Krishna Moorthy v HMRC (UKUT) – Termination Payments

In a judgment released on 14 January 2016, the Upper Tier tribunal (“UT”) upheld the First Tier Tribunal’s (“FTT”) decision in the case of Krishna Moorthy v HMRC [2016] UKUT 0013 (TCC).

The background to the case is set out in our review of the FTT’s findings, which can be found here, but in summary:

Mr Moorthy had originally received an ex-gratia sum of £200,000 following the termination of his employment with Jacobs Engineering (UK) Limited (“Jacobs”), in settlement of a legal challenge claiming he had suffered discrimination on the grounds of age. Jacobs paid the first £30,000 without deduction of tax, and withheld PAYE at the basic rate of 20% on the balance.

In the prior tax year, Mr Moorthy had received a statutory redundancy payment of £10,640, which had been paid to him without deduction of tax.

Mr Moorthy claimed that the entire amount was tax free and filed his tax return on that basis.

After much correspondence, HMRC offered to settle with Mr Moorthy on the basis that £30,000 of the payment fell within the statutory exemption for compensation for loss of office and, as a concession, no tax would be collected on additional £30,000.

Mr Moorthy appealed to the FTT, arguing that the whole payment should be treated as exempt from tax.

The FTT found that Mr Moorthy was only entitled to the £30,000 exemption provided by ITEPA 2003, s431 and, in addition, ruled that it was unable to uphold HMRC’s concession of an additional tax free amount of £30,000.

In addition, the FTT, on reviewing Mr Moorthy’s case found that the statutory redundancy pay that he had received in the prior tax year should be counted against the £30,000 exemption, which meant that Mr Moorthy left the FTT in a far worse position than had been offered by HMRC.

Mr Moorthy appealed to the UT, and the appeal focused on three issues:

  • Whether the entirety of the settlement payment fell within ITEPA 2003, s401;
  • Whether “injury” in ITEPA 2003, s406 includes injury to feelings; and
  • What was the effect of the concession made by HMRC that £30,000 of the settlement payment should be treated as damages?

S401

With regard to ITEPA 2003, s401, the UT were in no doubt that the £200,000 payment was “received directly or indirectly in consideration or in consequence of, or in connection with” Mr Moorthy’s employment, they agreed with the FTT that the motives for making the payment were irrelevant.

Mr Moorthy’s counsel had argued that there was a discrepancy in the treatment of compensation payments made to an employee in respect of discrimination that they had suffered during the course of their employment and discrimination resulting in the termination of that employment.

The UT accepted that the discrepancy existed, but pointed to the wording of the statute, which explicitly treats payments of any sort made on the termination of employment as taxable employment income.

S406

Mr Moorthy’s counsel argued that the definition of “injury” for the purposes of ITEPA 2003, s406 includes awards for injury to feelings; on that basis, the payment to Mr Moorthy should be exempt from tax.

Mr Moorthy relied on the decisions of the Employment Appeal Tribunal in the cases of Orthet Ltd v Vince-Cain [2005] ICR 374 and Timothy James Consulting Ltd v Wilton [2015] ICR 764.  However, the UT found that these decisions were wrongly decided and that for the purposes of s406, injury “refers to a medical condition and does not include injury to feelings”.

The Concession

The additional tax free amount of £30,000 that HMRC originally offered as a concession was still held to be taxable. The concession was not made on a “correct view of the law” but as a means of trying to reach an agreement. As an agreement was not reached, the condition on which the offer was made was not met and as a result, the offer fell away.  The conditionality of the offer meant that Mr Moorthy was unable to compel the tribunals to uphold the offer on the grounds that he had a “legitimate expectation” that the tax treatment of the award was correct.

Mr Moorthy’s appeal to the UT was therefore dismissed in its entirety and reinforces the lesson learned following the FTT in knowing when to strike a deal with HMRC, especially when the alternative throws up a less favourable outcome.

For further information and help on this case and termination payments, please contact the TaxDesk on 0845 4900 509 and ask for Sean Eastwood.