On 19 June 2015, the First-tier Tribunal (in Hill v HMRC3) held that a payment to an employee pursuant to a compromise agreement was taxable as it was made to compensate him for a change to the terms of his employment contract. The decision makes some interesting points around the effect of TUPE transfers on the tax treatment of compromise agreement payments.
The employee argued before the tribunal that the £30,000 payment should be paid free of tax pursuant to section 401 ITEPA 2003, because the payment was made in return for a combination of his agreeing not to pursue a claim against his employer for (i) failing to consult on a TUPE transfer that had the effect of transferring his employment, and (ii) breach of the terms of his employment contract, which stipulated that he would only be required to work within a 10 mile radius of a specified location.
The tribunal dismissed the employee’s appeal, as:
- The payment was taxable as “earnings” under ITEPA, and could not therefore fall within section 401.
- This was supported by the fact that the employee did not raise the issue of his location of work (and the purported breach of his employment contract) until after the TUPE transfer had taken place.
- This was further supported by the fact that the terms of the compromise agreement required the employee to pay back (part of) the payment if he left his employer’s employment within a specified amount of time.
Although the decision did not turn on the question, the tribunal’s view was that the effect of the TUPE transfer was that there was no termination of the employee’s employment (which would have removed one of the possible arguments for section 401 applying).
The decision can be found here.