Pay in Lieu

Pay in Lieu

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My client has been made redundant after 25 years' local authority service. His contract provided for a period of notice (and not for a cash alternative), but as there was no work for him, his contract was terminated, he was given his P45 and left immediately. Although not provided in the contract, he was given pay in lieu of notice and this was subjected to PAYE deduction in the normal way.

Is it not the case that non-contractual pay in lieu is not a reward for services and is outside the scope of Income Tax? If we submit a Tax Return omitting the pay in lieu and thereby claiming a tax rebate, the return will be at odds with the return submitted by the employer. Will the client then be vulnerable to attack by HMRC?

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By billgilcom
13th Apr 2011 21:55

PILON or Other

Where a PILON is given instead of notice, how it is taxed depends on whether

(a) It is contractual (see http://www.hmrc.gov.uk/manuals/eimanual/EIM12976.htm ) - taxable

(b) customary (see http://www.hmrc.gov.uk/manuals/eimanual/EIM12977.htm ) - generally taxable and see case law Laidler v Perry etc

or

(c) a payment of damages (see http://www.hmrc.gov.uk/manuals/eimanual/EIM12978.htm ) generally non-taxable If it is done only as part of the process of termination rather than under an existing practice that the parties expect to implement (see customary above), the payment will not be from the employment but from the agreed terms for its destruction and is dealt with as a damages payment. In those circumstances the payment falls within Section 401 ITEPA 2003 even though no breach of contract occurs.

In practice it can sometimes be difficult to establish the date of termination clearly. To do so you have to :
 

look at all the correspondence, documents and surrounding facts associated with the terminationcheck the date to which benefits (such as use of a car or medical benefits) are given. Although benefits can be given for post-termination periods, they may support continuation of employment if other factors support that interpretation.consider any approved retirement benefits scheme or registered occupational pension scheme (from 6 April 2006): membership is normally open only to employees

There are general articles on PILONs in the August 1996 and February 2003 editions of Tax Bulletin (TB24B and TB63 respectively), the Schedule E/NICs Bulletin of September 2001 and the Earnings Bulletin of February 2005 (ebm01/05).

Of course any variance with the submission by the employer could provie a risk that HMRC would enquire into the matter however if yours is the correct interpretation of matters then why should this present a problem as long as the client is appraised of the additional risk

Hope that this helps
[email protected]

www.wamstaxltd.com

 

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By MBK
14th Apr 2011 13:21

Just to be clear ....

.. no payments on cessation of employment (contractual or otherwise) are tax free.

Very broadly they are either taxable as earnings (if they stem from the contract) or are otherwise taxable under S401 ITEPA. It is just that payments taxable under S401 are subject to a £30,000 exemption.

In the circumstances you have described, unless there is some kind of custom which involves paying PILONs then it is most likely that the payment fals within S401. I assume there will have been a compromise agreement and, if so, that agreement should make the position clear.

PAYE has to be applied (PILONs are also subject to NI), but by making a return at the end of the tax year a refund of tax on the £30k will be available.

 

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