In Krishna Moorthy v HMRC [2016] UKUT 0013 TCC, the Upper Tribunal ruled that injury to feelings did not exempt a payment from being taxable as a termination payment within s401 ITEPA.
- Mr Moorthy was made redundant by Jacobs Engineering (UK) Ltd in March 2010, receiving statutory redundancy pay of £10,640 in 2009/10.
- He claimed unfair dismissal and age discrimination, subsequently entering into a compromise agreement with the company and a settlement of £200,000.
- The company treated £30,000 of this amount as tax free, deducting basic rate tax from the remainder.
- Mr Moorthy completed his Tax Returns as if the whole amount was tax free on the basis that it was a payment to compensate for discrimination causing injury to feelings and to protect the employer’s reputation, not a payment in connection with his employment.
HMRC disagreed with Mr Moorthy and he appealed to the First Tier Tribunal (FTT) who decided that:
- The whole amount of £200,000 fell within s401 ITEPA and was chargeable to tax subject to the £30,000 exemption.
- The statutory redundancy paid in 2009/10 had reduced the remaining exemption allowed to £19,360.
Appeal to Upper Tribunal
The Upper Tribunal (UT) considered whether
- The settlement amount was a payment in connection with the termination of employment falling within s401 ITEPA and
- If it does fall within s401 ITEPA, whether it is taken out of the charge by s406(b) ITEPA as a payment on account of injury to an employee.
Decision
The payment was within s401: made in connection with Mr Moorthy’s termination.
- The scope of s401 is wide and all payments received directly or indirectly in consequence of the termination of employment are within its scope.
- Its scope is not restricted to payments made under contract or at the time of termination.
- Possible reasons for the payment, such as the company’s desire to settle the unfair dismissal claim, were not relevant.
The payment is not within s406(b) and so is not removed from a charge to tax:
This decision was later overturned by the Court of Appeal. Section 406 could apply to injured feelings in this case.
Section 406 is as follows:
Exception for death or disability payments and benefits
This Chapter does not apply to a payment or other benefit provided—
- in connection with the termination of employment by the death of an employee, or
- on account of injury to, or disability of, an employee.
The UT decided that:
- The injury referred to in s406 had to be the cause of or reason for the termination; s406 does not give a blanket exemption for all payments in respect of an injury
- Injury should be interpreted with “death” and “disability” and should mean a medical condition resulting in the termination of employment.
- “Injury” in s406 does therefore not include injury to feelings.
Comment
This case is noteworthy because it was the first time the issue of whether injury to feelings could fall within s406 after a number of courts and tribunals have previously reached different conclusions. The Equality and Human Rights Commission also intervened in this case and lodged written submissions.
The UT also acknowledged the distinction between payments of compensation for discrimination before termination which were not held to be taxable as earnings under s62 ITEPA, and such payments made in connection with termination which do count as earnings under s401.
Links
Our practical tax guide: Termination, redundancy and leaving payments.
