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Redundancy in a PSC

Redundancy pay for someone's partner tax free?

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A PSC has 2 shares split between someone and their wife, and they're both employed (salaried), but only he is a director. They wish to close and extract money from their company (which is more than solvent).

I know a sole director can't be made redundant in most cases. But what's to stop them making the wife redundant, paying her a £30,000 goodwill redundancy payment and reducing the closing tax bill by a massive amount? I got asked this question earlier today and it sounds dodgy as hell but I couldn't give a good answer as to exactly why HMRC would inevitably have a complete fit if they ever found out. 

Replies (24)

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By David Ex
17th Aug 2021 17:15

andach wrote:

… what's to stop them making the wife redundant, paying her a £30,000 goodwill redundancy payment and reducing the closing tax bill by a massive amount?

Tax basics. Not W&E.

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Replying to David Ex:
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By paul.benny
17th Aug 2021 19:36

On that basis, surely any redundancy payment above statutory would be disallowed?

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Replying to paul.benny:
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By David Ex
17th Aug 2021 20:14

paul.benny wrote:

On that basis, surely any redundancy payment above statutory would be disallowed?

It was just a generic response to the question “what’s to stop …?”. As usual, we’d need more facts to draw a anything like firm conclusion on the OP’s clients.

I don’t know if there are any special rules for OMBs - or OMBs that are ceasing.

EDIT: Reading the question again, the client company is a PSC and, as the spouse isn’t a director, I wonder whether she has a substantive role or is just paid a token salary for carrying out the modest admin, which I assume is all that is involved with a PSC. The answer to that might shed some light on the question whether the amount of the suggested redundancy payment was likely to appear over generous.

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Replying to paul.benny:
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By Ian Bee
18th Aug 2021 11:26

I have been working in corporate tax for over 35 years and while most redundancy questions concern the PAYE side, this exact question has been around since I started. The only W&E reason I have seen put forward for a deduction above the amount statute allows is that redundancies made by large employers can have an impact on the staff remaining. If the leavers are seen to be treated well, this can be good for the workforce.

It's not a very strong argument and virtually non existant for a PSC. And that's before you look at the PAYE side.

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By wingman22
17th Aug 2021 17:42

A sole director can also be an employee…

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By GR
17th Aug 2021 20:30

Assuming the wife plays no role in the company, her salary and her redundancy pay would not be allowable.

How can you justify paying someone who does nothing, say a salary of £1k/month and redundancy of £30k?

There is unlikely to be any material admin work to do if the company is a PSC.

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By Paul Crowley
17th Aug 2021 21:07

Why is he being so generous?
Business gets no benefit
But chances are HMRC will not notice because HMRC is really just a computer

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Replying to Paul Crowley:
By Duggimon
18th Aug 2021 10:13

Paul Crowley wrote:

Why is he being so generous?
Business gets no benefit
But chances are HMRC will not notice because HMRC is really just a computer

The business never gets a benefit from a voluntary redundancy payment.

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Replying to Duggimon:
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By Paul Crowley
23rd Aug 2021 15:43

Reputation for a continuing business

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By Hugo Fair
17th Aug 2021 22:02

The heart of this issue really falls within HR rather than Payroll ... in that Non-Statutory Redundancy Pay (aka contractual redundancy pay) cannot just be made up on the spur of the moment.
The reasons why an employer might choose to be more generous than required by the law (i.e. Statutory Redundancy Pay) are usually defined in contract of employment - such as maintaining a reputation as a good employer, keeping up morale in the part of the workforce which remains, and so on.
In the scenario of OP's client it is presumed no such terms exist already (and it's hard to think of any that would be applicable to what is essentially a OMB).

Why is any of this relevant? Because HMRC always study such a payment (which will have to be reported via RTI, so is quite visible) - with a view to denying the tax-free status of some or all of the payment, usually by demanding that you prove it is not really earnings.

FWIW I would consider hefty ER Pension contributions (depending on all sorts of factors unknown to me) ... but they should be talking to someone with experience of all the options, not relying on opinions from people like me!

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Replying to Hugo Fair:
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By David Ex
17th Aug 2021 22:21

Hugo Fair wrote:

FWIW I would consider hefty ER Pension contributions (depending on all sorts of factors unknown to me) ...

The need to be able to justify the payments as being wholly and exclusively for the purposes of the trade still arises with pension contributions. As you note, the OP’s clients would also need to consider whether pension contributions were appropriate.

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Replying to Hugo Fair:
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By [email protected]
23rd Aug 2021 13:32

Be Careful

If the payment is part of a contract it is severence pay and fully taxable! NOT Redundancy

To qualify as a redundancy payment there must not be entitlement in an existing contract. (so effectively must be made up on the spur of the moment as part of negociating the redundancy package)

It is quite common to negociate a redundancy package in exess of the statutory minimum. An employer is able to do so and will for any number of reasons. A big one is goodwill with the soon to be former employee and those who remain. Another might be union involvement.

