In Peter Andrew v HMRC [2015] TC04672 the First Tier Tribunal (FTT) concluded that although a termination payment was made due to redundancy it was still fully taxable as it constituted a contractual payment in lieu of notice.
- Mr Andrew's employment began in April 2011 was terminated in June 2011.
- He entered into a compromise agreement with his former employers in July 2011 and received £68,800, which constituted six months basic salary, car allowance and pension contributions.
- Although his employers deducted PAYE from the full amount, Mr Andrew claimed a £30,000 deduction in his tax return which was submitted by his accountant.
Mr Andrew, who had taken advice from an employment lawyer and his accountant, contended that his the payment made to him in accordance with the compromise agreement was a redundancy payment the first £30,000 of which should be exempt by virtue of section 403 ITEPA.
Unfortunately his contract of employment provided that "the company shall employ the director...from 1st April 2011...until determined by not less than six months' notice in writing...given by either party to the other...Payment in lieu of notice may be given by the company..."
Further, the compromise agreement contained the following clause "£68,800...as payment of salary in lieu of the Employee's notice period which it has been agreed the Employee will not be required to work. For the avoidance of doubt this sum comprises basic salary, car allowance and Company pension contributions"
The FTT concluded that the payment was a contractual payment in lieu of notice and therefore taxable as earnings under s62 ITEPA.
Comment
Based on the facts as presented to the tribunal this is essentially a very straightforward case, and in many ways it is surprising that it was taken to tribunal at all.
The case does highlight that there is still a great deal of confusion and misunderstanding as to the scope of the £30,000 exemption, even amongst professional advisers.
If a termination payment is made to an employee, and the termination of the employment is due to redundancy, this does not automatically mean that the first £30,000 is exempt. If the payment is made up of anything which constitutes earnings, such as back pay, payment for holiday not taken, or contractual payments such as those made in lieu of notice, then the exemption does not apply.
See our guide Termination, redundancy and leaving payments for more detail as to the types of payments that do and don't fall within the exemption.
Case reference: Mr Peter Andrew v HMRC [2015] UKFTT TC04672
