Compensation payment is fully taxable

The taxpayer had worked for her employer since 2007. She raised a grievance against the employer alleging sexual harassment and bullying. The employer did not uphold her grievance so she began proceedings in the employment tribunal. However in return for withdrawing the employment tribunal claim and any other claims she may have against her employer she made a settlement agreement and received a compensation payment of more than £1m. She agreed to confidentiality and non-disclosure obligations.

Under the agreement the employer treated the sum as a termination payment. It applied the £30 000 exemption and taxed the balance. In her self-assessment return the taxpayer claimed an overpayment of £467 684 on the basis that the payment was not connected to the termination of her employment and was wholly in consideration of her agreement to enter into the confidentiality and non-disclosure obligations.

HMRC disagreed. It said the compensation...