A recent First-Tier Tribunal raised an interesting point with regard to the rules on Termination Payments under ITEPA 2003, s.401.  These rules apply not only to compensation payments made on termination, but also a change in the duties of a person’s employment or a change in the earnings from a person’s employment, and can mean that the first £30,000 of such qualifying payments is exempt from Income Tax.

An important point to note however, is that these rules only apply where there is not already a tax charge under another heading per s.401(3).  In the case of payments made due to a change in duties this presents difficulties, as the payment could be taxed as normal employment income if the payments are found to be emoluments.

This is how the taxpayer in A Hill v HMRC (TC04480) came unstuck.  The taxpayer had his employment transferred under the Transfer of Undertakings Regulations 2006 but was not happy with the new conditions.  A compromise agreement was made under which each company paid him £15,000 in settlement of his complaints. He was required to continue working for the new company and would have to repay them both if he left within two years.

The taxpayer argued that the payments should be exempt under ITEPA 2003, s 403, however HMRC argued that they were taxable.

The First-tier Tribunal decided the payments were consideration for agreeing to accept a change in his contract of employment, however the fact he was required to continue working, and would have to repay the sums if he did not, showed they referred to his continuing employment. As such they were taxable as emoluments and not exempt.

The question as to whether or not monies are taxable as employment income is a common area of dispute in tax.  However, the First Tier Tribunal case of Colin Collins v HMRC involved a particularly unusual set of circumstances to which the question needed to be applied.
The case itself involved the payment of $2 million by a former shareholder of a Company to the taxpayer who had worked for that Company, before subsequently leaving and later being re-employed under the new ownership.
The precise facts of the case led the Tribunal to consider that the payment amounted to a gift by the former shareholder. HM Revenue and Customs had contended that it was a payment in connection with the taxpayer’s former or current employment.
Of significant interest is that the Tribunal set out in their written judgement a list of key points that lead them to their decision:

  • Was the payment gratuitous?
  • Was the payment expected?
  • Was it proportionate (for example in terms of past salary)?
  • Was there any regularity in the payments?
  • Who made the payment?
  • Was there a time delay in making the payment and if so was this delay cosmetic?
  • What was the occasion/reason for the payment?

While the list is of interest, the old adage remains that each case must be considered on its own merits.