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HMRC internal manual

Employment Income Manual

Employment income: negative taxable earnings

British Railway Board v Franklin

This was not a tax case but the Inland Revenue made a submission to the Court of Appeal regarding the possible repayment of tax in the circumstance of an employee having to make a payment to the employer effectively reimbursing an amount previously paid by the employer under deduction of tax.

Mr Franklin was an employee of the British Railways Board (“BRB”). The terms and conditions of employment provided for employees to receive sick pay for periods of up to one year of absence from work due to illness or accident. The amount of sick pay was the employee’s normal basic salary before deductions for tax and National Insurance contributions (“NIC”). The relevant clause in the conditions of service (Clause 9) indicated that the sick pay was construed as a loan, repayable to the BRB in the event of the employee receiving a payment from the BRB in respect of damages.

Mr Franklin sustained an accident at work that caused him to be absent for over a year. In the first year of absence he received amounts totalling £5,551 (net; i.e. £6,630 gross) by way of sick pay after deduction of £1,079 tax and NIC, which the BRB accounted for to the Inland Revenue and Department of Social Security (“DSS”).

Subsequently Mr Franklin received an award of damages from the BRB. The amount included the sum of £5,551 for loss of earnings, being the amount received net of tax and NIC, calculated in accordance with the rule in British Transport Commission v Gourley (see EIM13995). Mr Franklin repaid that amount to the BRB.

The BRB contended successfully in the High Court that Mr Franklin was required to pay the gross amount received as sick pay rather than the net amount and it was for Mr Franklin to seek to recover the tax and NIC from the Revenue and DSS respectively. In contrast, Mr Franklin contended that the BRB should seek repayment of the tax and NIC. Mr Franklin appealed to the Court of Appeal where the Inland Revenue were called to provide assistance as amicus curiae (a friend of the court – i.e. someone who is not party to the case and has not been solicited by any of the parties to assist the court but offers information that bears on the case). At the Court of Appeal the Inland Revenue submitted that Mr Franklin was not entitled to a repayment of tax as of right but Mr Franklin could rely on Inland Revenue practice whereby tax might be repaid by concession in similar circumstances if the employee repaid the gross amount to the employer. No repayment would be made if the employee only repaid the net amount but the Inland Revenue would refund the tax to the employer. The DSS was not called but the Court of Appeal was a referred to an internal memo that indicated that the DSS would similarly refund the NIC.

The Court of Appeal held that Mr Franklin was only required to repay the net amount. Giving the leading judgment, Nolan LJ held that when making payment of the sick pay the BRB had acted correctly in deducting tax and NIC and accounting for those amounts to the Inland Revenue and DSS.  However it was inappropriate to describe the sums accounted for in accordance with a statutory duty as constituting a loan repayable by Mr Franklin to the BRB.  Whilst the Court of Appeal accepted the explanation that the tax and NIC would be refunded, Nolan LJ added:

“while the treatment accorded to the Clause 9 payments by the Revenue and the DSS produces as fair and sensible result, I would not wish to be taken as expressing a view one way or the other on its correctness as a matter of law.”