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Voluntary payments on termination of employment
by David Whiscombe
For years HMRC have been seeking to limit the scope of the well-known “golden handshake” exemption. And of course it is a wild and dangerous oversimplification to say that when an employee is “let go” he can be paid £30,000 tax-free. Among the factors that need to be considered are:
- Is there an express or implied contractual entitlement to the money?
- Is the payment in reality a terminal bonus?
- Is the money being paid in return for a restrictive covenant?
- Is the employee retiring?
However, once you have satisfied yourself that none of these apply and that the payment is rooted in the termination of employment and in the termination alone, you can be reasonably confident that the only charging section is s401 with the result that the £30,000 exemption applies.
It is a common misconception that the exemption applies only if the payment can be seen to be in the nature of “redundancy payment” or “compensation for loss of employment” or “damages”. Not so: all of these might well be payments that are within the scope of s401 (and thus the £30,000 exemption) but what puts them there is not their character as “redundancy” or “compensation” or “damages” but the fact that they are received in connection with the termination of an employment and are not otherwise taxable. It follows that the size of the payment, or the existence or absence of any legal obligation to make it, does not matter; a wholly voluntary payment that is made as a mark of regret at the ending of the employment relationship is as capable of falling within s401 as a payment made in the plainest possible case of breach of contract. Certainly if a payment is manifestly excessive the payer may have some difficulty in showing that it was made “wholly and exclusively for the purposes of the trade” but that is another matter altogether: it cannot affect the treatment in the hands of the (ex-) employee.
It is understood that HMRC are in some cases seeking to argue that a payment which prima facie exceeds a reasonable level of damages falls outwith s401 and instead automatically falls to be taxed as employment income. This is simply wrong and seems to be based on a misreading of the practice set out at EIM 12852. While one cannot disagree with the right of HMRC in such cases to “consider critically whether any part is in substance paid for some other reason” it is for HMRC to show that the payment falls within some other charging provision rather than for a taxpayer to show that it doesn't. The fact is that it cannot be validly assumed that a payment on termination of employment is in substance something else simply because it is larger than HMRC think it should be.
