Termination Payments – Moorthy v HMRC TC03952
In a recent case concerning the tax treatment of termination payments, the taxpayer landed a rather unusual result because his taxable income was increased by £40,617 from that included on the original HMRC assessment.
This unusual situation arose because not only did the tribunal reject the taxpayer’s appeal but also; (a) HMRC allowed a deduction through a one off concession which the tribunal concluded they were unable to uphold, and (b) the tribunal spotted an error in HMRC’s assessment.
Analysis of the Moorthy Case
In the case of Krishna Moorthy v HMRC the taxpayer received a payment of £200,000 from his former employer .
HMRC held the amount of £200,000 to be taxable subject to the £30,000 statutory exemption and an further £30,000 which was deducted by concession based on the maximum award for compensation for injury to feelings as per the scale in the Vento case.
The taxpayers case was that he had been subject to age discrimination and that the full amount of the payment should therefore be non-taxable.
A key point in the tribunal’s decision was that even if discrimination did take place, by the admission of the taxpayer such discrimination could only have started following the announcement of the restructuring and redundancy process therefore the payment would have been received in connection with the termination of the employment.
Unfortunately for the taxpayer, the tribunal having reached this decision went on to say that they could not uphold HMRC’s concessionary deduction and furthermore the £30,000 statutory exemption should have been reduced by the amount of statutory redundancy pay received.
Had the taxpayer accepted HMRC’s offer he would have been in a better position. Although that is not to say that the same is true in every case, instead all taxpayers involved in a dispute should carefully weigh up the benefits/risks of accepting an offer from HMRC before making a decision regarding tribunal proceedings.
Termination Payments – An Overview
Many people have heard of the £30,000 exemption available on termination of employment, however in practice the rules are much more complex.
The starting point is that payments treated as earnings of the employment (for example; holiday pay and contractual payments in lieu of notice) are subject to income tax and NICs in full.
In addition there are a number of specific taxing provisions relating to payments received in consideration for entering into a restrictive undertaking (for example agreeing not to work in Leeds for 2 years) and payments in connection with retirement.
There are also relieving provisions which exempt certain payments in connection with foreign service, or contributions to a registered pension scheme etc.
Where a payment does not fall into any of these categories but is received in connection with the termination of employment (for example; compensation for loss of office or a non-contractual/ex gratia payment in lieu of notice) then the first £30,000 is exempt from tax and the balance is taxed at the individual’s marginal rate of income tax. None of the payment will be subject to NICs.
The £30,000 exemption is reduced by the amount of any statutory redundancy payments received.
Finally, where a payment is not received in connection with the termination of employment (either directly or indirectly) it is outside the scope of tax.
For example, where a payment is made as a result of discrimination occurring prior to the termination then the part of the payment as compensation for injury to feelings would normally be outside the scope of tax.
Following the Vento case, such compensation payments are typically in the range £500 to £30,000, although payments may be significantly higher.
See our December 2014 Tax Update for more recent cases.