Payment to settle part-time working claim taxable as earnings

The first tier tax tribunal has ruled that a payment made to settle a claim under the Part-time Workers Regulations 2000 was taxable as earnings.

Facts

In Pettigrew v HMRC, Mr Pettigrew, a part-time judge, was one of a number of claimants who alleged that they had been paid less pro rata than a full-time judge in respect sitting fees, training days and London weighting. The Ministry of Justice (MoJ) paid him just over £55,000 to settle his claim, less PAYE deductions of £22,000. Mr Pettigrew sought to reclaim the tax through his self-assessment tax return, arguing that the MoJ should not have deducted tax as the payment represented compensation for breach of his statutory rights under the Part-time Workers Regulations, rather than arrears of salary.  

The case reached the first tier tax tribunal. 

Decision 

The tribunal considered that the payment represented an underpayment of fees for sitting and training days and was taxable as earnings, on the basis that compensation is treated for tax purposes in the same way as the payment it replaces. Even if, as Mr Pettigrew argued, the payment represented compensation for breach of statutory employment rights, the employment was still the source of the payment and so it was taxable as earnings.  

Implications

Where compensation is paid to settle a discrimination claim arising during employment (as opposed to on termination) a payment made to compensate an employee in respect of lost earnings will be taxable as earnings, on the basis that the employment is the source of the payment. However, any compensation paid for injury to feelings is those circumstances would not be taxable.  

The tribunal decided not to follow its decision in A v HMRC where it ruled that a payment made to settle a potential discrimination claim for an underpaid bonus was not taxable. That decision was not binding on the tribunal in this case and the tribunal in A v HMRC had not been referred to important case law.   

Where compensation is paid to settle a discrimination claim arising on termination of employment, it should be possible, subject to the rules on taxing notice pay, to pay the first £30,000 of compensation (whether for loss of earnings or injury to feelings) tax free as a termination payment.