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Tax tribunals underscore importance of timing

21st Feb 2013
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Discovering your office has been moved to the basement when you return to work after a career break is probably not a good sign.

This is what happened to a jeweller of retirement age in one of three tax tribunals about company cars and payments to employees, explains Nick Huber. All cases highlight the importance of timing in the tax system.

The employment tax decisions, published in January, were about company car benefits, conditional bonuses and termination payments.

Termination payments

The first tribunal ruling highlights the importance of clearly defining the purpose of making a termination payment.

In D V Thomas and Commissioners for HMRC, Thomas had been employed by Garrard & Co as crown jeweller since 1986 but did not have a “written service agreement”. After his 65th birthday Thomas took a two-to-three month break.

In his absence, a new chief executive was appointed. When Thomas returned after his break he found that his office had been moved to the basement. Shortly afterwards Thomas received a letter telling him that his employer wanted him to retire on 1 February 2009. If he took no further action he would be treated as agreeing to their proposal and receive a payment equivalent to six months of his base salary.

Realising he was not wanted Thomas did not challenge the letter. He believed that the payment was compensation for giving up his employment rights and as such that the payment was only taxable to the extent it exceeded £30,000.

However, the first tier tribunal held that the payment was fully taxable as employment income. The letter simply said that the payment would be made on his retirement. There was not mention of compensation for giving up his employment rights and therefore the £30,000 exemption did not apply.

Conditional bonuses

The second decision provides guidance on how relief should apply when employee bonuses are clawed back.

In Julian Martin and the commissioners for HMRC, Martin signed an employment agreement which included a signing on a bonus of £250,000. However, the bonus would be clawed back if he left his employer within five years. Martin resigned within the five year period and had to repay £162,500 to his employer.

HMRC asserted that relief was not available for the repayment made to the employer. If they had been correct this would have meant that Martin would have suffered tax on monies he was not able to keep. Martin appealed to the first tier tribunal

The tribunal decided that the repayment of £162,500 must be “negative taxable income” for 2006/07.

Priya Dutta, senior tax consultant at Gabelle said that case was important because previously it was not clear how to treat the claw back of conditional bonuses. “This decision is good news for taxpayers because it means that relief is still available even where the taxpayer is out of time to make an error or mistake claim in relation to the original receipt,” she said.

Car benefits

Another first tier tribunal case, Peter Marshall v Revenue and Customs, shows how a car benefit tax charge may be avoided after the end of the relevant tax year, says Gabelle, which advises firms on tax.

Marshall was assessed on a taxable benefit on his company car. He made payments to “make good” the taxable benefit but these payments were made outside the relevant tax year.

HMRC denied an offset of amounts paid, because they were paid outside the tax year. But the first-tier tribunal decided that an employee’s offsetting payment did not need to be made in the tax year in question.

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