Joseph Bryan considers the recent judgment of the Employment Appeal Tribunal in Sheikholeslami v The University of Edinburgh [2026] EAT 96.
The arithmetical and fiscal gymnastics associated with the exercise of grossing up an ET award often lead parties to conclude that it is disproportionate to even attempt the exercise before the issue is live. Not infrequently, Schedules of Loss leave the calculation ‘to be confirmed’.
It may, therefore, be of some comfort to practitioners that the EAT in Sheikholeslami v The University of Edinburgh [2026] EAT 96 (Lady Poole, sitting alone) has endorsed a “sensible and pragmatic” approach to grossing-up in a complex remedy scenario. This note seeks to draw out the key themes of the EAT’s judgment. David Reade KC appeared on behalf of the University at the remedies hearing at which grossing-up issues were considered. He has contributed to the preparation of this note.
The context
The appellant, the claimant below, had been employed by the respondent until April 2012. Lengthy litigation in the ET followed in which the claimant’s complaints of unfair dismissal, disability discrimination and victimisation (among others) were ultimately upheld. This latest appeal, the third visit to the EAT in the proceedings (the first is reported at [2018] IRLR 1090), was concerned with two issues arising from a previously remitted remedy hearing at which a substantial money award was made.
Of the two grounds of appeal, the issue of interest for present purposes was whether the ET erred in law in not making a gross award to the claimant and instead making an award of net losses. The ET had decided that it would not gross up the net losses because the tax position was not clear and, in any event, the respondent had undertaken to indemnify the claimant in the event that the award was later found to be chargeable to tax. The ET left the claimant at liberty to restore the proceedings should the respondent fail to make payment in respect of any tax found to be due by HMRC.
The Gourley principle
British Transport Commission v Gourley [1956] AC 185 was a personal injury case in which the House of Lords affirmed the principle that the object of a damages award was to place the injured person in the same financial position, so far as can be done by an award of money, as they would have been had the accident not happened. Income tax, as “expenditure imposed by law as a necessary consequence of [the receipt of earnings], is relevant to the ascertainment of the loss suffered by the party injured” (Lord Tucker at 215).
In Shove v Downs Surgical plc [1984] 1 All ER 7 (relying on an earlier decision of the Court of Session in Stewart v Glentaggart Ltd 1963 SC 300 (OH)), the High Court confirmed that the Gourley principle applies to damages for wrongful dismissal. In effect, the court decided that the usual approach is to:
- estimate the net amount which the claimant would have received after deduction of tax from their gross income (which amount is intended to reflect as realistically as possible the actual loss);
- then, take account of the claimant’s liability to tax on the damages awarded so that the net amount received should, as far as possible, equal the net (actual) loss suffered.
As Lady Poole noted in the present case, the Gourley principle is also transferable to compensatory awards for unfair dismissal and discrimination.
There is, however, no rigid rule that awards must be grossed up in every case where a tax liability is foreseen. While grossing up is the principled approach, other possibilities may exist, such as the “rough and ready” method of assessing loss using gross figures (Chief Constable of Northumbria Police v Erichsen UKEAT/0027/15/BA at [69]); but this does not diminish the expectation that, where the question of taxation arises, the parties – certainly represented parties – will “proactively” assist the Tribunal to perform the grossing-up calculation “as precisely as can reasonably and proportionately be achieved” (Acetrip Ltd v Dogra UKEAT/0238/18/BA at [90]).
Fundamentally, the touchstone in all cases is, in the words of Lord Goddard in Gourley (at 210), “reasonable common sense”.
A practical problem is that the tax position will be subject to scrutiny by HMRC, which may hold the view that tax is payable on the award itself. As it is the employer who will be making the payment of the award, it has the primary responsibility to deduct tax if it is taxable, for example under s. 401, ITEPA, as a termination payment. That is the case even after the end of the employment relationship. The employee may be determined to have an additional liability for tax on their annual return. Disputes as to whether the sum is properly taxable will be resolved by the appeal structure through the Tax Tribunal and the civil courts. The ET does not decide the tax liability question so as to bind HMRC.
Decision in Sheikholeslami
Having concluded that the claimant was entitled to substantial compensation, the ET considered whether the award would be chargeable to tax. It concluded that the tax position was not clear. For example:
- Some aspects of the compensation, such as a pre-termination failure to make reasonable adjustments, might not be payable “directly or indirectly in consideration or in consequence of, or otherwise in connection with”the claimant’s termination (s. 401, ITEPA) and thus fall outside the reach of the relevant taxation provisions.
- Other elements of the compensation, although connected to termination,might fall within the exemption for payments and benefits provided “on account of injury to, or disability of, an employee” (s. 406, ITEPA, the section which exempts such payments from the charge to tax under s.401).
Lady Poole concluded that the ET was entitled to find the position unclear in this case. HMRC had declined the respondent’s invitation to give its view before the case had been decided in full. There was a risk that grossing up in these circumstances might infringe the principle that the claimant should be in no better or worse position than if the wrong had not been committed.
Accordingly, the EAT endorsed the “sensible and pragmatic” [40] approach of awarding net losses while expressly acknowledging the claimant’s right to seek a reconsideration if necessary, having regard to the undertaking given by the respondent.
In conclusion, clearly both the ET and the EAT were influenced by the undertaking given by the respondent. If no such undertaking had been given, there might well have been an expectation that the ET would try to grapple with some of the uncertainty as best it could – with the parties’ assistance, of course.However, respondents who are prepared to give such an undertaking might well find it easier now to argue at a remedy hearing for an award of net loss only.
The judgment is available here.
