Some employers choose to negotiate their own settlement agreements to prevent future claims which are then formalised in writing using their own templates so as to be compliant with S.203(3) of the Employment Rights Act 1996 (ERA 1996) and other corresponding statutory provisions.

Acas advice on the use of their model settlement agreement under S.111A of the Employment Rights Act 1996 (confidentiality of negotiations before termination of employment), is that an employer may wish to seek legal advice. Acas advice holds good for all forms of settlement agreement because of the complex issues that may arise, particularly involving tax, as demonstrated by the Upper Tax Tribunal’s decision in Moorthy v HMRC, where the Tribunal disagreed with decisions of the EAT on taxation of injury to feelings payments and with EOC advice.

In Moorthy, the employer made a £200,000 payment as compensation for loss of office and employment, as part of a settlement agreement with Mr Moorthy, to settle a claim for unfair dismissal and age discrimination following his redundancy. Moorthy argued that the payment was exempt from tax under S.406(b) of the Income Tax (Earnings and Pensions) Act 2003 as it was a payment or benefit “on account of injury to … an employee”, namely injury to feelings.

The Tribunal disagreed. It considered that “injury” in S.406 refers to a medical condition and does not include injury to feelings.  Therefore, payment for injury to feelings on termination was not exempt from tax and previous decisions by the EAT to the contrary in Timothy James Consulting Ltd v Wilton and Orthet Ltd v Vince-Cain were wrong. Furthermore, the Equal Opportunities Commission (pre-EHRC) statement that an award for injury to feelings is “arguably not taxable”, only indicates there is an argument and is not indicative of a resolution.

Moorthy shows that legal advice on settlement agreements is crucial, particularly as this case involved injury to feelings arising on termination of employment, but the situation is different where payment is made for injury to feelings during employment and unconnected with termination. There needs to be a clear distinction, and if both apply, a clear apportionment. 

Content Note

The aim is to provide summary information and comment on the subject areas covered. In particular, where employment tribunal and appellate court cases are reported, the information does not set out full details of all the facts, the legal arguments presented by the parties and the judgments made in every aspect of the case. Click on the links provided to access full details. If no link is provided contact us for further information. Employment law is subject to constant change either by statute or by interpretation by the courts. While every care has been taken in compiling this information, SM&B cannot be held responsible for any errors or omissions. Specialist legal advice must be taken on any legal issues that may arise before embarking upon any formal course of action.