Tax Settlement Agreement

Sram · 8 June 2017 at 10:45AM

I've been offered a settlement agreement by my employer. The first 30k should be tax free but the terms of the agreement contains a tax indemnity clause making me liable to pay any tax should HMRC come along at a later date and decide that my employer got it wrong and tax should have been paid on the first 30k.

The clause also seeks to make me liable for any fines, penalties, interest, liabilities that may arise should the above situation actually happen. I'm told it is very rare that HMRC actually seek tax on a 30k ex gratis termination payment but it's not unheard of. Employers do sometimes get it wrong.

I'm trying to get a better understanding of the risks involved should this situation arise and I might find myself getting hit with fines, interest, liabilities and penalties etc. I have worked for these people for a long time and I have never had any issues with their payroll department so the risk that they might now make a mistake seems very small. But it is still a risk.

I suppose what I'm most concerned with is how long I have to live with that risk. As long as no fraud is involved, am I right in thinking that after after four years HMRC could no longer enforce the tax payment should it turn out my employer did not pay the correct tax on the first 30k?

uknick · 9 June 2017 at 9:56AM

Does the settlement relate to a termination of employment?

If so, does it include any amount for payment in lieu of notice (PILON)?

See here for more information;

https://www.monacosolicitors.co.uk/articles/ex-gratia-payment/

agrinnall · 9 June 2017 at 11:42AM

I presume that you are consulting a solicitor (chosen by you but paid for by your employer), so what do they have to say about it?

Sram · 9 June 2017 at 12:58PM

uknick wrote: »

Does the settlement relate to a termination of employment?

If so, does it include any amount for payment in lieu of notice (PILON)?

See here for more information;

Thanks for that. Interesting reading. I don't have a PILON clause in my employment contract which would appear to be the biggest risk facing an employee if they faced a tax demand.

agrinnall wrote: »

I presume that you are consulting a solicitor (chosen by you but paid for by your employer), so what do they have to say about it?

The problem with this system requiring employees facing a settlement agreement to take legal advice is that employment solicitors are not tax specialists. They can only explain what the clause means. I think proper advice from a tax specialist is something that an employee should also insist upon because every employee's circumstances are different.

Really all I want to know is if I sign such a deal, how long does the risk of facing a tax payment and associated interest, fines etc last before it is statued barred? Does anyone know? Am I correct in thinking that HMRC would only have 4 years to correct any mistake the employer may have made in relation to this payment? Assuming no fraud was involved of course.

Cook_County · 9 June 2017 at 9:01PM

What does your solicitor say?

Sram · 9 June 2017 at 10:28PM

Solicitor just says that he's an employment expert not a tax expert. So he can't advise in detail on my specific tax arrangements and that it would be negligent for him to pretend otherwise.

He says I'm his first client in 11 years to ask about this particular clause about potential fines, interest, penalties etc in relation to a tax free 30k ex gratia payment.

Apparently most clients just sign the settlement agreement with very little fuss. He claims that if I'm really worried I should take further advice from a tax specialist but he himself has never heard of a situation where hmrc have come back and decided to tax an ex gratia payment of 30k or less. That's not to say it couldn't or doesn't happen but it's never happened to a client of his that he's aware of.

The employer won't pay for tax advice, just legal advice. I know the risk is minimal. It's just how long the risk is likely to last that I'm trying to figure out. I still think if it's not fraud then it's 4 years.

aveylee · 10 June 2017 at 7:16AM

There are three general time limits for opening an enquiry or discovery into a tax return. 4 Years where you were not careless or deliberate, 6 years if HMRC think you were careless, and 20 years for fraud (not applicable in this case).

If you want to be absolutely certain you are in the clear you would need to wait 6 years. While I feel that any problem with the £30k payment should be in the 4 year category, HMRC may try it on and go for the 6 year time limit.

Also you may want to check exactly what it is the employer is asking you to indemnify them for. HMRC can go after the employer for Employer NIC's and penalties etc. as well as after you for Income Tax and Employee NICs. So you may be agreeing to pay any fines HMRC impose for the employer element of tax not just your income tax and NIC element.

