Nature of compensation

Payment made to employee on the termination of his employment

The taxpayer was made redundant in March 2010 and received a statutory payment from which no tax was deducted. During 2010/11 he sued his employer for unfair dismissal and age discrimination. As a result of mediation the employer made an ex gratia payment of £200 000 which it paid in two tranches in 2010/11. The employer treated the first £30 000 of the sum as exempt from tax under ITEPA 2003 s 403 and deducted tax from the balance.

The taxpayer claimed a repayment of the deduction saying the settlement had been tax-free. The First-tier Tribunal said the payment fell within s 401 and was chargeable to income tax.

The case proceeded to the Upper Tribunal. The Hon Mrs Justice Rose said that s 401 had a wide scope. Further nothing in the section excluded...