Inland Revenue 5
17 March 1998
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FAIRER TREATMENT OF REDUNDANCY SETTLEMENTS
Following public consultation, legislative modifications to
give a simpler and fairer tax treatment of payments and
benefits provided after redundancy were announced today.
Benefits will be taxable only to the extent they arise and
both payments and benefits will be taxable for the year in
which they are enjoyed or received - rather than being
treated as income of the year of termination.
The 30,000 pound redundancy exemption is unaffected by these
modifications. The revised rules reflect the Government's
commitment to better regulation.
DETAILS
1. It has become common for employment termination
settlements to include provision for benefits to continue
after termination. There are sound commercial reasons why
this is often a sensible approach. For example, an employee
with a company car is made redundant, there are three years
to run on a leasing agreement for the car but the employer
has no further use for the vehicle; it may well be in the
best interests of both parties for continued provision of the
car to be included in the redundancy package.
Existing Rules
2. Under the current law (Section 148 Income and Corporation
Taxes Act 1988), what is taxed is the value of the promise to
provide the ongoing benefits rather than the benefits
themselves. So the taxable value of the car provided for
three years is the amount the ex-employee would have to pay,
at the date of the termination, for a three-year car hire or
lease agreement. Tax will be charged on the full value of
the three year provision - all as income for the tax year in
which the termination of employment takes place.
3. Valuing the right to a future flow of benefits in this
way can be difficult. For example, there might be open-ended
discounted use of leisure facilities owned by the ex-employer
- how is this to be valued accurately?. It will involve a
significant up-front tax charge when the now jobless
ex-employee can least afford it, for a benefit he or she will
receive gradually over a number of years. In addition, the
assessment, once finalised, cannot be adjusted to reflect the
level of benefit actually received - even if this turns out
to be very different from the assessed amount (say if the
leisure facilities are closed after two years).
4. Where cash is paid after termination, it too will all be
assessed for the year of termination but a charge cannot
arise before the payment is made. This means that, with
respect to the cash payments alone, an individual's tax
liability for the year of termination may have to be revised
on several occasions if he or she continues to receive
payments in later years - perhaps as a result of a cash
settlement being paid in several annual instalments. This
does not fit easily with the system of self assessment,
designed to enable the taxpayer to settle his or her tax
affairs for each year within a specified time thereafter.
5. Following representations by employers, an optional
alternative approach (detailed in an Inland Revenue press
release of 17 March 1997) was introduced as a temporary
measure. For redundancies occurring between 6 April 1996 and
5 April 1998 the ex-employee can elect for ongoing benefits to
be taxed only to the extent they are received - in much the
same way as cash payments. The benefits are valued using
essentially the same rules as apply to employees receiving
such benefits. However, as with cash payments, the tax
charge is still raised in respect of the year of termination.
Proposed Modifications
6. The proposed legislative modifications build upon the
temporary arrangements. Not only will benefits be taxable
only to the extent they arise, but both payments and benefits
will be taxable for the year in which they are enjoyed or
received - rather than being treated as income of the year of
termination. Better Regulation and Simplification
7. The modifications have been the subject of public
consultation. They give legislative basis to, and build
upon, temporary arrangements first introduced in response to
representations by employers. The revised rules have been
designed to make the tax treatment of employment termination
settlements simpler and fairer, thereby reducing
administrative costs for employers and employees. In
addition, the opportunity has been taken to rewrite the
underlying legislative provisions using techniques developed
as part of the Tax Law Rewrite project - it is hoped that
this will make the rules clearer and easier to use.
Compliance Cost Effect
8. The main purpose of these modifications is to make less
burdensome the tax treatment of employment termination
settlements. The modifications should mean compliance cost
savings for employers as well as simplifying things for
employees.
NOTES FOR EDITORS
1. Where someone receives compensation for loss of
employment and that compensation is taxable under Section 148
of the Income and Corporation Taxes Act 1988, only the excess
over 30,000 pounds is taxable. This exemption is being
retained. Any portion of this exemption unused in the year of
termination will be carried forward for use in subsequent
years.
2. Taxpayers whose employment terminated during 1996-97 and
1997-98 and who elected for the temporary alternative
treatment will be able to benefit from the revised rules with
respect to any outstanding payments and benefits.
INLAND REVENUE PRESS OFFICE
Media enquiries to: 0171-438-6692/6706/7327
(Out of hours: 0860 359544)
Non media enquiries to: 0171-438-6420/6425
(Office hours only)