Taxmen give notice on redundancy pay

Employees will lose out

Hundreds of thousands of people facing the grim prospect of redundancy may be hit even harder by an additional tax sting from the Inland Revenue, unless action is taken now to minimise the blow.

Revenue officials say they intend to tax payments in lieu of notice made to staff who are made redundant. This much stricter interpretation of tax rules, announced in August, is part of the taxman's bid to claw back some of the estimated pounds 1.5bn foregone each year from payments made to staff who lose their jobs.

At present, employees do not have to pay tax on the first pounds 30,000 of their redundancy payoff.

This is the statutory amount based on gross salary, age and number of years' service. Maximum payments are pounds 205 a week, up to a total of pounds 6,150. But many companies, either through union pressure or because they feel generous, have redundancy agreements considerably in excess of this amount.

When employees lose their jobs, employers will usually top up any redundancy payment with the salary normally paid in lieu of notice, be that one, three or six months worth of money. As long as the combined amount was under the pounds 30,000 limit, no tax was levied on it.

The Inland Revenue has always contested this practice, arguing that payments in lieu of notice (or Pilots, as experts call them) are part of a separate contractual agreement between a company and its employee and therefore subject to tax.

In August, the taxman pounced. The Revenue said it no longer intended to permit Pilots to be untaxed. One month later, Thorn EMI lost a case linked to the same issue which it had argued before the Special Commissioners, arbitrators in tax matters. The company is considering an appeal to the High Court.

The upshot has been a mad scramble by employers to get round the new restriction. One common device is to remove any reference to Pilots, whether at the company's discretion or otherwise, from employees' contracts of employment.

Employers hope that by doing so, the Revenue will be unable to argue that any notice paid to staff alongside their redundancy payments forms part of a contractual agreement between both sides.

John Whiting, a tax partner at Price Waterhouse, the chartered accountants, and also chairman of the Chartered Institute of Taxation, says: "The Revenue's position is a pre-emptive strike against these payments. I suppose we should at least be grateful that they have decided to stake out their position so clearly.

"It makes eminent sense to strike out such a clause [of pay in lieu of notice] in a contract of employment if this is simply stated as a discretionary right on the part of the company. But I can understand the fears of employees who may fear that they are losing a right to something, even if it does not amount to much."

Mr Whiting says that while taxman can still examine the overall redundancy payment between the individual and the company to determine whether part of the payoff is made up of Pilot, this option may still be the best available.

Union experts argue that where salary in lieu of notice is not a discretionary arrangement, a separate deal whereby a person waives this right at the moment of redundancy in return for a separately enhanced payoff is the best alternative. However, this is likely to come under even tighter - and negative - Revenue scrutiny.

A company always had the right to deny Pilots to staff, forcing them to work out their notice instead, however unlikely in the event of redundancy.

But staff should seek to ensure that in the event of a successful High Court challenge by Thorn EMI or another firm, their employer will reinstate the Pilot provision in their contracts, discretionary or otherwise.

The key question is whether a firm will continue to make such payments even though they are no longer even referred to as a discretionary option in the contract of employment.

Ultimately, it all comes down to how much you trust your boss. In today's climate, that may not be further than you can throw him.