CheckLists.Tax (beta)
F8. Termination of employment
GENERAL
Company law issues
- Payments to directors requiring approval
- Requirement for approval by members of payments to directors for loss of office - CA 2006, s.215.
Legislation: CA 2006, s.190, s.215, s.226B to 226D;
Cases:
HMRC manuals: NIM12015 - Directors' loan accounts and payments on account of earnings: Miscellaneous;
Commentary:
See also:
EMPLOYMENT INCOME TAX
Earnings charge
- Scope of charge
Personal qualities
- Payment to recognise personal qualities exhibited by employee during course of rendering services would be earnings from employment (Haderlein, §28).
- Payment to recognise personal qualities in recognising that the time has come leave not from employment (Haderlein, §28).
- Even if calculated by reference to foregone redundancy entitlement and prospective benefits (Haderlein, §29).
Legislation:
Cases:
McBride v Blackburn [2003] STC (SCD) 139;
Haderlein v. HMRC [2008] UKSPC SPC00710, Judge Gammie QC;
HMRC manuals:
Commentary:
See also:
- Double tax treaty relief
Model Article 15
- Article 15 applies to "salaries, wages and other similar remuneration" derived in respect of an employment.
- Taxing rights given to the residence state.
- Taxing rights also given to the other Contracting State if it is the source state (i.e. where employment is exercised).
Scope
- Other similar remuneration applies to any reward a person derives in respect of their employment services, but "remuneration still involves the concept of something that is given as a quid pro quo for services rendered" (Haderlein, §38).
- Includes benefits in kind (OECD Commentary, §2.1).
- Does not cover everything taxable is employment income:
- "There is nothing in the context of the Act or in the language of the Convention, however, to indicate that Article 14 of the Convention should be construed as encompassing anything that falls within the charge to tax under Schedule E or within ITEPA. Thus I do not think that the gratuitous payment should be treated as within the Treaty concept of "salaries, wages and other similar remuneration" just because it happens to be taxed by the UK as an amount that counts as employment income." (Haderlein, §39).
- Does not apply to pension income and government service income within Article 18 and 19.
Source state: where employment is exercised
- Employment is exercised in place where employee physically present when performing activities (OECD Commentary, §1).
- Does not matter if fruits of employment are exploited in another place (§1).
Legislation: OECD Model Article 15;
Cases:
Haderlein v. HMRC [2008] UKSPC SPC00710, Judge Gammie QC;
HMRC manuals:
Commentary:
See also:
Termination payments charge (s.401)
- Scope of charge
- Ex gratia payment for "doing the right thing" and resigning was in connection with termination of employment in Haderlein (§30).
Legislation:
Cases:
Haderlein v. HMRC [2008] UKSPC SPC00710, Judge Gammie QC;
HMRC manuals:
Commentary:
See also:
- Residence
XX
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
- Double tax treaty relief
Model Article 15 (employment income)
- See above - Article 15 applies to "salaries, wages and other similar remuneration" derived in respect of an employment.
- Other similar remuneration applies to any reward a person derives in respect of their employment services, but "remuneration still involves the concept of something that is given as a quid pro quo for services rendered" (Haderlein, §38).
- Does not cover everything taxable is employment income:
- "There is nothing in the context of the Act or in the language of the Convention, however, to indicate that Article 14 of the Convention should be construed as encompassing anything that falls within the charge to tax under Schedule E or within ITEPA. Thus I do not think that the gratuitous payment should be treated as within the Treaty concept of "salaries, wages and other similar remuneration" just because it happens to be taxed by the UK as an amount that counts as employment income." (Haderlein, §39).
- A payment in lieu of notice (i.e. remuneration that the individual would have received under the employment contract had he/she been required to work out the notice period) is "equivalent of remuneration" and probably similar to salary or wages (Haderlein, §37; Squirrell, §11).
- Remuneration from such a case "should be considered to be derived from the State where it is reasonable to assume that the employee would have worked during the period of notice" (OECD Commentary §2.6).
- An ex gratia payment to an employee who "did the right thing" and resigned was taxable under ITEPA s.401 but not similar to salary or wages in Haderlein.
- "It is not solely the fact that it is ex gratia but the payment lacks the necessary nexus with services rendered that usually characterizes payments as salary, wages or other similar remuneration." (§38).
Model Article 21 (other income)
- In Haderlein, it was it was held that the ex gratia payment fell within Article 21 as other income.
- Ex gratia payment in Haderlein, so no asset that could have been alienated within Article 13.
