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.
