Tribunal case – termination payments
The tax tribunal recently examined the tax liability of a termination payment. The taxpayer in question had received a payment of £37,424 from his former employer under the terms of a compromise agreement entered into on 23 December 2004.
The taxpayer claimed that this payment was a termination payment and that £30,000 was not chargeable to income tax. HMRC disagreed and took the view that the payment comprised taxable earnings. HMRC had sought sight of the rationale for the payment of such a precise sum. It became apparent that it was computed by reference to outstanding commissions due to the taxpayer. However the letter explaining this was issued some four years after the event.
HMRC also argued that the fact that the payment had been made net of basic rate tax and national insurance indicated that the monies were taxable earnings. The tribunal disagreed.
The tribunal also noted that HMRC have generally accepted that payments made by reference to Compromise Agreements are capable of qualifying for the £30,000 exemption. However the tribunal indicated that no one should assume this will automatically be the case. "Each case depends on its facts. For example, a £30,000 exemption does not apply to the extent that a cash sum paid to the employee is not in settlement of claims but rather it is consideration for services."
The tribunal found that the taxpayer was not contractually entitled to the sum which was paid in settlement of prospective claims which he might have made against his ex-employer. The taxpayer did not undertake any duties in return for the payment and did not receive the payment for acting as an employee. The taxpayer’s appeal was allowed, and the tribunal held that the payment qualified for the maximum £30,000 exemption from income tax.