The Upper Tribunal has confirmed the decision of the First Tier Tribunal in Moorthy -v- HMRC 2013 and held that compensation for injury to feelings made in connection with a termination of employment was taxable.
We reviewed the decision in Moorthy here and noted the inconsistency that had arisen between the approach of the tax tribunals and the EAT on the question of the taxability of compensation for injury to feelings. The EAT ruled in Timothy James Consulting Ltd -v- Mrs S Wilton 2014 that a payment for injury to feelings was not taxable.
After a detailed review of the case law relating to the appeal, the Upper Tribunal came to the conclusion that the EAT had misunderstood the nature of the statutory exception relating to payments in connection with ‘injury’ (section 406 ITEPA 2003). The Upper Tribunal stated that the word ‘injury’ must be read in the context of the other words in the relevant section (being ‘death’ and ‘disability’) and therefore ‘injury’ must mean a medical condition that results in the termination of employment. Accordingly, injury to feelings was not covered.
While this decision provides certainty over how the First Tier Tax Tribunal will deal with these matters in the future (because the Upper Tribunal decision binds the First Tier Tribunal), there still remains uncertainty over the position in the EAT (because the Upper Tribunal does not bind the EAT). Until a higher court rules on the matter, the prudent course is to assume that HMRC will regard compensation for injury to feelings to be taxable.