (605) that he would advise the following week if Clyde and Co would be producing an expert letter on tax.
37. On 22 November 2016, two days before this hearing, Mr Duffy emailed Mr Wilcox (608):
"We understand that skeleton arguments will be exchanged at 10am tomorrow.
We would hope to be in a position to exchange our costs schedule with tax reports at the same time and will contact you to do so at 10.00am." "
"… the calculations of the tax payable on the award made by the Employment Tribunal to Alexander Osipov if Alexander Osipov was subject to UK tax. …"
"… However we do not have enough information at this time to determine whether US tax law or UK tax law applies save in relation to the award of unpaid salary as mentioned in the attached schedule."
"2.1. The amount of unpaid salary (£169,702.58) is likely to be taxed as if it were regular "earnings" from the employment (ITEPA 2003 s62). …"
In other words, this sum would be taxed under UK tax law.
"2.1. … We do not have sufficient information concerning the tax status of AO [Alexander Osipov] during his period in the UK to comment definitively on his UK tax treatment. However, we understand that AO performed employment duties in the UK during the period between 1 June 2012 to 27 September 2014 and that the Unpaid Salary part of the Award is in respect of such duties. In any case, on any basis (even if AO was not a UK tax resident) the Unpaid Salary part of the Award would still be subject to UK income tax as UK based earnings under ITEPA 2003, s27."
"2.2. The remainder of the Award is likely to be taxable under the special provisions relating to the taxation of termination payments (ITEPA 2003 s401), but only to the extent that it exceeds the £30,000 threshold (ITEPA 2003 s403). …"
"5.1. Depending on double taxation (see point 6 below) the remainder of the Award may fall to be taxed in the UK in this tax year."
"6. The UK/US Double Taxation Convention (the Treaty)
6.1. Even if AO is now US resident, Article 14 (Income from employment) of the Treaty would still seem to allow the UK to tax the unpaid salary element of the Award. Article 14 provides that "salaries, wages and other similar remuneration" earnt in one state can be taxed in that state.
6.2. However, it seems quite likely that the remainder of the Award should be exempt from UK tax since it should fall within Article 22 (Other income) of the Treaty. This Article only allows the state in which the individual is resident to tax the income. We note though (save in relation to the award of unpaid salary referred to above) that at this stage we do not have enough information to determine whether US tax law or UK tax [law] applies."
"… examined the component elements of the award made at Tribunal and the exchanges between parties subsequently to find a basis on which to evaluate the grossed up component."
"If, in the year of payment, Mr Osipov is resident for State tax purposes in New Jersey or other of the states of [the] United States he will be subject to the laws of that state. Almost all US states impose an income tax on residents and very few states provide any relief for taxes paid to foreign countries. As a result the likelihood is that the payment will be subject to state taxes in full, subject to confirmation of Mr Osipov's state of residence, and a US state tax gross up is likely to be required (on top of the UK tax gross up)."
"The UK will consider earnings relating from an employment delivered in the UK to income taxes when determined … irrespective of whether the individual is resident or non-resident at the point of receipt. …
The constituent parts of the award fall to be assessed under different sections of the UK tax legislation applying to employment related awards. The components that are compensatory in nature rather than contractual payments may qualify for a significant element of relief from UK tax for foreign service with the group. Relief may also be available under the US-UK tax treaty, under the 'Other Income' article (article 21)."
"In order to determine the extent of this relief we have to examine the total period of employment by Mr Osipov with IPL and other group companies. We then need to determine the years when Mr Osipov was resident counting as years of UK service and, either non resident years or resident but not ordinarily resident years counting as overseas years in determining the ratio of foreign service relief that may be due."
"Hopefully this analysis of how taxation matters work between the UK and the US is helpful but, no conclusions can be drawn with [the] information supplied.
In order to satisfactorily consider the Federal (State and local taxation if applicable) in the United States and the UK taxation treatments in terms of the gross up of payments correctly and accurately we would need to have the following:
1. A copy of the Federal tax return for the 2015 calendar year (Form 1040) including Forms 1116 reflecting the carry over foreign tax credit position and a supporting statement of any carry forwards for the 10 year period.
2. Clarification of State of residency for tax purposes, the 2015 State return(s) as filed will be helpful and any change of circumstances in 2016 where a main residence or property is maintained and a physical presence in different states if changed from 2015.
3. Clarification of Mr Osipov's UK residence and Ordinary Residence status for all years he was employed by IPL or related entities, so that a determination of Foreign Service Relief (FSR) can be made."
"33. The Respondents cannot be required to calculate tax liabilities, potentially arising over several years, in a vacuum. Proper disclosure should have been provided.
34. It follows that the appropriate way for the Tribunal to dispose of this aspect of the case, is to require the Claimant to provide proper disclosure to the Respondent. Only once that has happened, can the Tribunal consider the appropriate approach to 'grossing up'.
Calculation of Tax
35. If notwithstanding the Respondents' submissions, set out above, the Tribunal is minded to make an assessment of the Claimant's liability to pay tax, the best that the First Respondents can do is as follows.
37. As to the wages element of the award (and doing the best the Respondents can):
(a) since these wages were earned in the UK, they ought to be taxed in the UK;
(b) assuming that the wages are split equally as between the 2012/13 and 2013/13 [sic] tax years, the Respondents assess the tax at £80,608.75.
38. It is assumed that the remaining aspects of the award will be taxed under US law, although in the light of the foregoing, it is very difficult for the Respondents to know what the true position is."
"(b) A spreadsheet prepared by BDO, on behalf of the Respondents, merely calculating the tax payable by Mr Osipov in the UK and taking the New Jersey taxes figure from the GTN calculations. The Respondents make no attempt to undertake the grossing up process." (My emphasis).
Accordingly, the Tribunal had available to it two calculations, both prepared on the basis that the sums were taxable in the UK, neither referring to any foreign service relief.
"… without prejudice to the Respondents' principal argument that this approach is incorrect by reason of Articles 14 and 22 of the UK/US Tax Treaty. You heard the Respondents' submissions in relation to this point yesterday."
However, I find it difficult to understand this statement. To what was the schedule "without prejudice"? The Respondents had been refused an adjournment. They were ordered to provide grossing up calculations. It was open to them to provide a calculation based on the application of article 22 of the Double Tax Treaty to the whole award or to some part of that award, but they failed altogether to do so. Instead, they produced a calculation based on UK law, without reference to the foreign service relief, while maintaining that such a schedule was incorrect.
"42. The Tribunal prefers the approach taken by the Claimant. It adopts that approach, taking national insurance out of the calculations. Mr Osipov would not have been entitled to a personal allowance as he earned more than £122,000. Accordingly, the UK tax calculations of GTN are correct and are as follows:
£43,000 at 20% equals £8,600
£43,000 - £150,000 at 40% equals £42,800
£150,000 to £813,372.56 at 45% equals £298,517.65
Total tax £349,917.65
The Tribunal does not add national insurance because this is an award of compensation. It does however add the New Jersey tax figure given by GTN which is £64,606.09 which when added to £349,917.65 amounts to a total tax figure to be grossed up of £414,823.74."