This can be a complicated area (but one that most high street accountants should be able to deal with) and I would advise you to consider covering your back and getting advice from an accountant. Once you've got that advice you really could not be called careless so the 4 year limit would apply.

Sram · 10 June 2017 at 9:30AM

Thank you aveylee. That's what I thought.

As I understand it under PAYE it is the employers responsibility to deduct the correct tax. And the indemnity is to cover the employer not only for the tax they failed to pay but also for any fines, penalties, interest and liabilities they may incur as a result of their failure to pay.

But I'm curious as to how it works in practice. The indemnity is between employee and employer. It's not between employee and HMRC. Therefore I would have thought that HMRC would charge the employer the tax owed along with any fines, interest, penalties, liabilities on the unpaid tax. And it would be for the employer to recoup the tax and associated charges from the employee by enforcing the indemnity, through the courts if necessary.

That's the only way I can see it working. I can't see the employer showing HMRC the indemnity clause and then telling HMRC to go after the employee because that clause is not a contract HMRC are party to.

Obviously I'd need to take proper advice on this but I'd welcome any input on how this indemnity would actually be enforced in practice. I can't see HMRC trying to enforce an indemnity clause that they themselves haven't agreed to.

aveylee · 11 June 2017 at 1:32PM

Your absolutely right about how HMRC would approach the matter. I am an accountant, and have dealt with HMRC enquiries, but not in personal tax (so this is not profesional advice, as I'm not sufficiently expert (or silly enough) to give formal advice - this is just my opinion).

The liability in law is the company's not yours (except in very specific situations).

HMRC cannot legally come after you any Employer contributions and penalties would be assessed against the Company. Who would pay it.

They would then approach you to recompense them according to the contract you signed.

My concern if I was in your position would be if HMRC were to go after the company (probably not that likely). How much of a defence would they put up if ultimately you would be the one paying?

In my opinion it is fair to make you liable for your tax liability (Income Tax etc), if something goes wrong, as you are the one legally liable (and the one gaining the tax benefit).

I would not want to indeminify the company for their mistake and their liabilities though. You won't be in control of responding to the tax enquiry, and you won't know how much you are on the hook for, you also won't be in a position to influence the level of any penalty.

However any personal tax specialist accountant should be able to tell you whether the scheme your company is proposing is (probably) tax legal or not.

It would be a mistake to lose out on a generous settlement offer and get stuck with (much less) statutory redundancy, if the risk is very small, or your contingent liability to HMRC is less than the amount you stand to gain by taking the settlement.

Sram · 11 June 2017 at 5:31PM

Thanks again aveylee.

Obviously nobody should ever take anything you, me or anyone else says online as professional advice.

But you make a lot of valid points.

I'm glad to hear that I'm unlikely to have HMRC trying to get me to pay the employers liabilities. It makes sense as my agreement is with my employer not HMRC. I have a fair amount of leverage with the employer and I'm sure that I could get them to see reason (to an extent) should this situation arise. Whereas I'd have no leverage with HMRC and I've never heard of anyone making them see reason.

You make a good point about not being able to influence the kind of liabilities the employer may incur and that they might drag their heels if they think someone else will ultimately pay. Although the settlement agreement does state that before meeting any liabilities the employer will take reasonable steps to notify me so that I have a chance to challenge them myself.

I agree that the employee paying their actual tax is fair should the tax break they've benefited from turn out to be incorrect. However, the employer is adamant that these are their standard terms for settlement agreements and they don't change them for anyone. So I have a decision to make as to whether or not I am happy to take the risk on any liabilities, fines, interest and penalties etc if the tax needs to be paid in the future.

It is the contingent liability I think I was most concerned about. The idea that I might be exposed to this potential risk of facing fines, penalties, interest etc for the rest of my life. It's good to know that unless there's fraud involved the risk should only last 6 years.

anselld · 11 June 2017 at 5:51PM

I have to disagree with the previous poster. As a general rule individuals are liable to pay the correct tax. If HMRC dispute the tax treatment they will be after you for the tax in the first instance.

Tax Settlement Agreement

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