So there it is – to no-one’s really very great surprise, the Government consultation document on the simplification of the tax and NI treatment of termination payments turns out not to be about simplification after all, but just a naked tax grab. This was reasonably apparent from the chronically ill-considered nature of the original consultation document and has been put beyond argument by the issue this month of the Government’s response to the feedback it has received over the intervening year.
The headlines are these:
- all notice payments will be taxable, whether the employee works his notice or is paid in lieu and (if paid in lieu) whether there is a PILON or not;
- severance compensation which isn’t contractual and isn’t notice pay remains tax free up to £30,000;
- payments over £30,000 will now attract employer’s NI as well as income tax;
- compensation for injury to feelings (as opposed to actual psychiatric injury or other recognised medical condition) will become taxable and so no longer represents a means of paying more than £30,000 tax free;
- foreign service relief is mostly abolished, though no-one really cared too much about that anyway.
So far, so predictable. However, the response also contains some breathtaking exercises in self-justification by HMRC:
- “The Government will continue to support individuals when they lose their job by ensuring that the first £30,000 of a termination payment remains exempt from income tax”, but it sticks a knife into those same individuals by procuring that the one bit of severance pay they are almost bound to get, their notice pay, can no longer be paid without deduction of tax. In other words, those who get least from their former employer are the most disadvantaged by the Government’s stance.
- Making injured feelings money taxable is “because of the divergence of judicial decisions about this issue”, though this is a divergence which (i) is actually reasonably clear in its application; (ii) could easily have been resolved in favour of the employee rather than the Government, but; (iii) somehow wasn’t.
- “Removing uncertainty around some types of payment will ensure that the £30,000 exemption … can only be used for payments that are genuinely the result of an individual losing their job”. A payment which more directly results from losing your job than your notice pay is hard to imagine, you might think, but never mind.
But the real stake through the heart of simplification as a genuine objective of this exercise lies in the stealth extension of the tax regime not just to notice pay but to all and any other sums or benefits or bonuses which the employee “would or should have received” had he worked his notice period. The intention is clearly to stop employers commuting sums which would have been taxable if paid during the notice period into non-taxable severance payments. The principle is clear enough but the Government’s first crack at addressing it in legislative drafting is a real mess, a rash of sub-sections (indeed, pages) of inter-reliant definitions and algebraic formulae such as this little treasure (the proposed ITEPA Section 402D(5)); “A payment is within this sub-section if it is a payment … that the employee could reasonably be expected to receive by reference to the employment and in respect of times before the end of the employment were the employee to continue in the employment long enough to receive it and … that has not been received before the employment ends”. What?
An assessment is made of what the employee “would have received” during his notice period by reference to what he received in the 12 weeks before he was given notice (excluding bonus), not what he actually received during that time. If any step is taken to reduce that average artificially, whether lawfully or not, the taxable amount will be based on an average from prior years, albeit that they may be totally unrepresentative of the present year.
The Government is not seeking to tax people on severance payments which they never received, though that does appear to be one possible next step, but it is overtly seeking to squeeze every last penny of tax out of employers and employees at the very time those employees need those pennies most. For HMRC to dress up what it now proposes as a “simplification” is an insult to the intelligence of the reader.