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Which tax year for Insolvency Service payments?

A client was made redundant on 26 March 2020 but payments were received during 2020-21.

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We are completing a tax return for a client who was made redundant on 26 March 2020.  The last payment of any type she received from her employer was her February salary (received at the end of Feb).  She has received 3 payments from The Insolvency Service and we would like to know which tax year each payment should be declared in (their letters are less than helpful in this respect).  The payments were:

Arrears of pay (1 - 26 March 2020).  Paid 14 April

Redundancy pay (well below £30k).  Paid 14 April

Compensation for loss of notice (assessed period 27/3/20 - 30/4/20).  Paid 12 May

Any guidance as to which (if any) of these payments should be declared in 2019-20 would be greatly approciated.

Many thanks in advance

Replies (21)

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By Lesley50
22nd Nov 2020 12:27

In my opinion
Arrears of pay relating to 2019/20 should be shown on Tax Return for that year the question is are these net or gross? What does paperwork say?
Second redundancy not taxable as under £30,000
Thirdly I would say that loss of notice would also come under this £30,000 if amounts below this

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Replying to Lesley50:
Psycho
By Wilson Philips
22nd Nov 2020 14:19

PILONs are now, generally, taxable.

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Replying to Wilson Philips:
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By Lesley50
22nd Nov 2020 15:03

Sorry yes agreed from April 2018!
I retired in 2017!!!!

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Replying to Wilson Philips:
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By Paul Crowley
22nd Nov 2020 15:40

Concur

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By richard thomas
22nd Nov 2020 13:19

In my opinion, which happens to coincide with the opinion of Parliament as expressed in ITEPA, these amounts, if taxable, are taxable in 2020-21. Employment income has been taxed on the receipts basis for decades now.

If the arrears of wages were paid gross, then the client should be able to use reg 185 of the PAYE regs to include a deemed deduction of PAYE in the relevant pages of their return.

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Replying to richard thomas:
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By I'msorryIhaven'taclue
22nd Nov 2020 14:07

Regarding the first PAYE amount, in case the Insolvency Service has other ideas to those expressed in ITEPA I wonder whether the O.P. is able to deduce which year it is attached to via its deductions. There was a change to the primary NI threshold for 2020/21 which might just give the game away.

So far as the redundancy pay is concerned that probably won't matter too badly which year given that it's tax-free; although be aware O.P that it's been common enough over the years for people receiving higher amounts of redundancy pay to have payment split over two years in order to get under the £30k threshold twice. Such treatment has to be agreed by both parties, and written into the redundancy agreement.

Now I know the Insolvency Service will not have any such arrangement as that, but I mention the above to illustrate an exception to the rule so far as redundancy pay is concerned. In short, I believe redundancy pay in this case could fall (or, perhaps more accurately, is capable of falling) either side of the wire. I'd keep an open mind on that.

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Replying to I'msorryIhaven'taclue:
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By Tax Dragon
23rd Nov 2020 06:53

In relation to two lots of £30k, it might (have) be(en) common enough (over the years) for employers to think that, but [any employer that uses(/d)] an accountant really ought to (have) know(n) better. Unsurprisingly [and I struggle to believe this is a new rule], payments are aggregated. See s403(4). After all, the trigger is an event [redundancy], not a tax year.

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Replying to Tax Dragon:
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By richard thomas
23rd Nov 2020 09:40

You are right to struggle. It appears first as the proviso to section 36(3) Finance Act 1960 when the threshold was £5,000.

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Replying to richard thomas:
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By I'msorryIhaven'taclue
23rd Nov 2020 11:26

Tax Dragon & Richard,

I hear what you say. But I do know that BT, for one, got away with splitting many >£30k redundancy across 2 years in the mid-noughties. (The 20 noughties, not 19 noughties, that is :)

Rightly or wrongly, that is.

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Replying to richard thomas:
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By StephenGuy
24th Nov 2020 10:06

Thank you Richard.
Doesn't ITEPA s18 Rule 2 contradict your statement that the first payment (for 1-26 March 2020) is taxable in 2020-21?

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By Paul Crowley
22nd Nov 2020 15:44

P45 is the trigger
Add NI rules as per Imsorry

Wages are as per paid date
RTI and all that

Edit
Just noticed RT
RT is correct, trust me

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Replying to Paul Crowley:
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By StephenGuy
22nd Nov 2020 19:06

If only The Insolvency Service had issued a P45. Just a letter with the amount of tax/NI deducted (on the wages and notice payments). I will use the date of payment. Thanks

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Replying to StephenGuy:
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By Matrix
23rd Nov 2020 06:59

Even if the P45 were issued with a leaving date of 26 March then the receipt would still be taxed in 20-21.

