ex gratia Redundancy payments
Discussion
If you are made redundant, the first £30K of your redundancy payment wil be tax free.
If you have a decent employment law solicitor, any PILON payment will also be tax free (up to the £30K limit including redundancy pay).
Anyway, there'll be someone much more qualified than me here shortly to explain.....
If you have a decent employment law solicitor, any PILON payment will also be tax free (up to the £30K limit including redundancy pay).
Anyway, there'll be someone much more qualified than me here shortly to explain.....
Eric Mc said:
The important thing is that NO reference to the amount must be made in any employment contract or redundancy settlement paperwork. It MUST be "ex gratia". There is no automatic tax free exemption for redundancy payments unless they meet the "ex gratia" qualification.
so if my contract says 3 months redundancy payment - then i have to pay tax on that?Fidgits said:
Eric Mc said:
The important thing is that NO reference to the amount must be made in any employment contract or redundancy settlement paperwork. It MUST be "ex gratia". There is no automatic tax free exemption for redundancy payments unless they meet the "ex gratia" qualification.
so if my contract says 3 months redundancy payment - then i have to pay tax on that?Eric Mc said:
The important thing is that NO reference to the amount must be made in any employment contract or redundancy settlement paperwork. It MUST be "ex gratia". There is no automatic tax free exemption for redundancy payments unless they meet the "ex gratia" qualification.
So, Eric. Lets say a business if closing. Its staff are all being made redundant. Lets say there is no formal Ts and Cs with respect to redundancy. How much could the firm pay out tax-free to its ex-employees? Does it make a difference if they were Directors (I'd have thought so!) or Shareholders (I'd definitely have thought so)?It strikes me this could be abused dramatically!
A recent example of how the assumption that there is an automatic tax free redundancy amount of £30,000 can all go horribly wrong -
A company which negotiated redundancy payments with its staff had a nasty shock recently at the hands of the Special Commissioner of Taxes.
The scenario was one which is quite common. The company wished to make employees redundant and negotiated severance terms with their union representatives. In this case, they used 'memoranda of agreement'. It is commonly considered that the relevant tax law (now contained in s401 ITEPA 2003) exempts the first £30,000 of a redundancy payment from liability to income tax and that was what was intended on both sides in this case. However, this is not always the case. The exemption applies only where the payment does not arise 'from the employment', being granted only when the payment arises from the termination of the employment, which is a different matter.
In this case, each memorandum operated technically as an amendment to the contract of employment of the employee being made redundant. The amendment gave the employee the right to accept short notice of redundancy on terms which gave them the right to receive a sum incorporating the redundancy payment and payment in lieu of notice. This change made the payment part of their contract of employment and therefore made it taxable.
It is not known what the effect of this decision on the employer was, but presumably it now has to pay the PAYE not paid on the taxable payments and to request its ex-employees to refund the overpayments – an unpleasant outcome for all concerned.
When negotiating redundancy packages, it is critical to get the terms right as failure to do so can have serious adverse consequences.
A company which negotiated redundancy payments with its staff had a nasty shock recently at the hands of the Special Commissioner of Taxes.
The scenario was one which is quite common. The company wished to make employees redundant and negotiated severance terms with their union representatives. In this case, they used 'memoranda of agreement'. It is commonly considered that the relevant tax law (now contained in s401 ITEPA 2003) exempts the first £30,000 of a redundancy payment from liability to income tax and that was what was intended on both sides in this case. However, this is not always the case. The exemption applies only where the payment does not arise 'from the employment', being granted only when the payment arises from the termination of the employment, which is a different matter.
In this case, each memorandum operated technically as an amendment to the contract of employment of the employee being made redundant. The amendment gave the employee the right to accept short notice of redundancy on terms which gave them the right to receive a sum incorporating the redundancy payment and payment in lieu of notice. This change made the payment part of their contract of employment and therefore made it taxable.
It is not known what the effect of this decision on the employer was, but presumably it now has to pay the PAYE not paid on the taxable payments and to request its ex-employees to refund the overpayments – an unpleasant outcome for all concerned.
When negotiating redundancy packages, it is critical to get the terms right as failure to do so can have serious adverse consequences.
