Employees are liable to income tax on all earnings from employment and this takes priority over the rules on termination payments, where there is an exemption for the first £30,000. Hence, in Hill v Revenue & Customs,a case we covered last year, the payment which an employee received to settle a grievance about a change of workplace location after a TUPE transfer was taxable as income – the payment to compensate for the relocation was made in return for the employee remaining as an employee.
In Reid v HMRC, the scenario was slightly different. Part of the employer's business was TUPE transferred to a company with a less generous reward and benefit scheme. A lump sum, described as a "buy-out payment", of almost £26,000 was paid, to compensate for loss of pension, bonus and share rights and lunch allowances. A single lump sum payment was made but the compensation for each lost right was set out in a separate agreement.
Payment to the employee was conditional on him signing and complying with the terms of a compromise agreement and entering into a new contract of employment with the transferee. The compromise agreement confirmed that the buy-out payment was compensation for the termination of employment and giving up access to the employer's reward and benefit scheme.
HMRC decided that the whole buy-out payment was taxable as earnings from employment. The First-tier Tax Tribunal disagreed. There was no evidence that the payment was made as an inducement to enter into employment with the transferee or to accept different terms and conditions. The requirement to enter into an employment contract with the transferee was the trigger, not the reason for, the payment. It was helpful for the employee (and would have been for the employer, had HMRC attempted to recover the extra tax from the employer rather than the employee) that the reasons for the payment were recorded in detail.
So tax on the buy-out payment had to be calculated by looking at the tax treatment of the individual lost rights. In fact, the employee was only able to establish that compensation for the loss of pension rights should be treated as a termination payment; the rest (loss of bonus, shares and lunch allowances) were chargeable as earnings.