Posted by Gemma Ospedale, Partner
On 1 September 2016 Withy King LLP merged with Royds LLP. The trading name for the merged firm is Royds Withy King. All content produced prior to this date will remain in the name of the firms pre-merger.
PILON payment taxable as termination payment
An interesting case has come before the First Tier Tribunal; that of Michael Philips v HMRC. It concerned the correct taxation of a payment in lieu of notice in a Settlement Agreement. There was no contractual right to a PILON clause and it was not made to compromise an amicable unforced termination. Instead, the First Tier Tribunal found that the payment was taxable as a termination payment rather than as earnings for employment, and was compensation for the release of the tax payer’s contractual rights to notice. Applying the case of Henley v Murray (Inspector of Taxes) it considered that this was a damages payment and therefore fell to be taxed under Section 401 of the Income Tax (Earnings and Pensions) Act 2003 as a termination payment.
This decision contrasts with that of a differently constituted First Tier Tribunal in 2010 in the case of Goldberg v HMRC, where the Tribunal held that a payment which was described as a PILON and was made where the contractual notice terms were unclear, was instead taxable as earnings. While Tribunals will look behind labels, to describe a non-contractual PILON clause as compensation or damages for lack of notice more accurately reflects their tax treatment.
It appears that HMRC did not consider how the payments should be taxed because if it had, it might have applied its published guidance which confirms that, where the employer and employee agree to terminate without proper notice on payment of a PILON (on the assumption that there is no contractual discretion to pay in lieu), as long as this is done as part of the termination process, that payment will not be one made from the employment but instead from the agreed terms for the ending of that employment. As such, it is taxed as a damages payment.
HMRC would not allow the tax payer to spread the payment over 2 years – cash termination payments have to be taxed in the year of receipt.
It pays to employ the right employment solicitor