EIM12965 – Termination payments and benefits: statutory compensation for discrimination and compensation for hurt feelings
Apart from the Employment Rights Act 1996 (see
EIM12950) there are many statutory
provisions that provide rights to compensation for various forms of
discrimination by employers.
The most common claims are in respect of discrimination on
grounds of sex, disability, politics and religion. Compensation for
such discrimination may be paid under several different heads, such
as for loss of earnings, personal injury, injury to feelings and so
on. Each head needs to be considered separately.
Such payments are taxable only under Section 401 ITEPA 2003.
Further, they are only taxable where they are
“connected” (see
EIM13012) with the termination (or, less
commonly, with a change in duties or earnings) of the employment.
If the settlement does not specify what part of the payment is so
“connected”, the facts must be analysed with care and
part apportioned, if necessary, on a just and reasonable basis.
Any part of the settlement that can reasonably be attributed
to discrimination occurring
before the termination should be accepted as not
being employment income as it is not “connected” with
the termination. However, where the compensation relates only to
the consequences of the termination itself, no apportionment will
be appropriate. For example, if the compensation is for loss of
future earnings (after termination) it is all connected with the
termination and Section 401 ITEPA 2003 applies even though the
discrimination brought about the termination. If, by contrast, the
compensation is for injury to feelings and there was discrimination
before termination, then any part of that compensation that is not
connected with the termination will not be within Section 401 ITEPA
2003.
The Special Commissioners’ Decision in Walker v Adams
(SpC344) may be cited in this context. It confirmed that Section
401 applies to statutory discrimination compensation, in this case
for loss of earnings resulting from termination after religious
discrimination. The statement that a payment made as compensation
for hurt feelings was not taxable was based on the
Commissioners’ view that all discrimination took place
pre-termination, and was accepted by HMRC on that basis only.
An example of compensation for discrimination that falls
wholly within Section 401 ITEPA 2003 is that paid as compensation
for sexual discrimination to members of the armed forces who were
once dismissed on becoming pregnant. In that case, the whole
payment is “connected” only to the discrimination
suffered in respect of the termination itself and not to any
earlier act or event.
An example of compensation for discrimination that falls only
partly within Section 401 ITEPA 2003 is that paid as compensation
for sexual discrimination occurring over a period leading up to
termination and also inherent in the termination itself. To
establish the part within Section 401 ITEPA 2003, the facts need to
be examined and a reasonable apportionment agreed.
(This text has been withheld because of exemptions in the
Freedom of Information Act 2000)
