Contractual Redundancy Terms Create Unexpected Liability
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A company which negotiated redundancy payments with its staff had a nasty
shock recently at the hands of the Special Commissioner of Taxes.
The scenario was one which is quite common. The company wished to make
employees redundant and negotiated severance terms with their union
representatives. In this case, they used 'memoranda of agreement'. It is
commonly considered that the relevant tax law (now contained in s401 ITEPA 2003)
exempts the first £30,000 of a redundancy payment from liability to income tax
and that was what was intended on both sides in this case. However, this is not
always the case. The exemption applies only where the payment does not arise
'from the employment', being granted only when the payment arises from the
termination of the employment, which is a different matter.
In this case, each memorandum operated technically as an amendment to the
contract of employment of the employee being made redundant. The amendment gave
the employee the right to accept short notice of redundancy on terms which gave
them the right to receive a sum incorporating the redundancy payment and payment
in lieu of notice. This change made the payment part of their contract of
employment and therefore made it taxable.
It is not known what the effect of this decision on the employer was, but
presumably it now has to pay the PAYE not paid on the taxable payments and to
request its ex-employees to refund the overpayments – an unpleasant outcome for
When negotiating redundancy packages, it is critical to get the terms right
as failure to do so can have serious adverse consequences.
About the Author
Gillhams Solicitors advise on employment
law issues and compromise agreements , and regularly appear in the Employment Tribunal for their clients.
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Article Published/Sorted/Amended on Scopulus 2006-08-23 20:34:44 in Legal Articles