Discrimination award made in connection with termination taxable as termination payment

The First-tier Tribunal has held that a compensation payment related to discrimination and injury to feelings that was made to an employee on the termination of his employment was taxable as a termination payment, because it was connected with the termination. If compensation for injury to feelings is related to discrimination occurring before the dismissal, HMRC accepts that it will not be subject to deductions for tax.

The Tribunal’s decision in this case is unsurprising and appears to accord with previous case-law in this area (despite the tribunal’s comments to the contrary). The judgment emphasizes that where, as in this case, the alleged discrimination is the act of dismissal itself, the payment will, almost inevitably, be connected with the termination and therefore, taxable as a termination payment. However, the tribunal’s criticism of previous case law, and in particular of the method to be used for apportioning an agreed global settlement payment, set out by a differently constituted tribunal of equal authority, now casts doubt over whether this is indeed correct.

(Moorthy v HMRC [2014] UKFTT 834 (TC).)

Further information on discrimination law, including details of damages for injury to feelings can be found here.

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