InK Moorthy v HMRC[2016] UKUT 13 (14 January 2016), the UT found that a payment, made by an employer to settle a claim by an employee upon the termination of his employment, was taxable.
The payment was made by a company to settle a claim for unfair dismissal and age discrimination made by its employee Mr Moorthy, following the termination of his employment by reason of redundancy. The issue was whether the payment constituted employment income under ITEPA 2003 ss 401 and 403 and was therefore chargeable to income tax.
The UT noted that s 401 had a wide scope and that nothing in its terms, taken alone or in connection with other parts of ITEPA 2003 chapter 3, excluded non-pecuniary awards, such as damages for injury to feelings. In particular, s 401 was not restricted to payments made under contractual entitlement or to payments made at the time of termination. The only question was whether the payment was directly or indirectly in consideration of, in consequence of, or otherwise in connection with the termination of Mr Moorthy’s employment. The termination payment therefore fell within its scope. In addition, although the compensation paid to Mr Moorthy exceeded the maximum amount payable for unfair dismissal, this did not mean that the excess was not connected with the termination of his employment.
The UT added that s 406 was not a general exemption from tax for payments ‘on account of injury to … an employee’. The UT therefore did not follow Orthet [2005] ICR 374 and Timothy James Consulting [2015] ICR 764, because it considered them to have been wrongly decided, insofar as they held that ‘injury’ in s 406 ITEPA included injury to feelings. Following obiter comments in Horner [1995] STC 766, the UT held that ‘injury’ in s 406 referred to a medical condition and did not include injury to feelings.
Finally, HMRC had stated in its closure notice that its offer to treat a further £30,000 as not taxable was a concession. The UT therefore found that the offer had fallen away when the taxpayer had appealed.
Why it matters: The UT accepted the apparent ‘anomalous distinction’ between payments of compensation for discrimination before termination, which in A [2015] UKFTT 189 were held not to be taxable as earnings under ITEPA 2003 s 62, and compensation paid in connection with termination, which constituted earnings under ITEPA 2003 s 401. This distinction may sometimes require the apportionment of the compensation between events which occurred before and after termination.
InK Moorthy v HMRC[2016] UKUT 13 (14 January 2016), the UT found that a payment, made by an employer to settle a claim by an employee upon the termination of his employment, was taxable.
The payment was made by a company to settle a claim for unfair dismissal and age discrimination made by its employee Mr Moorthy, following the termination of his employment by reason of redundancy. The issue was whether the payment constituted employment income under ITEPA 2003 ss 401 and 403 and was therefore chargeable to income tax.
The UT noted that s 401 had a wide scope and that nothing in its terms, taken alone or in connection with other parts of ITEPA 2003 chapter 3, excluded non-pecuniary awards, such as damages for injury to feelings. In particular, s 401 was not restricted to payments made under contractual entitlement or to payments made at the time of termination. The only question was whether the payment was directly or indirectly in consideration of, in consequence of, or otherwise in connection with the termination of Mr Moorthy’s employment. The termination payment therefore fell within its scope. In addition, although the compensation paid to Mr Moorthy exceeded the maximum amount payable for unfair dismissal, this did not mean that the excess was not connected with the termination of his employment.
The UT added that s 406 was not a general exemption from tax for payments ‘on account of injury to … an employee’. The UT therefore did not follow Orthet [2005] ICR 374 and Timothy James Consulting [2015] ICR 764, because it considered them to have been wrongly decided, insofar as they held that ‘injury’ in s 406 ITEPA included injury to feelings. Following obiter comments in Horner [1995] STC 766, the UT held that ‘injury’ in s 406 referred to a medical condition and did not include injury to feelings.
Finally, HMRC had stated in its closure notice that its offer to treat a further £30,000 as not taxable was a concession. The UT therefore found that the offer had fallen away when the taxpayer had appealed.
Why it matters: The UT accepted the apparent ‘anomalous distinction’ between payments of compensation for discrimination before termination, which in A [2015] UKFTT 189 were held not to be taxable as earnings under ITEPA 2003 s 62, and compensation paid in connection with termination, which constituted earnings under ITEPA 2003 s 401. This distinction may sometimes require the apportionment of the compensation between events which occurred before and after termination.
