The 20-second summary
The EAT has suggested that injury to feelings discrimination awards are tax free, contrary to the latest Tax Tribunal ruling on this point. This increases the uncertainty of the tax treatment of injury to feelings awards.
EAT suggests injury to feelings awards benefit from a special tax free exemption
In Timothy James Consulting v Wilton the Claimant was constructively dismissed following various acts of sex harassment by the employer. The Employment Tribunal awarded injury to feelings of £10,000, which it grossed up to £16,666. The Employment Tribunal did this on the basis that the award was connected to termination of employment and so was subject to the termination payments tax regime. Whilst there is conflicting Tax Tribunal case law in this area, the latest decision of the Tax Tribunals (Moorthy v. HMRC) says that such termination payments awards are taxable unless limited tax free exemptions apply (such as the £30,000 exemption).
The employer in this case appealed the decision to gross up the award, arguing that injury to feelings payments are not taxable. The EAT allowed the appeal and reduced the award to £10,000. The EAT considered but rejected Moorthy, preferring instead its own interpretation of the income tax statute. It suggested that injury to feelings awards benefit from a special tax free exemption in the legislation for "payments on account of injury".
The EAT’s decision adds unwelcome uncertainty in this area. Pending clarification from a higher Tax Tribunal or court, employers who prefer the Moorthy approach may wish to bear in mind that the EAT’s view in this case is not binding, as the EAT is not a Tax Tribunal, and that the Moorthy decision accords with HMRC’s own view.