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Gray – FTT allows appeal against discovery assessment as ITV correctly accounted for PAYE

03 August 2017. Published by Michelle Sloane, Partner

In Gray v HMRC [2017] UKFTT 0275, the First-tier Tribunal (FTT) allowed the taxpayer's appeal against a discovery assessment in relation to a termination payment as there was no additional tax to assess in the relevant year and in any event the assessment was out of time.


Mr Gray (the taxpayer) had a contract of employment with ITV Services Limited (ITV). This contract was terminated on 31 March 2008. 

On 9 April 2008, ITV paid the taxpayer £221,136 in settlement of any claims he had, or might have, against it (the Termination Payment). The first £30,000 of the Termination Payment was made without deduction of income tax or national insurance contributions (NICs) pursuant to section 406, Income Tax (Earnings and Pensions) Act 2003, and the remainder was subject to an appropriate deduction for income tax at the basic rate and NICs.  

The taxpayer did not notify HMRC of his higher rate tax liability.  

In December 2013, HMRC issued a discovery assessment in respect of the 2008/09 tax year, pursuant to section 29, Taxes Management Act 1970 (TMA).  The taxpayer contended that this was the wrong tax year and in August 2015, HMRC discharged the 2008/09 assessment and issued a new one for 2007/08 (the Assessment).  

The taxpayer appealed the Assessment on the basis that the Assessment was outside the time limits permitted by section 34, TMA.    

HMRC contended that the taxpayer should have given HMRC notice of receipt of the Termination Payment (under section 7, TMA) and that in failing to do so he was careless or negligent (the statutory language applicable at the time) which enabled them to issue an assessment outside the normal time limits.  

The taxpayer contended that he had received the Termination Payment after tax had been deducted by ITV and he was not careless or negligent in relying upon this fact.  

FTT's decision 

The FTT allowed the appeal. 

The FTT undertook a detailed analysis of section 7, TMA, and the Income Tax (Pay as You Earn) Regulations 2003 (the PAYE Regulations).  

In respect of section 7, HMRC contended that because ITV had deducted tax at the basic rate only, the taxpayer's income could not have been said to have been taken into account in accordance with the PAYE Regulations.  

In the FTT's view, the income was assessable in 2008/09 and ITV had correctly accounted for PAYE in that year in accordance with the PAYE Regulations.  Thus, not only was there no additional tax to assess in 2007/08, but the assessment for that year was out of time because the taxpayer was not required to notify any other source of income under section 7 for that year.


The FTT acknowledges in its decision that the statutory provisions relating to the taxation of termination payments are complicated. It is to be hoped that the Government's proposed reforms in this area, which are expected to come into effect in April 2018, will help simplify this complex area of the law.   

A copy of the decision can be found here.