The Court of Appeal overturned a decision of the Upper Tribunal (UT) and held that a payment for injury to feelings made to an employee as part of a termination payment was not subject to tax under the pre-6 April 2018 provisions in ITEPA 2003.
Having been made redundant in March 2010, Mr Moorthy began proceedings alleging unfair dismissal and age discrimination against his former employer. A compromise agreement was reached which involved the employer paying Mr Moorthy a £200,000 settlement sum.
The Court considered whether the £200,000 sum was subject to income tax under section 401 ITEPA and, if so, whether any part of the sum was taken out of the charge by section 406 of ITEPA, which provides an exemption for a payment or benefit paid "on account of injury to … an employee".
The Court of Appeal concluded that the full £200,000 sum fell within section 401 as a payment or benefit that had been received directly or indirectly in consideration or in consequence of the termination of Mr Moorthy's employment. Having examined previous case law and considered the natural meaning of the term "injury" in section 406, the Court further concluded that damages awarded for injury to feelings fell within the natural construction of section 406 and thus part of the £200,000 payment (in this case £30,000) was not subject to tax.
This case will only have relevance for pre-6 April 2018 payments as section 5(7) Finance (No 2) Act 2017 amended section 406 to make clear that the meaning of injury does not include injured feelings. Therefore, any such awards for injury to feelings from 6 April 2018 will be fully taxable. That amendment may lead to attempts to apportion larger amounts of lump sum termination payments to psychiatric injury rather than injury to feelings where a personal injury claim will be pleaded.