James Bailey examines HMRC’s position on termination and the tax exemption that they regularly seem to challenge.
There is a tax exemption of up to £30,000 for payments made in connection with the termination of a person’s employment. HMRC will often fight tooth and nail to deny this exemption, and there have been numerous tax cases over the years that have, if anything, made the interpretation of this rule more confusing, rather than clarifying the position.
The basic concept sounds simple. The exemption is only available if the payments concerned are not taxable under the normal rules for ‘employment income’, so HMRC try to argue that any termination payment was made under the terms of the person’s employment contract, and as such is taxable on general principles.
Pay in lieu of notice
One example is a payment in lieu of notice (PILON). If an employment contract provides for a period of notice of termination of employment, the employer may dismiss the employee and pay him the salary he would have earned during the notice period. If the employment contract states that this can be done, HMRC will argue the payment is taxable because it is, in effect, wages paid under the contract. If the contract does not allow for a PILON but the employer makes one anyway, in law this is not a payment under the contract but compensation paid by the employer for breaking the contract by not allowing the employee to work out his notice.
HMRC will, however, run all kinds of spurious arguments to try to argue the payment is employment income – for example, they will say that if this has been done before in the case of another employee, then there is an ‘established practice’ of making such PILONs, and so they are an ‘implied term’ of the employment contract.
Exemption was due
HMRC will try any argument they can think of to deny the £30,000 exemption. A recent case (Turullols v HMRC [2014] UKFTT 672 (TC)) demonstrates that they will oppose it in even when it is absolutely obvious that it is due.
Maria Elisa Turullols was a whistleblower, and was dismissed (by email) as a result of certain disclosures she made about her employer. She appealed to the Employment Tribunal, who initially granted her ‘interim relief’. This means that they ordered the employer to continue to pay her salary until the complaint was resolved.
Eventually, the Employment Tribunal found in her favour, but with the usual slowness of these things (Hamlet, in his famous soliloquy, lists ‘the law’s delay’ as one possible reason for suicide!) by this time she had been receiving her ‘interim relief’ monthly for two years.
Maria Turullols quite rightly thought the £30,000 exemption should apply to the monthly payments the Employment Tribunal had ordered her employer to make – they were after all, statutory compensation for losing her job as a result of whistleblowing – but HMRC tried to argue that they were taxable as normal payments of salary. They took this line on the basis that the payments were of the same amounts that would have been payable if she had not been fired, so they were payable under her contract of employment. They seemed to think that because the payments were made at the same intervals that her salary had been paid this somehow turned them into the lost salary.
The Tax Tribunal found that the £30,000 exemption was due. They considered it irrelevant that the payments were made monthly – they were still compensation for being fired, not payments of salary.
Practical Tip:
This case should serve as a warning – HMRC will usually try to argue that the £30,000 exemption is not due, even in the clearest of cases such as this one. If HMRC tried to deny the exemption to compensation paid under the Employment Rights Act, it seems they believe it is never due!
