The recent decision by the First-tier Tribunal in Goldman v
HMRC reminds employers and employees that the type of payment
in lieu of notice ("PILON") clause, included in an
employment contract, will affect the tax treatment of any PILON
made to an employee on termination of employment.
Mr Goldman's employment contract stated that, should his
employment be terminated without notice, his employer would make a
PILON equivalent to 12 months' salary and medical insurance
costs, within 14 days of the termination. Mr Goldman's
employer terminated his employment without notice, but did not make
the PILON to him. The parties subsequently entered into
negotiations and reached a settlement with Mr Goldman accepting a
lower payment than he was entitled to under the terms of the PILON
clause contained in his contract. A compromise agreement was
entered into and the employer paid the agreed settlement figure to
Mr Goldman, less income tax deducted from the whole
payment.
When Mr Goldman submitted his self-assessment tax return he made
a claim for repayment of the income tax his employer had deducted
from the first £30,000 of the payment on the basis that the
payment had been made purely as a consequence of the termination of
his employment, and was therefore exempt from tax up to
£30,000 and not a wholly taxable payment of earnings.
HMRC refused the claim for repayment and Mr Goldman appealed to the
First-tier Tribunal.
In dismissing Mr Goldman's appeal, the First-tier Tribunal
held that the termination payment was taxable in full, as
earnings. The reason for this decision was that, as Mr
Goldman's contract of employment permitted his employer to
terminate his contract without notice upon payment of a PILON, Mr
Goldman's employment had been lawfully terminated even although
his employer did not make the PILON to him. The claim which
Mr Goldman had against his employer was therefore a claim for
payment of a contractual debt, not a claim for breach of his
employment contract, and as such any amount paid in settlement of
that claim was wholly taxable as earnings.
The facts in this case can be contrasted with the situation
where an employment contract contains a discretionary PILON
clause. A discretionary PILON clause allows an employer to
choose whether or not to make a PILON. Where an employer has
discretion over whether to make a PILON, if the employer chooses to
terminate the employment and make a PILON, then the payment will be
taxable in full as earnings. If, alternatively the employer
terminates the employment without giving notice or making a PILON,
then the employer is in breach of contract and the payment may
benefit from the application of the £30,000 tax free
exemption if it can be shown that the payment to the employee is
not a PILON made in accordance with the terms of the employment
contract.
When considering what, if any, payment in lieu of notice
provisions to include within a contract both the employer and the
employee would do well to weigh the certainty which a compulsory
PILON provides against the adverse tax position of a compulsory
PILON.
The material contained in this article is of the nature of
general comment only and does not give advice on any particular
matter. Recipients should not act on the basis of the information
in this e-update without taking appropriate professional advice
upon their own particular circumstances.
Specific Questions relating to this article should be addressed directly to the author.
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