Payments made to an employee under a settlement agreement

After bringing a group litigation action against their employer for alleged failure to pay overtime and other allowances the taxpayer and his colleagues were paid a global settlement sum under a settlement agreement. This related to legal fees and insurance. The employer made no admission of liability to pay overtime or other allowances.

The taxpayer did not include his share of the settlement in his self-assessment tax return. After an enquiry HMRC raised assessments on the basis the settlement agreement was paid ‘in full and final settlement’ of the claim which was for unpaid overtime and allowances. The taxpayer would not have been entitled to any payment under the agreement were it not for his employment.

The taxpayer appealed. He said the payment was not a reward for services - it was a sum paid to settle a claim.

The First-tier Tribunal it was clear from the settlement agreement...