The Upper Tribunal, that deals with tax appeals, has upheld a decision that a settlement payment for injury to feelings made in connection with a termination of employment was taxable as a termination payment. The payment was made to settle all the taxpayer's claims against the employer including claims for unfair dismissal and age discrimination arising during the redundancy selection process. (Moorthy v HMRC [2016] UKUT 13 TCC (14 January 2016).
The Tribunal did not agree with an earlier EAT case in which the EAT found that payment for injury to feelings can be exempt from tax on the basis of the exemption for payments made on account of death, disability and injury. The Tribunal found that “injury” for these purposes means a medical condition that results in the termination of employment. This case related to injury to feelings, which could not be a medical condition, hence the exemption did not apply.
In this case, the alleged discrimination arose from the termination itself in any event and accordingly the compensation was taxable. It was not compensation for discrimination that occurred before termination (which compensation is not taxable).
Given the different views taken by the EAT and the tax Upper Tribunal, it is hoped that a future Court of Appeal decision will resolve the conflict.
Advise should be taken in individual circumstances regarding the tax treatment of payments for injury to feelings.