UK: Recent Developments In Employment Tax Caselaw

Last Updated: 14 January 2011
Article by Nicholas Stretch, Tair Hussain and Isabel Pooley

There have been several recent cases of interest, including two which have considered cases which have been the subject of previous Law-Nows.

Discrimination payments

Two cases have recently confirmed that certain amounts payable in discrimination claims are entirely tax-free (and not subject to the normal £30,000 cap).

While it would be rare for both an employer and employee to want to construct a discrimination claim for this purpose (and only bona fide payments would benefit from the favourable treatment in any event), these cases confirm that payments for injury to feelings (as opposed to loss of future earnings etc or other financial claims) can be made entirely free of tax in termination of employment cases.

On the one hand, the fact that any amounts payable are entirely tax (and National Insurance) free may mean that employers and employees can benefit from structuring payments in this way. However, accepting that there has been injury to feelings can be a difficult pill for employers to swallow and they may wish not to reflect this in any written document. Even where nothing was expressed in the severance agreement, that, however, has not been a bar to an employee successfully asserting that as a matter of fact a payment was made for injury to feelings.  Moreover, in tax terms the amount attributable to injury to feelings is not necessarily limited to what an employment tribunal would award for injury to feelings (which is relatively low), so long as the parties have actually agreed higher amounts.

As stated above, given the sensitivities in this area, it is unlikely that the structure of termination settlement payments will generally change because of this, but the confirmed tax-free nature of these payments should not be ignored.

To view the relevant cases, please click the links below.

Norman v Yellow Pages Sales Ltd [2010] EWCA Civ 1395

Oti-Obihara v HMRC [2010] UKFTT 568 (TC)

Payments to reduce contractual redundancy rights

The Upper Tribunal has recently ruled that a payment to buy out accrued rights should be taxed in the same way as a payment of the underlying entitlement would have been taxed.

The ruling overturns the initial decision by the First-tier Tribunal that a payment to reduce an employee's future contractual redundancy rights could potentially be entirely tax-free and would not count towards the £30,000 exemption available on any future termination of employment.

By allowing HMRC's appeal, the Upper Tribunal has confirmed that a payment made to an employee to buy out redundancy rights will be taxed in the same way as a termination payment even though there is no actual termination of employment.

The £30,000 tax exemption for redundancy and certain other payments is only available once during the course of a particular employment.  Accordingly, any portion of the £30,000 used to shelter a payment to buy out accrued redundancy rights would no longer be available on the termination of that employment.

For a link to the original law now article setting out the full facts of the case, click here, although the case has now been resolved in the Revenue's favour.

For a link to the relevant case, click here.

Failure to make good income tax due under PAYE

Typically, where income tax arises on the exercise of employee share options, PAYE is operated by the employer deducting the tax due from the proceeds of the sale of the shares at the time of the exercise.  However, strictly, the employee has 90 days to make good the liability.

The problem is that where the right amount is not or cannot be deducted and the employee puts the employer in funds to cover the PAYE due more than 90 days later, further tax (and not just interest and penalties) automatically becomes chargeable on the amount due on the 90th day and later payment does not reverse that charge.
In this case, the employee made a payment to the employer after the 90 day deadline. The Court of Appeal has now dismissed the taxpayer's appeal in this case.  It rejected his argument that the purpose of the legislation was to encourage prompt re-imbursement of tax by the employee to the employer in cases where the employer cannot deduct PAYE in the normal manner and it could not have been intended to apply when the employee does in fact reimburse the employer, even if this the reimbursement occurs outside the relevant timeframe.

The Court of Appeal ruled that the legislation was clear and unambiguous, and as such could not be construed differently by the courts even though it may lead to results which are harsh and unjust.

While we are aware of cases where the Revenue has not applied this provision, it increasingly is, applying it with full rigour.  The problem most often arises with expatriates where payroll departments may learn late in the day about option exercises or share vestings.

For a link to the original law now article setting out the full facts of the case, click here.

For a link to the relevant case, click here.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 13/01/2011.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.