When drafting a schedule of loss employment lawyers often forget to gross up compensation awards - a new case adds more detail...
In accordance with the principle set out in Shove v Downs Surgical plc  1 ALL ER 7 an employment tribunal must gross up any award it makes over £30,000 in order to ensure that the Claimant receives the net award made by the Employment Tribunal. For example an employment tribunal makes an award of £36,000. The first £30,000 is tax free but tax is applied to the 6,000 above it.
It is best to consult an accountant when working out this element of the award. Often tribunals will add a flat rate of say 40% when grossing up an award but as the judgment referred to below suggests annual personal allowances should be taken into consideration.
A very recent case of, Yorkshire Housing v Cuerden is an authority for the proposition that personal injury and injury to feelings awards that pre-dates the termination of employment are not taxable and should therefore, not be subject to grossing up.
The same case is also an authority to say that pension loss awards should not simply have the highest tax rate applied to the whole award but rather, marginal tax rates for each element of the award should be taken into account.
Vital law referred to by His Honour Judge Peter Clark in the judgment:
Income Tax (Earnings and Pensions) Act 2003 (ITEPA).
The general rule that termination payments are taxable, subject to the £30,000 threshold (s403), is subject to this exception under s406:
"This chapter does not apply to a payment or other benefit provided –
(b) on account of injury to or disability of, an employee."
HMRC website where it is stated, by reference to the Special Commissioners' decision in Walker v Adams  STC 269, that awards for injury to feelings in respect of pre-termination discrimination are not to be treated as taxable employment income, whereas awards arising on termination of employment are taxable under s401.
BAILII case number:  UKEAT 0397_09_1607
Appeal No. UKEAT/0397/09
This article is for academic purposes only and does not represent formal legal advice