Following the First-tier Tribunal decision in HMRC v Tottenham Hotspur Ltd in 2016 concerning termination payments paid to transferring footballers ( UKFTT 389 (TC)), the Upper Tribunal  UKUT 453 (TCC) has recently upheld the FTT decision. David Whiscombe, Partner, Tax Technical, at BKL reports.
The case concerned payments made to Peter Crouch and Wilson Palacios on the early termination of their contracts. The contracts contained provisions under which they could be terminated early by mutual agreement; but were silent as to what payments would or might be made on early termination.
The Upper Tribunal decision is helpful for its careful analysis of the development of case law in the area but ultimately does not seem to have had much difficulty in coming to its conclusion:
‘In our view, the authorities show that the relevant distinction is between cases where the entire contract of employment is abrogated in exchange for the termination payment, and cases where the payment is made in pursuance of a pre-existing obligation to make such a payment arising under a contract of employment. This case fell squarely into the first category.’
Thus, where a contract provides for a termination payment (as for example where an employer has the right to give notice or to make a payment in lieu of notice), any termination payment will be taxable in full. Where it doesn’t (as in the Spurs case) a termination payment is taxable only under the ‘golden handshake’ rules and, importantly, is not subject to National Insurance Contributions (‘NICs’): and this remains the case whether the contract is breached or whether it is terminated by mutual agreement.
However, we were wrong on one point in our earlier analysis of the First-Tier Tribunal decision in 2016. In it we were rash enough to suggest that ‘the decision will prove of even greater and longer-lasting significance than three points at White Hart Lane.’ It won’t. Finance (No 2) Act 2017 changes the law with effect from 6 April 2018 to change the tax treatment of pay in lieu of notice (‘PILON’).
The broad effect of the change is that to the extent that a termination payment represents ‘post-employment notice pay’ (meaning, roughly, the basic pay that would have been earned up to the date the employment ceased if notice had been given and worked), it will always be taxable in full without the benefit of the £30,000 exemption (and also subject to NICs). So the distinction between contractual PILON (i.e. where the contract gives the employer the right to choose between giving notice or paying PILON) and non-contractual PILON is removed. Henceforth the limited tax exemption (and the unlimited employee NIC exemption) can be applied only to payments over and above any ‘post-employment notice pay’.
For example, if an employee on six months’ notice is paid off with no notice and a year’s salary, half of the termination payment will be subject to tax and NICs in the same way as the salary it replaces. The other half will be exempt from tax and employers’ NIC up to a maximum of £30,000, and exempt (as now) from employees’ NIC in full. Genuine redundancy payments up to the amount due under statute remain, as now, tax-free.
David Whiscombe, Partner, Tax Technical at BKL, is author of Partnership Taxation 2017/18 (Bloomsbury Professional): https://www.bloomsburyprofessional.com/uk/partnership-taxation-201718-9781526503084/
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