Taxpayer wins appeal re £10,000 termination payment
The tribunal considered whether or nor a termination payment made to a taxpayer upon leaving her employment was subject to tax. The taxpayer in this case had been employed as a clinical scientist in 1996, the terms of her employment were governed by a letter sent from the employer and an attached document entitled ‘Terms and Conditions of Employment’. The letter and accompanying document had been signed by both parties.
Some seven years later in 2003, the taxpayer who had been promoted in the interim to a project manager was advised that the company was restructuring and received a request to take on responsibility for data management in addition to her regular duties. There was some dispute over the amount of work these ‘management’ duties would involve. The initial letter and terms of employment had not been updated.
Ultimately, the employee took the view that these changes were not acceptable and sent a letter to the Human Resources Manager saying that she regarded herself as having been constructively dismissed. The employers considered the letter as a resignation, however a one time termination payment was agreed between both parties and the sum of almost £10,000 was paid to the taxpayer less income tax and Class 1 national insurance contributions.
The taxpayer declared on her 2003/4 return that the payment was not chargeable to income tax. HMRC amended the return to charge tax on the payment and the matter was appealed by the taxpayer. The tribunal had to decide if the payment was ‘earnings’ or whether it was exempt from income tax as a termination payment and exempt from tax (the payment was under the £30,000 limit).
The tribunal decided that on the basis of the evidence received, the taxpayer had been constructively dismissed and that the payment compromised any future claim for wrongful dismissal. The tribunal agreed that the payment was exempt from income tax and the appeal was allowed.