Moorthy v HMRC

What happened?

Mr Moorthy who had been an executive director of operations at an engineering company settled his claim for unfair dismissal and age discrimination against his former employer. He was paid £200,000 as compensation for “loss of office and employment” under the settlement agreement. The employer treated the standard £30,000 of this as exempt from tax. This was in “full and final settlement” of his existing claims and any other claims arising out of his employment or its termination. This key issue was whether any part of the settlement sum was not taxable by the exemption for payments or other benefit for injury to an employee. The alleged injury being the injury to Mr Moorthy’s feelings in the context of his age discrimination claim.

Henderson LJ, with whom the other judges agreed, allowed the appeal on the exemption issue, declaring that “£30,000 of the £200,000 paid to him is exempt from income tax under section 406 of ITEPA 2003, being a payment made to him on account of injury to his feelings in the context of his age discrimination claim.

The Hearings

The Court of Appeal confirmed that under the law at the time, payments for injury to feeling could fall within the exemption that allows termination payments for injury to be paid tax free. The court decided that the tax exemption for injury payments was not confined to medical conditions, but the law has changed since again.

Take-away points

• Legislation has been amended from April 2018 so that payments for injury to feelings are fully taxable and do not fall within the exemption for personal injuries.
• If any alleged discrimination was connected to the termination. If it was connected, then tax will be payable if the total compensation

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