Don said:
Eric Mc said:
The important thing is that NO reference to the amount must be made in any employment contract or redundancy settlement paperwork. It MUST be "ex gratia". There is no automatic tax free exemption for redundancy payments unless they meet the "ex gratia" qualification.
So, Eric. Lets say a business if closing. Its staff are all being made redundant. Lets say there is no formal Ts and Cs with respect to redundancy. How much could the firm pay out tax-free to its ex-employees? Does it make a difference if they were Directors (I'd have thought so!) or Shareholders (I'd definitely have thought so)?It strikes me this could be abused dramatically!
The employer can only pay the Statutory Redundancy Pay due to each individual tax free. The additional £30,000 can only be tax free if it is a genuine, bona -fide "gift" to the departing individual and is not in any way related to employment contracts or as a rewqard for work done.
I was thinking: what if there are no formal redundancy terms and the firm comes to an end, the people running it all shake hands, empty the coffers into their pockets and document it in the final accounts as "ex-gratia redundancy payment" then dissolve the company, submit the final company tax return and accounts and file all the paperwork in the cupboard for seven years. Clearly it would need to go out owing no-one anything...
Can't be right, can it?
Can't be right, can it?
Eric Mc said:
The employer can only pay the Statutory Redundancy Pay due to each individual tax free. The additional £30,000 can only be tax free if it is a genuine, bona -fide "gift" to the departing individual and is not in any way related to employment contracts or as a rewqard for work done.
OK. But if the employees were Directors (employed by the business on PAYE but now no longer) and could therefore decide to "gift" themselves the company bank balance (up to 30K each) after all bills/salaries/liabilities were met as an "ex-gratia" redundancy payment would this be right? Sounds like a very tax-efficient way to close a small company! In effect the final profit share could be paid out as this "ex-gratia" gift rather than as a dividend attracting corporation tax...I guess I'm saying: usually there are exemptions on these sort of things to prevent employees that are also Directors and Shareholders benefitting from tax breaks of this nature. Is there such an exemption to your knowledge?
DavesFlaps said:
If you are made redundant, the first £30K of your redundancy payment wil be tax free.
If you have a decent employment law solicitor, any PILON payment will also be tax free (up to the £30K limit including redundancy pay).
Anyway, there'll be someone much more qualified than me here shortly to explain.....
Akin to Eric's responses, PILON by definition cannot be made tax free as it is salary related pay.If you have a decent employment law solicitor, any PILON payment will also be tax free (up to the £30K limit including redundancy pay).
Anyway, there'll be someone much more qualified than me here shortly to explain.....
Now, this element could be 'sacrificed' and the value rolled into a loss of office/ex gratia payment. However, if the documentation goes on to say '£X is tax free and includes your PILON payment' or words to that effect then you have just shot yourself in the foot as whatever the PILON element of X is would be subject to deductions.
Don said:
Eric Mc said:
The employer can only pay the Statutory Redundancy Pay due to each individual tax free. The additional £30,000 can only be tax free if it is a genuine, bona -fide "gift" to the departing individual and is not in any way related to employment contracts or as a rewqard for work done.
OK. But if the employees were Directors (employed by the business on PAYE but now no longer) and could therefore decide to "gift" themselves the company bank balance (up to 30K each) after all bills/salaries/liabilities were met as an "ex-gratia" redundancy payment would this be right? Sounds like a very tax-efficient way to close a small company! In effect the final profit share could be paid out as this "ex-gratia" gift rather than as a dividend attracting corporation tax...I guess I'm saying: usually there are exemptions on these sort of things to prevent employees that are also Directors and Shareholders benefitting from tax breaks of this nature. Is there such an exemption to your knowledge?
Eric Mc said:
There are no special rules for directors of their own companies. If HMRC think that someone is trying to pull the wool over their eyes as to the nature of a payment, they will soon let you know.
Now that sounds to me like they could just make up their minds capriciously. Best not tested under those circumstances...It is not uncommon for directors to receive ex gratia ('Golden Handshake') payments when leaving the office of director, so there should not be too many issues regarding an ex gratia of an employed director of a company being wound up. However, as Eric said, if the HMRC thinks you are avoiding tax (perhaps if the payment was excessively large relative to the directors salary), then no doubt they would be interested.
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