In Moorthy v Commissioners for HMRC, the taxpayer was selected for redundancy and brought unfair dismissal and age discrimination claims, which were settled for £200,000.  He sought to argue, relying on previous decisions, that because the payment was made to settle the discrimination claim, it should be paid tax free.  HMRC allowed the balance (after deducting an earlier statutory redundancy payment) of the £30,000 tax free element, plus a further tax free element of £30,000 representing the top band "Vento" injury to feelings award.  It assessed the rest of the payment as subject to tax.  Mr Moorthy appealed.

The tribunal found that the payment was clearly made "directly or indirectly in consideration or in consequence of, or otherwise in connection with" the termination of the claimant's employment.  He had not alleged that there had been any discrimination prior to his selection for redundancy.  There was no reliable authority for the proposition that discrimination payments are always non-taxable.

The provision taxing termination payments (section 401) is very widely drawn and if a payment falls within section 401 because it is in connection with the termination then it is taxable under that provision regardless of the reason for the payment.  The tribunal said that HMRC had no grounds to offer the concession in relation to the "injury to feelings" element of the award, so the full payment (less the unused balance of the £30,000 tax free element) was subject to tax.

This decision reflects the orthodox view of how tax should be calculated where alleged discrimination arises from a termination of employment.  There is still some scope to argue that where compensation is paid to reflect discrimination that was not connected to the termination of employment, this should not be taxable.  However, the tribunal in this case was at pains to stress the breadth of the wording of section 401, so there may need to be cogent evidence separating the discrimination from the ultimate dismissal in those circumstances.