Very odd but I had one of these recently and only knew not to rely on the date on the P45 since I had an April payslip.

HMRC’s records go from the RTI which was filed in Month 1 20-21. I called them to check. Do the same if you are concerned.

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Replying to StephenGuy:
Lisa Thomas
By Insolvency Practitioner
23rd Nov 2020 12:17

It's up to the Company to issue P45s...Normally organised by whoever deals with the payroll.

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Replying to Insolvency Practitioner:
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By I'msorryIhaven'taclue
23rd Nov 2020 15:04

The company, not the Insolvency Service, issues the P45s?

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Replying to I'msorryIhaven'taclue:
Lisa Thomas
By Insolvency Practitioner
23rd Nov 2020 15:32

Correct - it's the Company's responsibility, nothing to do with IS - they just stump up the money owed.

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Replying to Insolvency Practitioner:
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By StephenGuy
24th Nov 2020 09:19

Thank you. In this case the company ceased trading and the liquidators issued P45s to all staff which included the March salary that hadn't been paid. They later issued correcting P45s removing the unpaid March salary. And that's the last that was received from the company/liquidators.
The question was about the payments made by the Insolvency Service who simply sent a letter stating what the deductions were. No payslip, no P45.

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By fawltybasil2575
24th Nov 2020 09:53

@ richard thomas (your 11.19 post).

May I respectfully disagree your comments in relation to the employee’s earnings for the period 1 March 2010 to 23 March 2020.

Except in the very unlikely event that there is a contract of employment under which the employee only becomes entitled to the pay (exceptionally so) on or after 6 April 2020, then prima facie Rule 2 [for “non-director” employees (we are not advised that the employee is a director and hence impliedly she is not a director – Rule 3 would apply if she IS a director)] of S.18(1) ITEPA 2003 IMHO determines the relevant date as 23 March 2020 (or conceivably 31 March 2020 - the distinction is academic) ie in 2019/20.

https://www.legislation.gov.uk/ukpga/2003/1/section/18

If the RTi submission and/or P45 treat the earnings as relating to the 2020/21 tax year, then such treatment would be incorrect; and have no impact on the correct treatment to be applied by the employee in dealing with his tax affairs (albeit, if the RTi/P45 treat the income as relating to 2020/21, then notifying HMRC of the correct position, including if necessary “white space” notes on Tax Returns, is advisable).

To the extent that the Insolvency Service are involved in making employment earnings payments to the employee, and/or issuing paperwork, they are effectively acting as agents of the employer for Income Tax purposes.

[I have no problem in relation to the Redundancy and Compensation payments being treated as income in 2010/21 (in view of the time limits available, beyond the employment cessation date, for such payments)].

Basil.

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Replying to fawltybasil2575:
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By richard thomas
23rd Nov 2020 17:15

You may, of course.

I was aware of what is now s 18 ITEPA and its predecessor s 202B ICTA 1988, and particularly Rule 3 about directors, which, like you, I took the client here not to be. I had assumed, wrongly it seems that Rule 2 was about bonuses and the like. Having read EIM 42290 I see that it also covers other cases including where companies in difficulty do not pay wages and go into liquidation.

So I accept that the receipts basis does not always apply in its pure form to non-directors, and it may well be that the wages are income of 2019-20 as being an entitlement at 31 March 2020, but it is an interesting question whether the prior redundancy and the ending of the contract of employment on 23 March before entitlement date affects the matter.

EIM does not deal with this case where wages are not paid on the due date but are later paid via the insolvency service.

I also agree with you about PAYE as s 686 ITEPA is the mirror image of s 18. The RTI return should probably have been made for tax month 12 of 2019-20 and so was late. One has to read para 19 Sch A1 to the PAYE Regs as requiring the entitlement date, even if it just says payment date, because s 686 provides that the meaning of "payment" in the PAYE Regs encompasses all the Rules. How many employers or payroll providers know that I wonder.

It is interesting that EIM 42260 and 42290 both refer to the PAYE credit (under reg 185) to which a person in the position of not receiving wages from a hard up employer is entitled to. This is contrary to HMRC's own position in Hoey and Higgs (though it was dealt a severe blow in the recent case of Lancashire).

But assuming PAYE was deducted in this case it will not be relevant.

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Replying to fawltybasil2575:
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By StephenGuy
24th Nov 2020 09:30

Thank you. My client is not and never was a director.
The link to s18 is most helpful.

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Replying to fawltybasil2575:
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By I'msorryIhaven'taclue
25th Nov 2020 11:16

Chapeau!

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