HMRC move the goal posts following Spurs’ Tribunal victory with regard to termination payments

One might wonder why the taxation of termination payments has long been fraught with difficulty for both employers and taxation practitioners alike.  After all, the first £30,000 is exempt from tax isn’t it?  Well, not necessarily.

A payment on termination of employment can consist of a number of components which may be taxable under different provisions.  New rules will apply to payments made on or after 6 April 2018 but will these make matters any clearer?

Current rules

Under the current rules, termination payments are either taxable in full as earnings (and therefore do not benefit from the £30,000 exemption) or they are taxable under separate provisions (and therefore do qualify for the £30,000 exemption).  A payment in lieu of notice or PILON could conceivably fall into either set of provisions depending on the nature of the payment.  If it’s a contractual PILON, such as a payment for gardening leave, it would be treated as general earnings but so could a non- contractual PILON if the employee has an expectation of receiving it. Then there’s the question of whether or not PAYE should be applied or if the payment is subject to NIC.

The Spurs case

The Spurs case was concerned with payments made to Peter Crouch and Wilson Palacios on the early termination of their contracts.  Whilst the contracts contained provisions to allow early termination, they were silent as to what payments would or might be made on early termination.

The Upper Tier Tribunal held that there is a distinction between cases where the payment is made in connection with the cancellation of the entire contract of employment rather than being a payment under the terms of the contract.  In the Spurs case, the payments did not derive from the contracts of employment themselves.  As such, the payments were non-contractual payments which qualified for the £30,000 exemption and were not subject to NICs.  Whilst the tax affairs of a footballer might seem far removed from the rest of us, this decision could have had far wider significance to the taxation of termination payments in general, particularly as HMRC were refused leave to appeal.

That is until the Finance (No2 Bill) 2017 which received Royal Assent on 16 November 2017.

The changes

The following changes will apply to termination payments made on or after 6 April 2018:

• The new rules basically bring all payments in lieu of notice, not just contractual entitlements, within the general earnings net such that some elements which would have been covered by the £30,000 exemption will now be taxable. The concept of “post-employment notice pay” is introduced.
• The employer NIC rules will be aligned with the income tax rules so a termination payment which benefits from the £30,000 exemption will be subject to income tax and Employer Class 1A NICs on amounts over £30,000. The existing employee NIC exemption is retained.

Conclusion

Whilst we do now have some clarity over the treatment of certain termination payments, more payments will be brought within the Income Tax and Employers’ National Insurance net.  On the whole, it’s another win for HMRC.

If you would like more details on anything covered in this article, or for more information on Employment Tax issues, contact Louise Lane on 0845 880 5678 or email louise.lane@wrightvigar.co.uk – she would be delighted to help you.