On 14 January 2016, the Upper Tribunal (in Moorthy v HMRC8) held that a payment for injury to feelings, made in connection with the termination of employment and as part of a compromise agreement, was taxable under section 401 of ITEPA 2003.
In this case the employee alleged unfair dismissal and age discrimination (in connection with his redundancy process) against his previous employer. Under a compromise agreement he received £200,000 by way of compensation for loss of employment. HMRC sought to tax this amount (save for the £30,000 statutory threshold).
The Tribunal disagreed with the Employment Appeal Tribunal’s view9 as to how “injury” should be construed for the purposes of the exemption from a section 401 tax charge provided by section 406 of ITEPA. The Tribunal preferred the narrower meaning of “injury”, so that only termination payments for medical conditions fall within the scope of section 406.
The Tribunal’s decision confirms that care should be taken in apportioning any discrimination payments between those that relate to discrimination connected to the termination (always taxable under section 401 ITEPA) and those that relate to discrimination prior to termination (not taxable).
It remains to be seen whether this decision is appealed.
To view the decision, click here.