Krishna Moorthy v HMRC
| Jurisdiction | UK Non-devolved |
| Judge | The Hon Mrs Justice Rose DBE , |
| Judgment Date | 14 January 2016 |
| Respondent | HER MAJESTY’S REVENUE AND CUSTOMS |
| Appellant | employee within section 406 ITEPA - no - whether |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
| Appeal Number | UTC/2014/0066 |
[2016] UKUT 0013 TCC
Appeal number: UTC/2014/0066
INCOME TAX - termination of employment – payment of £200,000 made under
compromise agreement signed after termination - whether payment within Chapter
3 of Part 6 of ITEPA 2003 and chargeable to income tax - whether payment
received in connection with termination of employment within section 401 ITEPA -
yes - whether damages for injury to feelings payment on account of injury to
employee within section 406 ITEPA - no - whether Appellant can rely on
‘concession’ by HMRC to reduce amount chargeable to income tax - no - appeal
dismissed
Walker v Adams, Oti-Obihara v HMRC, Orthet Ltd v Vince-Cain and Timothy
James Consulting Ltd v Wilton considered
UPPER TRIBUNAL
TAX AND CHANCERY CHAMBER
KRISHNA MOORTHY Appellant
- and –
THE COMMISSIONERS FOR
HER MAJESTY’S REVENUE AND CUSTOMS Respondents
Tribunal:
The Hon Mrs Justice Rose DBE
Chamber President
Judge Greg Sinfield
Sitting in public in London on 26 - 28 October 2015
David Gray-Jones, solicitor advocate, of Thomas Mansfield Solicitors Limited
for Mr Moorthy
John Brinsmead-Stockham, counsel, instructed by the General Counsel and
Solicitor to HM Revenue and Customs, for the Respondents
© CROWN COPYRIGHT 2016
2
DECISION
Introduction
1. This appeal concerns the extent to which a payment made by an employer to settle
a claim for unfair dismissal and age discrimination made by an employee following the
termination of his employment by reason of redundancy falls to be treated as
employment income by sections 401 and 403 of the Income Tax (Earnings and
Pensions) Act 2003 (‘ITEPA’) and is thus chargeable to income tax under section 6 of
that Act.
2. In March 2010, the Appellant (‘Mr Moorthy’) was made redundant by his
employer, Jacobs Engineering (UK) Limited (‘Jacobs’). He received statutory
redundancy pay of £10,640 in the 2009-10 tax year from which no tax was deducted.
Mr Moorthy subsequently brought proceedings in the Employment Tribunal claiming
unfair dismissal and age discrimination. Following mediation, Mr Moorthy and Jacobs
entered into an agreement (‘the compromise agreement’) under which Jacobs agreed to
pay Mr Moorthy “an ex gratia sum of £200,000 by way of compensation for loss of
office and employment” (‘the settlement amount’). Mr Moorthy was paid the
settlement amount by Jacobs in two tranches in the 2010-11 tax year. Jacobs treated
£30,000 of the settlement amount as exempt from tax by virtue of section 403 ITEPA
and deducted income tax at the basic rate from the balance. Mr Moorthy completed his
self-assessment tax return for 2010-11 on the basis that the settlement amount was tax
free. The Respondents (‘HMRC’) did not agree and, in August 2013, issued a closure
notice amending Mr Moorthy’s self-assessment return for 2010-111 to include an
additional £140,023 as taxable income.
3. Mr Moorthy appealed against the amendment to his return and his appeal
subsequently came before the First-tier Tribunal (‘the FTT’). In a decision released on
21 August 2014 under neutral citation [2014] UKFTT 834 (TC) (‘the Decision’), the
FTT (Judge Redston and Mrs Watts Davies) found that:
(1) the settlement amount of £200,000 fell within section 401 ITEPA;
(2) taking into account the statutory redundancy payment of £10,640 made in
the 2009-10 tax year, the £30,000 exemption allowed by section 403 ITEPA was
reduced to £19,360; and
(3) the FTT had no jurisdiction to allow a further relief of £30,000 treated by
HMRC, as a concession, as damages for age discrimination and outside the charge
to income tax.
4. Mr Moorthy now appeals, with permission of the FTT, against the Decision. The
appeal raises three issues which are described more fully below. In brief, the first issue
is whether the settlement amount was a payment in connection with the termination of
employment within section 401 ITEPA to be treated, to the extent that it exceeds the
£30,000 threshold in section 403, as employment income chargeable to income tax. If
the settlement amount falls within the scope of section 401, the second issue is whether
it is taken out of the charge to tax by section 406(b) ITEPA as a payment or benefit “on
account of injury to … an employee”, namely injury to feelings in the context of a
1 Paragraph 4 of the Decision states that the amount was included as income for 2011-12 but this is
clearly a slip.
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