tax treatment of redundancy payment in different tax years due to grievance issue

cepheus

Here's an interesting paragraph in This is Money

Additionally, any redundancy package will be taxable when the individual becomes entitled to receive it, not when he does receive it. Therefore, deliberately spreading the payments in the severance agreement over two years to take account of two basic-rate bands in consecutive tax years will not work.

If on the other hand your employer requires you to receive the payments in two instalments, HM Revenue & Customs manuals indicate that the two payments will be taxable in two different tax years.

http://www.thisismoney.co.uk/tax/ask-an-expert/article.html?in_article_id=500618&in_page_id=2

Has anyone any idea what happens if there is a grievance issue with the amount and after a long drawn out but successful appeal the second instalment is paid one or more financial years after the first?

cepheus

So what does 'require' mean here.

If on the other hand your employer requires you to receive the payments in two instalments, HM Revenue & Customs manuals indicate that the two payments will be taxable in two different tax years.

Spreading payments between two tax years is very common so there is clearly a legal way this can be done.

If you DO anticipate further earnings in 2005/06 then maybe you should negotiate splitting the payment between the two tax years in order to utilise your basic rate tax band in 2004/05 first. Time is running out on this option as you would need to receive the payment on or before 5th April. (Note: You only have one £30k exemption and not one in each tax year.)

http://www.taxationweb.co.uk/forum/voluntary-redundancy-t6048.html

If on the other hand your employer requires you to receive the payments in two instalments, HM Revenue & Customs manuals indicate that the two payments will be taxable in two different tax years.

Care needs to be taken here to ensure HMRC do not regard any spreading of payments as an artificial arrangement designed to save tax.

http://www.thisismoney.co.uk/tax/ask-an-expert/article.html?in_article_id=500618&in_page_id=2

If your final payment will consist of a mixture of elements, ask your employer to split these out into different payments to avoid any unexpected tax liabilities.

http://www.saffery.com/manager/pdf/press_release/saffery_press_release_2008-04-01_117.pdf

Note this last quote seems very artificial and seems to contradict the above

It's all rather annoying. I'm more than happy to pay tax if everyone else does, but it seems that this is worded in a deliberately ambiguous fashion

Of course if I knew the extra amount was due I could have placed the extra in a private pension and claimed back tax that way, but there was and still is no way of guaranteeing the extra payment will be forthcoming. I don't suppose you can backdate pension subscriptions to previous years?

cepheus

Thanks for your comments Jimmo

I have an ongoing dispute with the employer since my redundancy date February 09. The employer paid 75% of the claim in that FY, but are disputing the remainder. It is a complex situation due to being an x-Civil Servant with potentially changed terms and conditions.

There is no question of deliberate delay on my part. I have all the paperwork to prove this, along with Emails asking everyone to speed things up! The balance is now about 14 months late and will soon lapse into a 3rd financial year.

The IR have been reluctant to ask me to send in a tax form until they have 'assessed the situation', perhaps this is why. I have informed them throughout about this situation.

However despite all this the IR might consider that it should have been paid all at once, there was certainly never any intention to split it up.

Perhaps I may ask the IR to compromise and allow me to backdate it in a private pension for the same financial year? After all I should have been able to do this if the amount was paid correctly and promptly. Of course I am counting chickens here...!

If you have any other ideas I would be thankful.

dampsquib

Where there has been no deliberate attempt to manipulate payment dates to avoid tax liability, I would expect HMRC to simply tax your original payment and any subsequent settlement on a straight forward "receipts basis" ie: taxing the payments in the years that they were received (whilst only allowing one £30,000 tax free allowance overall, of course).
I've been through something similar. In my case, I received an interim settlement and then a final settlement, in a different tax year to the original payoff. I'm confidentally expecting my payments only to be liable to tax in the years that they were received. I'm not expecting any nasty surprises from HMRC.

cepheus

dampsquib wrote: »

Where there has been no deliberate attempt to manipulate payment dates to avoid tax liability, I would expect HMRC to simply tax your original payment and any subsequent settlement on a straight forward "receipts basis" ie: taxing the payments in the years that they were received (whilst only allowing one £30,000 tax free allowance overall, of course).

I've been through something similar. In my case, I received an interim settlement and then a final settlement, in a different tax year to the original payoff. I'm confidentally expecting my payments only to be liable to tax in the years that they were received. I'm not expecting any nasty surprises from HMRC.

That seems fair, have you filled out the tax forms and not had a query back, or are you just assuming this?

dampsquib

I'm in no hurry to disturb the sleeping lion (HMRC), so no, I've not filled in any forms yet or had any confirmation, but I've read nothing on this forum or HMRCs website which causes me to doubt that my payments are simply liable to tax on the normal "receipts basis".

cepheus

So to summarise jimmo your view is that

1) both of us would be liable for tax for all our redundancy in one tax year (even though through no fault of our own we received it in parts in different tax years) however

2) we would be able to shelter any gains in a personal pension for the same tax year

I would still like to know clearly why so many sources still seem to think that it can be split between tax years to avoid gains. Perhaps the split has to be initially planned solely by the employer without discussion with the employee. Even if this is the case it seems to me a little initial effort by the employer could effectively increase the redundancy payment actually received by the employees quite considerably.

dampsquib

jimmo wrote: »

You don’t really think that HMRC is going to consciously disobey the law because there has been no attempt to manipulate payment dates do you?

I certainly don't, but with respect, what you seem to be overlooking, is that if after lodging an employment tribunal appeal, the employee receives one or more addtional payments under a compromise agreement, ACAS COT3 agreement, Tribunal Award, or whatever, then the nature of those payments has changed from that of the original Termination payment, and consequently, so have the entitlement dates (IMO).
Jimmo, in an earlier post, you even made this point yourself regarding Compromise Agreements.
I remain convinced that simple "receipts basis" applies for determining liability, when subsequent additional payments haven't made under some cosy instalmant arrangement, set up in an attempt to reduce the tax due.

dampsquib

As cepheus refers to a dispute that has already exceeded a year, my guess is that he/she is also heading towards either a compromise agreement, a COT3 agreement, or a tribunal award, if they do eventually receive a further payment. Perhaps cepheus can clarify the current nature of their "grievance/appeal". Even if it doesn't involve a tribunal claim, and they are simply following company grievance procedures, I'd have thought that if the company does eventually agree to make a supplementary payment, they will wish to do this under a compromise or COT3 agreement, to protect themselves from any possibility of further claims.

cepheus

I have been careful to follow the correct grievance procedure in consultation with my union for over a year now. However, the amount offered by the former employer has only been a small fraction of what should be paid of the balance, and the union legal expert thinks my case is sound. It therefore seems likely to go to a tribunal unless the threat makes my former employee back down. Note also in tribunal cases there is usually some kind of compromise involved.

However, this places me in a strange situation doesn't it? Since if I am suddenly paid the full amount without a tribunal (high court case actually) I may end up actually receiving less after tax than if I received a compromise agreement! Perhaps the best way is to go for a compromise agreement of about 95% of the total.

If an inflation element is legally binding, what if I agree to a compromise agreement by forfeiting any additional inflation claim? They will love that since they have been only offering about a quarter of the balance! What is the inflation element based on RPI, CPI? I think my union told me it is only about 1%.

Would a high court reward be treated the same as a compromise agreement for tax purposes?

dampsquib

Basically, my understanding is that amounts received under agreements and Tribunal Awards are taxed in the same way that the disputed compensation would have been taxed, had it have simply been paid in the first place. So for example, if the amount in dispute qualifies for £30,000 tax free, then so would an amount paid under an agreement or award (Only one £30,000 allowance overall though!).
From what you have said about your dispute, my bet would be that you will head towards a Tribunal Hearing, then with weeks or even days to go, you'll be faced with an offer and a "do I accept this bird in the hand" decision. You'll then have to weigh up, whether to accept what's offered, taking into account, that the Tribunal might award you something as high as "X", or something as low as "Y", or even zero due to some legal technicality. The company probably won't want to actually go the full distance though and risk losing a Tribunal Case.
The method of settlement shouldn't cause you to pay more or less tax, but the timing might (IMO, as already discussed).
Circumstances can sometimes warrant the amount of the claim being "grossed up" to compensate for extra tax incurred due to the company's actions.