Taxing times ahead
In light of the announcement that the government intends to crack down on accountants or advisers who help people bend the rules to gain a tax advantage, it is perhaps of little surprise that they have also been looking at how employee termination payments should be treated for tax and national insurance contribution (NIC) purposes.
The government has now published its response to the simplification of the tax and national insurance treatment of termination payments consultation
, together with a draft legislation to implement the proposed changes.
Key points to note
• All payments in lieu of notice’s (PILON) taxable and subject to Class 1 NICs, even if they are non-contractual.
Currently in the absence of an express PILON clause in a contract of employment, employers often look to try to pay PILONS tax free on the basis they are damages for breach of contract. This practice potentially exposes employers to risk and challenge by HMRC, especially if they are frequently in the habit of making such payments. The aim behind the proposed change is to ensure consistency and remove the confusion surrounding the different rules for PILONs.
• Payment of employer NICs is required on sums over £30,000 (not currently payable).
• Payments for injury to feelings are subject to tax (there is currently a conflict of judicial authorities on this point).
• The changes are expected to come into force in April 2018 but the draft legislation itself is now the subject of a consultation period until 5 October 2016.
What does this mean for you?
Until we have this clarity in 2018, employers need to be cautious when making termination payments. You should:
• Continue to carefully analyse the varying components making up the termination payment to be sure that they are treated correctly for tax purposes
• Pay particular attention to PILONs, payments that could be considered retention payments, and payments that could be viewed as consideration for entering into fresh restrictive covenants.
HMRC have demonstrated time and again how keen they are to challenge such payments, and even the imposition of a tax indemnity upon a departing employee, conferring liability for any unpaid tax on them, may not avoid the consequence of an investigation and audit by HMRC.
If you want to discuss how this impacts you and your organisation please do not hesitate to get in touch with a member of the Employment team.