Employment Appeal Tribunal
An employment tribunal had erred in grossing-up compensation awarded for injury to feelings and personal injury in a case of disability discrimination, as the awards related to pre-termination discrimination and were not to be treated as taxable employment income.
The appellant employer (Y) appealed against the amount of compensation awarded to the respondent former employee (C) following her successful claim of constructive dismissal and disability discrimination.
An employment tribunal had found that Y failed to make reasonable adjustments for C's disability to enable her to return to work after a lengthy period of sick leave. C resigned and was found to have been constructively dismissed. She was awarded compensation totalling almost £174,000 which included approximately £59,000 for pension loss, £9,000 for injury to feelings and £7,500 for personal injury. The tribunal decided that the award (save for the amounts for breach of contract) was taxable above £30,000, and the balance was grossed-up by the higher rate of tax of 40 per cent.
Y submitted that the tribunal had erred in law in its approach to taxation because: (1) by virtue of the Income Tax (Earnings and Pensions) Act 2003 s.406, it should not have grossed-up the elements of C's award relating to injury to feelings and general damages for personal injury; (2) the award for pension loss was not taxable as the scheme was tax exempt and payments under it were non-taxable by virtue of s.407(1)(a) of the Act; (3) the tribunal had made no allowance for C's taxable income below the higher rate.
HELD: (1) The question as to whether the exemption in s.406 applied was rendered moot by the fact that the awards for both personal injury and injury to feelings related back to the tortious act found by the tribunal, namely Y's failure to make reasonable adjustments, which pre-dated termination of C's employment. On the basis that pre-termination awards under those two heads were not taxable, it followed that those awards were not subject to "grossing-up", British Transport Commission v Gourley [1956] A.C. 185 and Walker v Adams (Inspector of Taxes) [2003] S.T.C. (S.C.D.) 269 considered. (2) The tribunal had not erred in grossing-up the award for pension loss. That award did not fall within s.407(1)(a), as that section was concerned with payments to a beneficiary out of a pension scheme. It was not directed to a tribunal award of compensation in respect of loss of pension rights on termination of employment. (3) The tribunal had taken a flat rate of 40 per cent for the purposes of grossing-up. However, that failed to take into account C's personal allowance and standard rate of tax for the year in which she received the compensation. New figures for grossing-up were therefore substituted, which had the effect of reducing the total award.
Appeal allowed in part.
LTL 29/7/2010
