Injury to Feelings Awards Can Be Tax Free
Author: Matthew Kilgannon
The recent case of Timothy James Consulting v Wilton has provided some helpful guidance on a couple of important areas of law:
- whether constructive dismissal is, itself, an act of harassment under the Equality Act 2010; and
- that an award for “injury to feelings can be tax-free”.
The Claimant (Ms Wilton) resigned from the Respondent (Timothy James Consulting) following various alleged acts of discrimination by her manager, Mr O’Connell. The Claimant and Mr O’Connell previously had a relationship which ended amicably. Mr O’Connell subsequently began a relationship with Ms Docker who reported to the Claimant. The alleged acts of harassment included various tirades from Mr O’Connell towards the Claimant.
EMPLOYMENT TRIBUNAL (ET) DECISION:
Some of the alleged acts of harassment were upheld and the Claimant was found to have been constructively dismissed as the result of three acts of harassment related to her sex. The Claimant therefore succeeded in her claims, which included claims for unfair constructive dismissal and harassment.
The ET held that the Claimant’s constructive dismissal was, itself, an act of harassment.
Further, in addition to an award of £40,394.85 for the unfair dismissal, the ET made an order of £10,000 for injury to feelings for the harassment that had occurred. It then ‘grossed-up’ the award to £16,666, so the net amount received by the Claimant would be £10,000.
EMPLOYMENT APPEAL TRIBUNAL (EAT) DECISION:
While there were various appeals by both parties, two important ones are:
1. The Respondent appealed the finding that the constructive dismissal was an act of harassment.
Sections 39 - 41 of the Equality Act 2010 deal with the application of discrimination and harassment in employment. Section 39 provides that an employer must not discriminate against an employee by dismissing them or subjecting them to any other detriment. Section 39 (7) (b) goes on to specifically provide that “dismissal” includes constructive dismissal.
However, harassment is defined in section 26 of the Equality Act 2010 and does not provide that constructive dismissal could be harassment. Furthermore, section 40 prohibits an employer from harassing an employee.
As a consequence, the EAT upheld the Respondent’s appeal on this point, confirming that constructive dismissal cannot amount to an act of harassment.
2. The Respondent also appealed the award of compensation for injury to feelings. It did not appeal the fact that an award was made nor the amount, but simply the grossing up exercise undertaken by the Tribunal.
The EAT undertook a detailed review of the relevant legislation and case law (much of which is conflicting) and upheld this ground of appeal. The EAT found that section 406 of the Income Tax (Earnings and Pensions) Act 2003 permits awards of “injury to…any employee” to be tax-free. This tax statute will be familiar to many readers, as it also allows the first £30,000 “compensation” to be paid tax-free.
WHAT DOES THIS MEAN FOR YOU?
The decisions from the EAT provide helpful guidance, particularly, around the taxable status of awards for injury to feelings although it should be noted that the EAT’s view on the tax point is not binding on HMRC. This decision could help settlement negotiations where there are allegations of discrimination, as it enables compensation payments for injury to feelings to be paid free of tax. This is separate from the provision that allows up to £30,000 to be paid tax-free as compensation for loss of employment, which means employees could receive more net pay and you avoid employer’s NIC. However, in relation to injury to feelings compensation care will be needed and specialist advice should be sought on the tax implications and the realistic values that should be apportioned to this aspect to avoid challenges from HMRC.
The finding that constructive dismissal is not an act of harassment could also help, although it’s importance is likely to be more limited. If faced with similar facts, this decision places an additional hurdle for employees to overcome where such claims arise.
If you have any questions regarding the above, please contact Matthew Kilgannon either by telephone on 01483 411517 or by email: firstname.lastname@example.org or speak to another members of our Employment team.