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In Andrew Hill v HMRC, the First-tier Tribunal (FTT) held that a payment made to an employee under a compromise agreement (now referred to as a 'settlement agreement') was a taxable emolument, as it was in consideration for changing his terms and conditions employment.
Mr Hill's employment with General Motors (GM) transferred to Saab City under the Transfer of Undertakings Regulations 2006 (TUPE). As a result of this transfer, Mr Hill was expected to work at another workplace which was further away from his home and contrary to his employment contract with GM. Mr Hill objected to the change in his place of work and raised a grievance. The grievance was resolved by way of a compromise agreement under which Mr Hill received compensation in the sum of £30,000. The payment was made to him without deductions for tax and National Insurance.
HMRC considered the payment Mr Hill received to be subject to income tax as it fell within the definition of earnings in Part 3 Income Tax (Earnings and Pensions) Act 2003. Mr Hill argued that he had been paid the sum not as consideration for the change to his employment terms but as compensation for giving up his claim for damages in respect of the breach of his employment contract. As such, he contended that the payment fell within the exemption to income tax and given that the payment didn't exceed the £30,000 threshold, it should be tax free.
The FTT held that in reality the effect of the agreement was that Mr Hill agreed to work further from his home in return for receiving the £30,000 payment. In addition, it was noted that the compromise agreement required Mr Hill to repay part of the sum if he left Saab City's employment within the first two years following the payment. This was indicative of the money being in consideration for his continued acceptance of the new place of work. As such, the sum fell within general earnings and should be subject to deductions for income tax and National Insurance in the usual way.
The tax treatment of payments made under settlement agreements can be complex. Employers should always seek advice when entering into settlement agreements, so as to made sure their position is properly protected. In particular a settlement agreement should always include tax indemnity provisions, making the employee responsible for any tax payments that arise out of the settlement agreement and to reimburse the employer for any payment it is liable to make to HMRC.