In Krishna Moorthy v HMRC [2018] EWCA Civ 847, the Court of Appeal allowed the taxpayer relief from tax to the extent that the redundancy package covered injury to feelings.
This case was an appeal to an earlier Upper Tribunal decision.
- Mr Moorthy was made redundant by Jacobs Engineering (UK) Ltd and received a small redundancy payment.
- He claimed unfair dismissal and age discrimination and received a settlement of £200,000.
- The company treated £30,000 as a tax free Termination payment.
- Mr Moorthy completed his Tax Returns as if the whole amount was tax free on the basis 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.
The UT decided the whole amount was within s401 ITEPA 2003, it was taxable, and injury to feelings did not qualify for relief under s406 ITEPA 2003.
The Court of Appeal agreed with the UT the whole amount must be within s401(1)(a) ITEPA. It was clearly “directly or indirectly in consideration or in consequence of… the termination of his employment”.
The Court of Appeal disagreed with the UT with regards to s406:
- There is no definition of the word ‘injury’ in section 406.
- There is nothing to indicate that it should not be given its ordinary meaning.
- It does not use the term ‘personal injury’ and there is no qualification of the word ‘injury’ save that it must be an injury to the employee in question.
- Parliament have chosen to permit the recovery of compensation for injury to feelings in respect of discrimination claims.
- As a minimum, injury should include anything recognised by Parliament as providing a basis for compensation to an employee.
- Section 406 does not just apply to injury related to medical conditions.
- Section 406 therefore includes injury to feelings in relation to discrimination.
The Court of Appeal concluded that £30,000 of the £200,000 could fall under s406 as compensation for injury to feelings.
For Termination payments after 6 April 2018, injury to feelings is specifically excluded from s406, so this case will only affect terminations up to 5 April 2018.
Links
Termination, redundancy and leaving payments (to 5 April 2018)
Termination, redundancy and leaving payments (from 6 April 2018)
Upper Tribunal Decision: Termination payment taxable despite injury to feelings
External link Krishna Moorthy v HMRC [2018] EWCA Civ 847
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