Termination payments, specifically a payment in lieu of notice, were considered in the recent First-tier tribunal case of Kayne Harrison v HM Revenue & Customs.
Mr Harrison had been dismissed on 16 February 2006 without written notice and had successfully won a small amount of compensation from an Employment tribunal.
Three days after he was dismissed, his employers made a termination payment, consisting of a payment in lieu of notice. This termination payment was made in line with the terms of his employment contract. Mr Harrison argued that as his position was terminated without written notice, the payment was not contractual as it had been made in circumstances outside of his contract. He believed that the findings of the Employment tribunal backed up this belief.
The tribunal found that Mr Harrison’s interpretation of the Employment Tribunal was incorrect in that they found the payment in lieu of notice had been made in accordance with the contract. Despite the issues raised at the Employment Tribunal, Mr Harrison’s employment had ended on 16 February 2006 and the payment had been made in accordance with his contract.
HMRC were therefore correct to argue that the payment was taxable and the tribunal dismissed Mr Harrison’s appeal.
In the recent case of Goldman (TC 01999) the tribunal found that a payment made to an employee for termination of their contract was taxable as earnings under ITEPA s.62 and did not therefore qualify for the £30,000 statutory exemption.
The taxpayer had contended that the amount agreed under the terms of a compromise agreement was received not as earnings but as damages because the employer failed to make the payment in lieu of notice (PILON) within 14 days of termination, thus making them in breach of contract.
However, the tribunal found that where a payment is made in respect of a contractual provision it should be regarded as an emolument and not damages.
In reaching this conclusion the tribunal said that if the taxpayer was correct it would be possible for anyone entitled to a payment in lieu of notice to ensure the availability of the £30,000 exemption by accepting an amount in settlement of the claim to enforce the contractual contract. This was considered to be inconsistent with a purposive interpretation of the legislation.
On the other hand, in the case of Rubio (TC 02047) the tribunal decided that a termination payment was not earnings under s.62 but a payment of damages. This was particularly relevant because the taxpayer spent a lot of time abroad therefore the foreign service exemption was available.
In this case, the taxpayer had been seconded from Spain to the UK. The UK company issued a new contract which stated that he was on leave from the Spanish company. HMRC therefore stated that the original Spanish contract was automatically reinstated when he ceased employment with the UK company (and under the terms of which he would have been contractually entitled to a PILON). However, the tribunal did not agree with this interpretation.
These cases demonstrate that where an employer is making a termination payment, the facts should be looked at carefully in order to determine whether or not the payment is contractual or a non contractual payment of damages.