Moorthy v HMRC is the latest in a line of cases considering the taxation of payments to employees for injury to feelings arising from discriminatory treatment culminating in the termination of their employment. Damages for a dismissal that constitutes discrimination are liable to tax under the termination payments legislation, including any element reflecting injury to feelings. Damages for discrimination that results in the employee resigning are arguably only within that legislation to the extent they reflect loss of earnings arising from the termination, but not injury to feelings. Moorthy held that the exemption in that legislation for payments on account of injury does not apply to injury to feelings, as it is not a medical condition. The decision reverses the previously settled practice, and will affect negotiations between employer and employee to compromise claims for damages for discrimination.
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