In this specific case - does the fact that the wife is a shareholder put up a red flag?

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By paul.benny
18th Aug 2021 08:06

I suppose we all acknowledge that a generous severance payment in these circumstances stretches the rules on such matters. Whether it stretches the rules past breaking point probably depends on whether the client is lucky or unlucky; if unlucky, there is then a much greater risk that HMRC challenge the whole employment of the spouse.

Is that a risk client is willing to take? And is it something you're willing to go along with?

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By Winnie Wiggleroom
18th Aug 2021 09:27

the answer is as always - it depends!

If the wife did very little work, was paid a salary of 8k for answering the phone and had no contract of employment that is a very different situation than if she had a very active role, was paid a salary in accordance with the work she did and had a contract of employment that set out what she would be paid in the event of a redundancy, I suspect that in this case it falls into the former in which case you might suggest a redundancy of 4 years salary is a tad excessive.

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By Duggimon
18th Aug 2021 10:15

Were I HMRC, I would say the £30K was paid by virtue of the wife being a shareholder and challenge the business to prove otherwise.

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By I'msorryIhaven'taclue
18th Aug 2021 12:40

andach wrote:

I got asked this question earlier today and it sounds dodgy as hell but I couldn't give a good answer as to exactly why HMRC would inevitably have a complete fit if they ever found out. 

I have a small number of clients who ask questions such as this; where matters are all well documented on the internet, and they have often spent countless hours "researching" the issue for themselves without achieving their desired outcome.

The question itself is no doubt the thin end of the wedge. If you don't tell them what they want to hear, they'll argue it tooth and nail on your time.

Do tell your clients that, while you don't believe their proposition is likely to achieve success in their circumstance, you'd be happy to undertake a detailed appraisal by applying the rules to their case and producing a report and recommendations. Await their instructions - see whether they still want to play with the meter running!

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By Gerry Brown
23rd Aug 2021 14:53

In a previous life with HMRC I always looked at redundancy/compensation for loss of office payments in family companies. Unless the recipient had a history of receiving a salary from the company I would seek to disallow the payment on 'whooly and excluively' grounds. Where there was a salary paid I would seek to restrict the deduction for the payment to what would be paid on an arm's length basis. I wouldn't have thought a payment of more than 6 months salary would be made on such a basis. (I have been made redundant and received a payment on that basis.)

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Replying to Gerry Brown:
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By Winnie Wiggleroom
23rd Aug 2021 15:05

Gerry Brown wrote:

In a previous life with HMRC I always looked at redundancy/compensation for loss of office payments in family companies. Unless the recipient had a history of receiving a salary from the company I would seek to disallow the payment on 'whooly and excluively' grounds. Where there was a salary paid I would seek to restrict the deduction for the payment to what would be paid on an arm's length basis. I wouldn't have thought a payment of more than 6 months salary would be made on such a basis. (I have been made redundant and received a payment on that basis.)

Hold on, I got a years pay when I was made redundant, So as a HMRC inspector what exactly were you using as a legal basis to restrict it to what in your view was a fair amount? very woolly indeed!

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By More unearned luck
23rd Aug 2021 16:35

IF the company getting a CT deduction was the only problem then I don't see it as a reason not to pay the sum. After all you (no doubt) regularly recommend your clients take dividends from the company for which the company gets no CT deduction. In this case there wouldn't be tax at 7.5%, 32.5% or 38.1% for the recipient to pay.

But is it the only problem?

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By The Dullard
23rd Aug 2021 22:05

CT deductible but taxable as employment income. There are a mixture of good and bad responses in this thread, so also consider this much more learned thread:

https://www.accountingweb.co.uk/any-answers/redundancy-pay-for-directors

Wilson v Daniels, referred to in the thread, being particularly relevant, I think

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Replying to The Dullard:
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By Winnie Wiggleroom
24th Aug 2021 06:02

The Dullard wrote:

CT deductible but taxable as employment income. There are a mixture of good and bad responses in this thread, so also consider this much more learned thread:

https://www.accountingweb.co.uk/any-answers/redundancy-pay-for-directors

Wilson v Daniels, referred to in the thread, being particularly relevant, I think

That thread deals with redundancy for a Director, this thread is not about that

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Replying to Winnie Wiggleroom:
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By The Dullard
24th Aug 2021 11:41

That thread deals with redundancy of a shareholder/director. The very same principles apply to a shareholder/director's spouse, IMO.

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By mumpin
24th Aug 2021 11:08

Oh no!
I've been doing it all wrong for 25 years and nobody ever pointed it out.
I had better call my insurers.

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By Justin Bryant
09th Sep 2021 13:59

This is more or less what happened here without success re W&E: https://www.bailii.org/uk/cases/UKFTT/TC/2021/TC08253.pdf

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