- Note that some versions of Article 21 give taxing rights to the source state (Article 21(3) - based on UN Model Treaty).
Model Article 13 (capital gains)
- Article 21 is a default category.
- If sum does not fall within Article 15, query whether it falls within Article 13, e.g. if it is made for settling/surrendering right of action.
Legislation: OECD Model Article 13, Article 15; Article 21;
Cases:
Haderlein v. HMRC [2008] UKSPC SPC00710, Judge Gammie QC;
HMRC manuals:
Commentary:
See also:
Specific types of payment
- Payment in lieu of notice
XX
Double tax treaty
- A payment in lieu of notice is within Article 15 (Haderlein, §37; Squirrell, §11).
- Both residence state and source state can tax such payments.
- Remuneration from such a case "should be considered to be derived from the State where it is reasonable to assume that the employee would have worked during the period of notice" (OECD Commentary, Article 15, §2.6).
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
- Voluntary payments on loss of office
- Payments on directors ceasing to hold office were held to be gratuitous lump sums paid in recognition of past service and taxable as s.62 earnings in Simrajsar Limited.
Legislation:
Cases:
Simrajsar Limited v. HMRC [2024] UKFTT 1072 (TC), Judge McKeever;
HMRC manuals:
Commentary:
See also:
- Wrongful termination/repudiation of employment contract
General earnings
- Compensation to compromise a claim for wrongful repudiation of employment contract is not earnings from employment as it arises by reason of the disappearance of the employment (Du Cros).
- "The contract of service was at an end. The source of income had disappeared, and the sum paid by way of damages could not be regarded as a sum derived from the employment. It was something which arose outside the employment. It was something to which Mr. Du Cros became entitled by reason of the disappearance of the employment." (Williams's Executors at 38).
- Chibbett v. Robinson - payment to a firm that managed a company upon termination/liquidation out of the company's 'abundant prosperity' was a "testimonial for what they had done in the past in their office which has now terminated".
- "I do not think that is taxable as a profit. It seems to me that a payment to make up for the cessation for the future of annual taxable profits is not itself an annual profit at all I do not know whether it has arisen or been discussed, and perhaps the less I say about it the better, but I should not have thought that either damages for wrongful dismissal or a payment in lieu of notice, at any rate if it was for a longish period - I will not say a payment in lieu of notice, I will say a voluntary payment in respect of breaking an agreement which had some time to run - would be taxable profits. But at any rate it does seem to me that compensation for loss of an employment which need not continue, but which was likely to continue, is not an annual profit within the scope of the Income Tax at all." (at 61).Chibbett v. Robinson (1924) 9 TC 48;
Section 401
-
Legislation:
Cases:
Chibbett v. Robinson (1924) 9 TC 48;
Du Cros v. Ryall (1935) 19 TC 444;
CIR v. Williams's Executors (1944) 26 TC 23;
HMRC manuals:
Commentary:
See also:
Post-termination continuing payments/benefits
- Insurance for legal liabilities/expenses run-off benefits (exemption from charge)
- Exclusion from the termination of employment charge for payments/benefits relating to liabilities/expenses that would be deductible under s.346 if paid during the employment (ITEPA s.409).
- Run-off period is 6 tax years.
- See F5. Employee expenses.
Legislation: ITEPA s.409;
Cases:
HMRC manuals:
Commentary:
See also:
- Post-termination sick pay
Payment by employer
- Payment of sick pay by employer after cessation of employment is unusual, but is potentially taxable as pension income (EIM06440).
Payment by third party
- Payment by pension trustees to a former employee were pension income, where paid in recognition of previous employment and because of his disability in Johnson v. Holleran.
- If the payments are not taxable as pension income, they may be taxable as annual payments.
- See EIM06440.
Legislation:
Cases: Johnson v. Holleran [1989] STC 1 (Morritt J);
HMRC manuals: EIM06440 - Employment income: sick pay and injury payments: sick pay and other sums paid after cessation of employment;
Commentary:
See also:
- Annual payments under own-health/unemployment risk policies (exemption)
- Where an employment policy ceases to apply upon termination of employment, but another policy is entered into under the employment policy ("the replacement policy") the exemption can continue to apply on the basis that the two policies are treated as a single policy (ITTOIA s.741; IPTM6125).
- For the main exemption, see N3. Insured event occurs.
Legislation: ITTOIA s.735 - 743;
Cases:
HMRC manuals: IPTM6125 - employer's schemes: where employment ends for health reasons: ITTOIA05/S741;
Commentary:
See also: