Tribunal case – termination payments
The First-tier Tribunal recently examined the tax liability of a termination payment made to a taxpayer on leaving his employment. The taxpayer in this case had received a payment of £200,000 from his former employer under the terms of a compromise agreement entered into on 19 May 2009.
The taxpayer claimed £145,000 of the £200,000 was not chargeable to Income Tax but rather related to a capital gain for compensation for his giving up rights to receive shares in his employer’s company. The taxpayer further argued that the amount could not possibly relate to the termination of his employment as it represented almost two years salary.
HMRC disagreed and took the view that the payment was employment income and was subject to Income Tax. HMRC also pointed out that the taxpayer had not been able to provide any actual evidence of his legal right to shares.
The Tribunal agreed with HMRC that the taxpayer had no legally enforceable rights over any shares and that at best there may have been an oral promise of shares at some time in the future. The quantum of the amount still did not mean that there was a right to shares and that there was evidence that even if the taxpayer had stayed as an employee no shares may ever have been received as the Share Option Pool had never been activated.
The Tribunal was clear that even if the taxpayer’s Capital Gains Tax analysis was correct ‘… on the facts all elements of this payment were directly or indirectly related to the termination of Mr Essack’s employment. Even if there is a Capital Gains Tax asset here, it is subsumed within the wide reach of s 401 and is taxable as employment income.’
The taxpayer’s appeal was dismissed.