Discrimination settlement - compromise agreement - taxable?

[littlemissy]

Hi all,

 

I am hoping someone can help or let me know of someone who can help.

 

Last year I raised a case of discrimination to the employment tribunal.

 

Case background: In 2009, I was attacked (outside work) and suffered PTSD and depression. 2012 employer implied I was weak because of the attack (e.t.c) and asked me to find another job (I had a very public breakdown whilst being told this & it was very belittling). I subsequently found myself having a re-occurrence of PTSD/depression.

 

I accepted a settlement based on the figures below (figures separated in COT3)

 

£30,000 compromise agreement to end employment (redundancy)

£15,000 to settle claim.

 

My questions are:

 

1) Do I pay tax on the £15,000? I consider this 'hurt feelings' for what I suffered. I haven't been able to work since and my career is over. How will HMRC see this figure?

2) During 2012, I was paid 40% tax on 3 months salary and paid 4 months statutory sick pay, and no other income. Would I get a tax rebate to bring the tax to 20% (3 months salary doesn't put me in the 40% tax bracket).

3) Can I claim tax back for legal fee's associated with the claim?

 

If you don't know the answer, do any of you know how I find out? I contacted an accountant 6 weeks ago but have had no response after much chasing. I have searched the internet and some sources say 'taxable' and some say 'not taxable'.

 

Many thanks for your help.

[blondebubbles]

Hmrc would want to know exactly what the £45000 was made up of e.g. They would first consider is any of it earnings such as holiday pay, payments in lieu of notice, bonuses due etc. This would all be taxable in the usual way.

 

They'd then consider was any of it for restrictive undertakings or retirement.

 

If it was solely for the termination of the employment then the first £30000 is non-taxable. The other £15000 would be. Compensation is not earnings for nic purposes.

 

You may be due a rebate if you have paid too much. You would need to ask them to calculate it.

 

I'm not sure why you would get tax back for legal fees as these two things are not related.

[littlemissy]

Hi there,

 

Thanks for your response. The £30,000 is for holiday, bonuses, etc. Since it is £30,000 and not above, I believe it won't be taxable.

 

The £15,000 is for statutory compensation for discrimination and to settle the discrimination tribunal case.

 

Taken from HMRC site:

 

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.

 

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. [/i]

...

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.

 

The discrimination I experienced, took place over a period leading up to termination and was inherent to the termination.

 

HMRC mentions I need the facts examined, how do I go about that?

 

 

Thanks,

 

FYI HMRC website: http://www.hmrc.gov.uk/manuals/eimanual/EIM12965.htm

Further info: http://www.employmentlawwatch.com/2011/01/articles/employment-uk/uk-tax-implications-for-settlement-payments-in-cases-of-discrimination-recent-developments/

[blondebubbles]

For the £30000 disregard the payment needs to fall under section 401 itepa. Before a payment is considered under this section it needs to be checked to see if it should be taxed elsewhere.

 

Payments for bonus, holiday pay etc are earnings and are taxable under section 62 itepa. The full amount is taxable subject to personal allowances. Think of it as if you were still working it would have been taxed. It isn't paid because your employment was terminated, it's what you were due from the employment.

 

It would then be the £15000 that would not be taxed as this is genuinely paid for the loss of employment.

 

This is guidance is quite good at explaining http://www.taxation.co.uk/taxation/Articles/2013/02/27/303301/taken-out

 

Have you got a breakdown as to how the £30000 and £15000 have been calculated e.g £5000 bonus, £2000 holiday pay etc

[littlemissy]

Hi,

 

Thanks for your help. I really appreciate it.

Unfortunately, I am not a subscriber to that document and unable to read it.

 

In the compromise agreement (COT3), the £30,000 is for 'Compensation payment' for termination of employment. There is no other breakdown of the payment. No breakdown for pension, bonus, holiday. It is listed purely as compensation because my employment was terminated. I suppose I assumed the payment was for holiday e.t.c but that is not what is documented in the compromise agreement.

 

I can't send you the wording because the document is covered under an NDA.

The compromise agreement was not part of poor performance on my part or a wider redundancy, it was because I took my employer to tribunal for disability discrimination.

 

Breakdown:

£15,000 settlement of disability claims.

£30,000 compensation payment.

 

There is no other breakdown. This is part of a COT3 and not standard redundancy.

 

Is this something any accountant could help with or should I start with a solicitor? HMRC said I need to have a review with a Tax inspector?!

 

Basically, I am happy to pay for someone to review but I am getting no response from the accountants I have called (I suspect this is due to the complexity?)

 

Once again, many thanks for your time.

[blondebubbles]

I'm afraid I can only give advice on what the tax implications are. I couldn't say whether you would speak to an accountant or solicitor.

 

If I was to look at your case based on what you've said on here I would not be able to answer your question. Someone must know how the payments were calculated and that's what you'd need to find out for HMRC to make a decision.

 

The problem with these kind of things if that employers give £30000 say it's compensation and leave it at that but it then turns out it was calculated with bonus, holiday pay, pilons etc which can be taxable. Just because it's called compensation doesn't mean it necessarily is all for that.

[littlemissy]

Thanks for your response. FYI, the payments were based on negotiation through ACAS to settle the case before it went to court. I was asked the question: 'how much do you want to cancel this claim?' A payment breakdown was never discussed. Due to trauma of the experience (and hence the reason I received so much payoff), I am reluctant to ask my ex-employers for a payment breakdown.

 

Based on the fact I have no breakdown, do you (or anyone else who may read this) know what my next steps would be?