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Mairs tale

As part of my examination of the important conditions that must be satisfied in securing exemption from tax on redundancy payments, last week I progressed to look at some of the case law and concessions that exist on this subject.

A significant characteristic of a payment under the enhanced redundancy scheme was that it was to compensate or to relieve an employee for the consequences of his not being able to continue to earn a living in his former employment.

Accordingly, such a non-statutory redundancy payment did not fall within the definition of an emolument from employment, rather it was a payment to compensate the employee for not being able to receive emoluments from his employment.

The other significant characteristic of a redundancy payment was that it would be payable after the employment had come to an end. Prima facie, a payment made after the termination of employment would not be an emolument from that employment unless it was deferred remuneration.

A redundancy payment was distinct from a payment of deferred remuneration because, in the case of the latter, once the employment had come to an end, the right to payment would inevitably accrue, whereas a redundancy payment was only payable in limited circumstances. Accordingly, as a non-statutory redundancy payment would not be taxable under Schedule E as an emolument from employment, then the amount received by the taxpayer in this case as compensation for the loss of the contingent right to receive such a payment was not taxable as an emolument from employment.

Mairs •Haughey was an important case in that, in effect, it overturned the previously stated Inland Revenue view that a tax charge might arise under general Schedule E principles where a redundancy payment in excess of the minimum statutory redundancy payment provided for under the Employment Protection (Consolidation) Act 1978 was made pursuant to a contractual obligation or in circumstances where the employee had an expectation that the payment would be made.

This case makes it clear that if genuine redundancy is the reason for the payment (or the payment is in compensation for the loss of redundancy rights), the fact that these rights are enshrined in a contractual obligation or the employee has an expectation of them will not automatically cause them to be assessable under the general principles of Schedule E.

Following this case, the Inland Revenue issued Statement of Practice 1/94. This was released on February 17, 1994 and acknowledges that lump-sum payments under a non-statutory redundancy scheme are liable to income tax only under section 148 ICTA, provided that they are genuinely made solely on account of redundancy as defined in section 39 of the Employment Rights Act. The statutory definition of redundancy is broadly as follows:

•The dismissal must be attributable wholly or mainly to the fact that either the employer is ceasing to carry on the business in which the employee was employed or at the place where the employee was employed or

•The requirements for employees to carry out work of a particular kind have ceased or diminished.

It is impossible to underestimate the importance of this change of view resulting from the Mairs •Haughey case.

I will finish this off next week. Cue playout music.

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