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A recent case (Moorthy v HMRC) has reminded us of the correct tax treatment of termination payments. A payment for discrimination and/or injury to feelings was taxable as a termination payment because the payment was made in connection with the termination of Mr Moorthy’s employment. This case teaches us that if a compensation payment is going to be made, and it is not intended to be compensation for the termination of the employment, then in order to give the best possible chance of ensuring that this does not fall within a charge to income tax, the reason for the payment should be expressly stated and a separate amount allocated to this.
Mr Moorthy was informed he was to be dismissed by reason of redundancy in March 2009. Following a 12 month period of garden leave, his employment was terminated and he received his statutory redundancy payment (and the full amount fell within the £30,000 exemption to tax). Mr Moorthy then commenced Employment Tribunal proceedings, alleging unfair dismissal and age discrimination. The case ultimately settled by way of a compromise agreement, and Mr Moorthy received £200,000 by way of compensation for his loss of office, and the full £30,000 exemption to tax was applied.
This case highlights some important points of principle when considering the tax treatment of a compensation payment on termination of employment:
Ultimately, Mr Moorthy would have been better off financially if he had accepted HMRC’s concession, rather than pursuing the matter to the tribunal.
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