Need a shoulder to cry on? Don't call the taxman...

09 February 2016

Andrew Hubbard

Sticks and stones can break my bones but words can never hurt me. But does the taxman agree?

I was reminded of the old nursery rhyme when reading the judgement in the recent case of Krishna Moorthy v HMRC. This was latest in a long line of cases on the tax treatment of payments connected with the termination of employment. We have discussed many of these in the past and often these cases are concerned with whether the £30,000 exemption applies.

This case was rather different. Mr Moorthy was made redundant and negotiated a payment of £200,000 in full and final settlement under a compromise agreement. He argued that part of the dispute related to an age discrimination claim, and hence at least part of the settlement payment represented compensation for injury to feelings caused through having to deal with the age discrimination issue. The significance of this is that there is an exemption for termination payments made on account of injury to, or disability of, an employee.

Did injury include injury to feelings? Some previous tribunal decisions had suggested that it might extend that far, but this decision makes it clear that injury refers only to medical conditions only. It would apply to mental as well as physical conditions, but not hurt feelings. Had Mr Moorthy lost his job because, say, he had a stroke, the compensation would have been tax free. Similarly - and perhaps oddly - had he received a compensation for, say, racial discrimination by his employer while remaining in employment, that compensation would probably have been tax free as well. Such are the strange ways of the tax system.

This shows yet again that termination payments remain a very difficult area of the tax system. HMRC has recently consulted on reform of the rules and we expect to see the outcome of that response in the forthcoming Budget. There are different views as to what the ideal system should be, but I don’t think anybody really thinks that the status quo is satisfactory.

I can’t leave this case without sharing a quote with you. At paragraph 61, the judge said ‘If a person is killed or suffers injury or disability in a road accident that might make him unfit for work….’

It isn’t often that tax case reports make me smile!

For further information please contact Andrew Hubbard or your usual RSM contact.