Termination Payments – when is the

In Brian Goldman [2012] UK FTT 313 (TC), published on 6 June 2012, the First-tier tribunal considered whether a payment following the termination of employment was taxable as general earnings under s62 ITEPA 2003, or subject to the exemption from tax for the first £30,000 under s403.  

General Principles

By way of background, payments to employees are taxable as general earnings under s 62 ITEPA 2003 if they are emoluments deriving from employment. So, for example, where a payment is made that derives from a person’s employment contract, it will normally be taxable as earnings under s 62 ITEPA.

Where the payment is not a reward for services but rather is damages for unfair dismissal, it will generally be taxable under s 401 ITEPA, subject to a £30,000 tax-free threshold.

The key to understanding whether a payment to an employee derived from his employment will be to identify why the payment was made.

The Facts

Brian Goldman (BG) was employed by SpinVox Ltd (the Company).  One of the terms of his employment was that he would be entitled to 12 months’ pay and benefits on the termination of his employment for any reason other than performance or conduct.  This payment would be made within 14 days of the termination date.  BG later fell out with the CEO of the Company and his employment was terminated.  The Company did not honour its agreement under the employment contract in relation to the agreed termination payment. After various discussions BG entered into a compromise agreement with the Company and agreed to accept less than he was entitled to under his employment contract.

The Arguments

BG argued that the sum paid under the compromise agreement was paid as damages for wrongful dismissal. Therefore the payment was taxable under s401 ITEPA (subject to the £30,000 tax-free threshold).

HMRC argued that the reason for the payment was because BG was entitled to it under his employment contract.

The Decision

The Tribunal found in favour of HMRC. The payment was not made as a result of a claim for wrongful dismissal. It was made because BG was entitled to a payment under the terms of his employment contract.  Although the payment was not directly in respect of work done under his employment contract, the term in his contract under which the payment was made, was negotiated to induce him to enter employment by providing financial security if he lost his job.  As such it is an emolument from employment and is taxable as earnings under s 62 ITEPA.

Why is this decision important?

This decision highlights that, when looking at termination payments, and considering the reason why a payment was made, consideration must be given to all the relevant facts and documents.

If you would like further information in relation to the taxation of termination payments please contact the TaxDesk on 0845 4900 509 and ask for Priya Dutta.