Organisations believe the only beneficiary will be HMRC
During the summer, the government issued a consultation outlining planned changes to the tax and NI treatment of termination payments. The consultation closed on 16 October.
Fox Williams asked its clients for their views on the proposals and found many considered them unhelpful. They expressed strong opinions on the proposal to remove the £30,000 tax-free threshold and replace it with a reduced tax free amount (calculated by length of service) which would apply only to redundancies or tribunal awards.
The government’s core objectives are simplification of the rules, particularly when dealing with PILON (pay in lieu of notice) and termination payments, and a fairer approach to payments in different circumstances. The consultation suggested removing the difference in tax treatment between contractual and non-contractual termination payments and also indicated that maintaining the current £30,000 exemption and extending it to all termination payments is not affordable. However the current level of exemption at £30,000 has not be indexed linked since it was first introduced and would be far higher now if it had been.
Organisations in our survey were concerned that the proposals were muddled and ran counter to previous government policy aimed at reducing burdens on employers and encouraging the early resolution of employment disputes.
The purpose of termination payments, including those for unfair dismissal, is to reflect employees’ potential losses from losing their job and to tide them over until they have secured replacement employment. Lowering the tax exemption will have a more significant impact on lower earning employees and will also make it more difficult to resolve disputes without going to an employment tribunal – one of the government’s stated aims.
To apply the exemption only to those who are being made redundant raises a number of key concerns. It does not recognise that individuals can lose their jobs for many other “no fault” reasons outside of redundancy, such as: long term ill-health; a restructuring which falls short of a redundancy; a dismissal at a customer’s request, or because of personality clashes or a breakdown in working relationships.
It is quite wrong to assume that whether or not there is a redundancy is always clear. There is a strict definition of redundancy in the Employment Rights Act 1996 to satisfy, and a number of components have to be met, including a reduction in the requirement for work of a particular kind or in a particular workplace. The meaning of redundancy has led to a considerable amount of case law over the years, and there is a real risk this proposal could encourage such disputes. The prospect of more beneficial tax treatment might encourage individuals to challenge their dismissal, in order to secure a finding of redundancy or lead some employers to apply the label erroneously.
Our clients said their reasons for making lump sum settlement payments ranged from redundancy (16 per cent) to performance (12 per cent), long-term illness and personality clashes, or concerns about employee attitude (4 per cent) respectively. Fifty per cent of respondents confirmed they had used tax-free lump sum payments to resolve issues relating to all of these reasons. We also know that many employers prefer not to state publicly that they are making redundancies due to the impact it may have on their reputation and how it might reflect on the financial perception of the business.
The clients in our survey were concerned that limiting the tax exemption of termination payments might:
lengthen negotiations with employees about the reasons for their departure (48 per cent)
increase spending on specialist advice on whether there is a redundancy (52 per cent)
add to uncertainty over whether HMRC will agree there is a redundancy (48 per cent)
increase grievances (43.5 per cent)
increase in tribunal claims for wrongful/unfair dismissal or discrimination (35 per cent)
Nearly 50 per cent of organisations thought the cost of settling disputes would rise with the need to gross up payments to achieve settlements, and that there would also be an increase in legal costs.
When asked who would benefit most from the proposed changes, 90 per cent of respondents to our survey acknowledged this would be HMRC.
Audrey Williams is a partner at Fox Williams LLP
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