The claimant in Campus Living Villages UK Ltd v Revenue and Customs Commissioners was made redundant shortly before the birth of her child, after she had qualified for statutory maternity pay (SMP). She claimed unfair dismissal and pregnancy discrimination. Those claims were settled in a COT3 agreement after ACAS conciliation for £60,000, which included £20,000 for injury to feelings. £30,000 was paid tax free, with income tax (but not national insurance contributions) deducted from the rest.

The claimant subsequently claimed over £42,000 SMP from her employer. The reason that the amount was so large was because a £44,000 discretionary bonus had been paid under the employer's incentive scheme during the eight week period used to calculate her average "normal weekly earnings" for SMP. HMRC decided that the SMP was payable under social security legislation; the employer's appeal against that decision has now been rejected by the First Tier Tax Tribunal.

HMRC was correct to take the discretionary bonus into account in calculating the claimant's average weekly earnings. Any remuneration derived from employment and paid during the eight week reference period constitutes earnings, regardless of whether payments are "normal" in the sense of being usual. The claimant's contract of employment provided for her participation in the bonus scheme, so it was clear that the bonus constituted earnings.

It was also clear from the breakdown of the COT3 settlement amount that it did not include the SMP entitlement – if it had, there would have been a deduction of NICs. In any case, a claimant cannot waive her entitlement to SMP, so the "full and final settlement" wording could not exclude the right to SMP.

The Tribunal noted that it was unfortunate that ACAS had not advised the parties in relation to the impact of the COT3 on SMP – but this could not affect the correct application of the law.

This case emphasises the importance of recording what part of any settlement payment relates to SMP and taxing it appropriately.