A client offered a job to an individual and they signed contracts of employment
before employment commenced, they decided they didn't need the employee (lost business) and so informed him they did not need him anymore.
As the contract was signed he is entitled to one weeks notice and they have paid him this as £961 (£50k salary) and deducted no tax and NI
My question - should it have been taxed as it was a contractual notice payment - my thoughts are it should have been taxed - in which case should teh £961 now be treated as net and grossed up
Thankyou
Replies (9)
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I would ask myself whether the amount was paid by reason of the unwanted additional employee's employment. I would answer with the opinion that the employment had not actually commenced so the answer has to be 'no'. In fact he never became an employee of your client so how could it be taxable?
Tax & NIC free
They have not paid him to work out 1 week's notice. They have broken the contract and paid him compensation in lieu of notice for not working the week.
It's an anticipatory breach of contract
The payment is damages for the anticipatory breach. It can't possibly be reward for services, because no services have been performed.
Non-taxable compensation in my opinion.
Payment made in lieu of notice?
If the payment was made in lieu of notice then my view is that it is a contractual payment and therefore taxable. It might be a good idea to have a good discussion with your client about what they perceive the payment to have represented and take a look at the contract to establish that the payment was contractually necessary.
Kind regards
PILON can be both taxable and non-taxable.
In this instance, I would have said it was taxable.
It is a simple question
No services have been performed, so the payment isn't reward for services. It's a payment of damages in respect of the anticipated breach of contract. It's damages, and it's not taxable.
There's an interesting employment law case on the anticipatory breach of an employment contract, but I can't find it at the moment.
Even after the employment has begun, the fact that the contract provides for notice doesn't render a PILON taxable.
PILON's are only taxable if it says in the contract that payment will be made in lieu of notice, or if there is a notorious custom that payment is made in lieu of notice.
PILONs are generally liquidated damages though and won't be taxable unless the total payments relating to a termination of employment exceed £30K.
In this instance though, because there have been no services performed, it can be nothing other than damages for the anticipated breach.
Found it!
CScape Strategic Internet Services v Toon. It doesn't say much, but confirms the anticipatory breach point.