ARTICLE
14 January 2011

Recent Developments In Employment Tax Caselaw

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CMS Cameron McKenna Nabarro Olswang

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

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 www.law-now.com/law-now/mondaq

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.

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