13TACD2020 – Payment made to an employee for special damages

This appeal concerns payment received by an employee from their employer for personal damages by virtue of not being able to work. The employee maintains that the payment was not a substitute for employment income due and was an out of court compensation payment and was exempt from income tax under section 192A Taxes Consolidation Act (TCA) 1997. Revenue’s position was that the payment was in respect of remuneration and is taxable under section 123 TCA 1997.

Proceedings were taken to the High Court by the employee against the employer for breach of contract and a claim for personal injury arising from workplace induced stress, bullying and harassment. A Settlement Agreement was agreed prior to the High Court hearing. Under the terms of that agreement the employee received a payment totalling €340,000; €45,000 for personal injury, €95,000 for special damages and an ex-gratia payment of €60,000. The balance of €140,000 was for legal costs. It is the special damages payment of €95,000 that was subject to the appeal before the Tax Appeal Commission.

The Tax Appeal Commission held:

• Section 192A(6) TCA 1997 provides that, if the section applies, payments shall be exempt from income tax and shall not be reckoned in computing total income for the purposes of the Income Tax Acts.
• The exemption under the section shall not apply to so much of a payment, however described, in respect of remuneration including arrears of remuneration or a payment referred to in section 123(1) or section 480(2)(a) TCA 1997.
• The description of the payment in the Settlement Agreement is ‘Special Damages’ and the amount was quantified separately to ‘Damages for Personal Injury. This separate description was considered significant. General damages are broadly viewed as being for pain and suffering (non-pecuniary loss) and special damages as pecuniary loss. Further, the Schedule of Special Damages refers to ‘loss of earnings’ for past and future losses.
• The payment was calculated by reference to the income the employee would have earned if in full-time employment. Part time employment income earned by the employee was taken into consideration.
• The payment was held to be in respect of remuneration and therefore was subject to tax as such. The exemption in section 192A TCA 1997 was held not apply to the payment.

12TACD2020 – Payment made to employee under a Severance Agreement

In this appeal the employee maintained that a payment of €65,000 made under a “Severance Agreement” was for compensation by his employer arising from a complaint of bullying in the course of employment. The payment was therefore exempt from income tax under section 192A Taxes Consolidation Act (TCA) 1997.

Revenue’s position was that the payment did not meet the statutory requirements per section 192A TCA 1997 and therefore was not exempt from income tax. While there was a dispute resolution process between the employee and the employer, the payment was not made under a mediation process. The payment was not an ‘out of court’ settlement as, for the settlement to be an ‘out of court’ settlement, the matter must be advanced to the point where there is a real prospect that the matter will be presented to a court for decision, which was not the position in this case. The use of the word “Severance Agreement” further supported that the payment was not exempt under s192A TCA 1997.

The Severance Agreement stated in clear terms that the employee was being given notice of the termination of his employment and that his employer agreed to make a termination payment. The employee accepted the payment without any admission of a breach of statute or law by either party or a breach of any duty or obligation by the employer, and in full and final settlement of any claims arising out of the employee’s employment with the employer.

The Tax Appeal Commission held:

• There is no reference to an ‘out of court’ settlement in section 192A (4) TCA 1997. Such wording appears in Revenue’s guidance and the Notes for Guidance on the TCA 1997 but no such wording is in the law.
• Section 192A (5) TCA 1997 provides that the section does not apply to a payment referred to in section 123(1) TCA 1997 which includes a termination payment.
• The payment made in this case was under the “Severance Agreement” on the termination of the employment.
• Section 192A TCA 1997 did not apply in this case and therefore the payment was not exempt from income tax under that section.