In Mrs A v HMRC [2022] TC8640, the First Tier Tribunal (FTT) held that a compensation payment made to an employee who agreed not to pursue her grievances at the Employment Tribunal was fully taxable as a payment for a restrictive undertaking. The £30,000 termination payment exemption did not apply.

Mrs A who was bringing a case in the Employment Tribunal for various grievances, including sexual harassment, signed a settlement agreement with her employer:

  • In return for withdrawing an employment tribunal claim and any other claims she may have against her employer, she received a compensation payment of £1,055,000.
  • She agreed to be bound by certain confidentiality and non-disclosure obligations.
  • The employer treated the sum as a termination payment and deducted tax under PAYE. This was all in accordance with the settlement agreement signed by Mrs A.
  • Mrs A wrote to HMRC to request a refund. In her tax return for the year, she claimed an overpayment of £467,684.
  • HMRC opened an enquiry. This resulted in them issuing a closure notice for £461,588 on the basis that the compensation was taxable as a Termination payment under s.401 and therefore s.403 ITEPA 2003 meaning that only £30,000 was non-taxable. Their alternative argument at the FTT was that it was a payment for a Restrictive undertaking taxable as earnings under s.225 ITEPA. This takes priority over s.403 and is taxable in full i.e. there is no £30,000 exemption.
  • Mrs A Appealed contending that the payment had no connection to the termination of her employment and was wholly in consideration of her agreement to enter into the confidentiality and non-disclosure obligations.

The FTT dismissed the appeal:

  • Any undertaking which restricts the individual’s conduct or activities and is given in connection with their employment is within the scope of s.225.
  • There is no doubt that an agreement not to pursue claims or proceedings is a restrictive undertaking within the scope of s.225
  • The compensation payment was not damages, it was paid in respect of the restrictive undertaking given by Mrs A that she would not make or pursue any claims against her employer relating to or arising out her employment or its termination. It was therefore taxable as earnings under s.225.
  • Had s.225 not applied, the payment would have been a termination payment taxable under s.403 and there was no scope for apportioning part of it as consideration for the confidentiality and non-disclosure obligations.

Useful guides on this topic

Termination, redundancy and leaving payments
How are redundancy and termination payments taxed? What amounts can be paid tax-free? What amounts are taxable as earnings?

Golden handshakes, signing on fees and unusual payments
How are golden handshakes, signing on fees and unusual payments taxed?

Unfair Dismissal
What is unfair dismissal? What are the rights of the employee and employer? What issues must the employer consider in dismissing a member of staff?

Wrongful Dismissal
When can an employee make a claim for wrongful dismissal?

External link

Mrs A v HMRC [2022] TC8640 


Oak ad
Loving our content? 😍

Join thousands of accountants and advisers and their clients use www.rossmartin.co.uk as their primary TAX resource.

Register with us now (for free 😅) to receive our receive our FREE weekly SME Tax News updates.

 

Squirrel advert

Loving our content? 😍
Sign up Now!
For free tax news, cases,
discounts & special tax briefings

We hope you are enjoying this amazing Practical Tax Database here at www.rossmartin.co.uk.

 

.