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Terminal Care

Sorry to go on but I must finish off the theme of what is and what

isn&#39t a redundancy payment. This is important to establish if you

want to claim tax exemptions. Some key points on the question of

taxability under section 148 or the general provisions of Schedule E


•Genuine redundancy payments and payments such as those

considered in the Mairs

Haughey case will be taxable under section 148.

•Payments made to compensate for a breach of contract should

also be outside the Schedule E charge.

•If an amount is to be paid as compensation for premature

termination of a contract, this should be made by way of a liquidated

damages clause. This would operate as a prearranged statement of the

compensation that would be made if a contract of employment was

breached. In effect, all such a clause would do is attempt to

estimate the loss in advance. The fact that the amount of damages is

specified in the contract should not by itself result in the payment

being taxable under Schedule E.

•Inducements to take up new employment would probably give rise

to assessment under the general provisions.

•Employers should avoid establishing a practice of making

termination awards that could create an expectation that awards will

always be made. This should make it harder for the Revenue to argue

that there are arrangements for making termination payments which

constitute an unapproved retirement benefits scheme.

Under section 148 ICTA 1988, it is provided that, subject to various

exemptions, tax is charged under Schedule E on “any payments (not

otherwise chargeable to tax) which are received in connection with

… the termination of a person&#39s employment or any change in the

duties of or emoluments from a person&#39s employment”. This applies to

payments received by a spouse, relative or dependant of the employee

or his personal representatives, as well as payments made to the

employee. This provision only operates to the extent that payments

are not otherwise chargeable to tax.

If an employee has the right to use an asset such as a car for a

specified period, a charge can arise. The benefit is calculated in

the same way as benefits for employees. The £30,000 exemption

could be available subject to normal conditions.

In Carter

Wedman, the payment made under the termination agreement was stated

to be in settlement of “past claims of the employee rather than in

respect of the total aggregation of his contract”. One of the past

claims was to unpaid bonuses. It was held that so much of the payment

which satisfied that claim was remuneration assessable under section


Section 148 applies to damages for wrongful or unfair dismissal

awarded by an industrial tribunal or court. An out-of-court

settlement should be treated similarly. Provided the payment is to

avoid wrongful or unfair dismissal claims, even if it is in excess of

the amount of compensation to which the ex-employee is legally

entitled, it does not automatically follow that the extra payment is

made in respect of the employee giving up the right to sue. It may be

that the employer wants to avoid adverse publicity.

Lump-sum payments made on termination of employment which are neither

provided for in the contract nor paid in accordance with an

established policy nor made in pursuance of some other legal

obligation could be wholly seen as an ex gratia or voluntary payment.

If the payment is not made on the employee&#39s retirement, it should be

wholly or partially tax-free under section 148.

In Revenue booklet P7, Employers&#39 Further Guide to PAYE, three types

of payment are considered in Section L1. The first type, generally

taxable under Schedule E (section 19 ICTA 1988), are payments made to

all employees regardless of whether or not they are being made

redundant. In Allan

CIR (1994) STC 943, some employees who received the payment were made

redundant but others were not. This was sufficient to categorise all

payments as assessable under the general rules of Schedule E.

The second type are payments that are taxable only to the extent that

they exceed £30,000. The third type are payments that are

entirely free of tax. These may be due to injury, disability or death

of the employee as a result of an accident.

Where an employee is given notice but not required to work, any

lump-sum payment given at the start of this leave would appear to

arise by virtue of the employment relationship and is treated as an

emolument assessable under section 19(1).

If an ex-employee enters into an agreement not to compete with his

former employer for a period or within a specific area, this is known

as a restrictive covenant. Payments made in consideration of such

arrangements are generally assessable under Schedule E by virtue of

section 313 ICTA 1988.

In Appellant

Inspector of Taxes 2001, the taxpayer agreed to take voluntary

redundancy, withdraw his appeal to an industrial tribunal and enter

into confidentiality agreements for a payment of £20,000. This

was paid after deducting income tax. The Revenue expressed the view

that the payment was in connection with the termination and so was

taxable under section 148(2) ICTA 1988 or, if it was made in respect

of the confidentiality agreement and the agreement not to pursue

further proceedings, was taxable under section 313 ICTA 1988. The

taxpayer appealed.

The Special Commissioner held that the sum was paid for the voluntary

termination and was taxable under section 148(2) ICTA 1988. It also

held that the exclusion from the income tax charge under section 313

ICTA by virtue of Statement of Practice 3/96 (where there is an

agreement to discontinue or not to commence legal proceedings) only

applies if the settlement does not provide for a value to be

attached. This shows the danger of relying on the golden handshake


Inland Revenue leaflet 143, Income Tax and Redundancy, deals with the

tax and NI aspects of redundancy.


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