The recent decision by the First-tier Tribunal in Goldman v HMRC reminds employers and employees that the type of payment in lieu of notice ("PILON") clause, included in an employment contract, will affect the tax treatment of any PILON made to an employee on termination of employment.
Mr Goldman's employment contract stated that, should his employment be terminated without notice, his employer would make a PILON equivalent to 12 months' salary and medical insurance costs, within 14 days of the termination. Mr Goldman's employer terminated his employment without notice, but did not make the PILON to him. The parties subsequently entered into negotiations and reached a settlement with Mr Goldman accepting a lower payment than he was entitled to under the terms of the PILON clause contained in his contract. A compromise agreement was entered into and the employer paid the agreed settlement figure to Mr Goldman, less income tax deducted from the whole payment.
When Mr Goldman submitted his self-assessment tax return he made a claim for repayment of the income tax his employer had deducted from the first £30,000 of the payment on the basis that the payment had been made purely as a consequence of the termination of his employment, and was therefore exempt from tax up to £30,000 and not a wholly taxable payment of earnings. HMRC refused the claim for repayment and Mr Goldman appealed to the First-tier Tribunal.
In dismissing Mr Goldman's appeal, the First-tier Tribunal held that the termination payment was taxable in full, as earnings. The reason for this decision was that, as Mr Goldman's contract of employment permitted his employer to terminate his contract without notice upon payment of a PILON, Mr Goldman's employment had been lawfully terminated even although his employer did not make the PILON to him. The claim which Mr Goldman had against his employer was therefore a claim for payment of a contractual debt, not a claim for breach of his employment contract, and as such any amount paid in settlement of that claim was wholly taxable as earnings.
The facts in this case can be contrasted with the situation where an employment contract contains a discretionary PILON clause. A discretionary PILON clause allows an employer to choose whether or not to make a PILON. Where an employer has discretion over whether to make a PILON, if the employer chooses to terminate the employment and make a PILON, then the payment will be taxable in full as earnings. If, alternatively the employer terminates the employment without giving notice or making a PILON, then the employer is in breach of contract and the payment may benefit from the application of the £30,000 tax free exemption if it can be shown that the payment to the employee is not a PILON made in accordance with the terms of the employment contract.
When considering what, if any, payment in lieu of notice provisions to include within a contract both the employer and the employee would do well to weigh the certainty which a compulsory PILON provides against the adverse tax position of a compulsory PILON.
Disclaimer
The material contained in this article is of the nature of general comment only and does not give advice on any particular matter. Recipients should not act on the basis of the information in this e-update without taking appropriate professional advice upon their own particular circumstances.
