Moorthy v Revenue And Customs [2018] EWCA Civ 847

Although this case isn't strictly about mediation per se, it is of interest because the Court of Appeal gives judgment on whether a sum received pursuant to a Compromise Agreement (agreed in mediation) was subject to income tax as employment income of the Appellant.  The Court considered two principle questions:

a)Whether the sums received by the employee were subject to income tax as employment income under Chapter 3 of Part 3 of the Income Tax (Earnings and Pensions) Act 2003 ("ITEPA 2003"), which treats as earnings, and thus as taxable employment income, "payments and other benefits which are received [by the relevant person] directly or indirectly in consideration or in consequence of, or otherwise in connection with- (a) the termination of a person's employment"; and, if so

b) whether the settlement sum (or any part of it) was taken out of charge to tax by the exemption in section 406 of ITEPA 2003, which states that Chapter 3 does not apply to a payment or other benefit provided "on account of injury to… an employee", the alleged injury being the injury to Mr Moorthy's feelings sustained in the context of his age discrimination claim.

The Court answered yes to both questions.  The judgment provides a summary of the law on this point which may prove useful to those advising clients on the taxable implications of settlement sums following an employment claim.

NB: In relation to the second question, the Court noted that section 406 ITEPA has now been amended by section 5(7) of the Finance (No 2) Act 2017, with effect for the tax year 2018/19 and subsequent years, by inserting a new subsection (2) which states that: "Although "injury" in subsection (1) includes psychiatric injury, it does not include injured feelings."

So a case determined under that provision may, in future, mean that the scope of the exemption will exclude payments on account of injured feelings.