Previously published in Newsbrief, Winter 2004
An article in our earlier edition of NewsBrief pointed out that monies are taxable where the sums being paid to sever employment are agreed during the course of employment. The revenue has yet again issued further guidance on the taxable status of payment in lieu of notice monies. And it would appear that it is not as straightforward as determining if a payment in lieu clause exists in the contract.
It was thought that where the employer has reserved a right, or the discretion to pay in lieu of notice, the payments of notice monies becomes taxable as an emolument of employment. This was confirmed in the case of EMI Group Electronics v Coldicott.
The Cerberus case followed in 2001and modified the approach in EMI as the discretion element to pay in lieu meant that the employer could chose to neither give notice or the payment in lieu but instead could breach the contract and pay damages for that breach. The damages would be payable gross and would fall within the £30,000 tax-free exemption. Furthermore, the employer could take advantage of the fact that the employee had found alternative work and hence mitigated his loss so that the employer pays less for the breach. This appeared to be a win win situation for both parties.
The revenue have now considered that employers who regularly make payments in lieu of notice in the absence of any express contractual provision to do so may have an implied term by reason of custom and practice that the employee is entitled to such payments. This being the case the payment is contractual and therefore taxable.
The motto is that where the contract does not expressly provide for payments to be made in lieu it should not be taken as read that the payment is tax-free. Employers must consider their custom and practice as this may render the payment liable to taxation where the payment is an automatic response in relation to any unworked notice.
