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Goldman v HMRC is a case concerning the tax
treatment of a termination payment. Mr Goldman's employment
contract stated that if his employment was terminated (other than
for performance or conduct) his employer must make a payment of 12
months' salary in lieu of notice within 14 days of the
termination date.
The employer failed to make the payment in lieu of notice
("PILON") within the 14 day period and the parties
negotiated a deal under which Mr Goldman accepted a lesser sum
payable in three equal instalments. The compromise agreement stated
that the termination payment was paid "by way of payment in
lieu of notice".
The First-tier Tax Tribunal found that the termination payment
was a PILON, rather than damages for breach of contract because the
source of the payment was the contractual PILON. The negotiations
between the parties had been intended to enforce the contractual
PILON as far as possible. The Tribunal held that the fact that Mr
Goldman had accepted less than his contractual entitlement did not
render the payment a damages payment and therefore it was subject
to deductions for tax and national insurance contributions on the
whole sum, rather than just sums exceeding £30,000.
Comment: Employers should review their
contracts to ensure that they understand (a) the nature of any
PILON clause in the contract (is it contractual or discretionary?)
and (b) what their obligations are if they exercise the PILON. If
it is discretionary and the employer exercises the discretion, the
PILON will be subject to tax. If it is contractual and a payment is
made in accordance with it, it will be subject to tax. If there is
no PILON and no custom and practice of making a PILON, the first
£30,000 can be paid tax free although any restrictive
covenants and other obligations of the employee under the contract
will fall away, as making the PILON will be a breach of
contract.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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