The recent case of Goldberg v HMRC TC628 was concerned with a payment in lieu of notice and whether the £30,000 exemption for termination payments applied to it. This is an odd decision as I shall explain.
Mr Goldberg was employed by a company for some years. His contract of employment entitled him to 12 months’ notice, but there was no payment in lieu of notice clause giving him any entitlement to receive, or the company any right to make, a payment in lieu of that notice.
In the fullness of time, his contract was terminated. The company wanted him to leave immediately and gave him 12 months’ pay in lieu of notice.
The question was whether that payment attracted the £30,000 exemption or whether it was fully chargeable to tax as part of his earnings from the employment.
These are some recent authorities on this point. EMI v Coldicott confirmed that where a payment in lieu of notice is made in pursuance of a contractual provision enabling the employer to make such a payment, it is part of the earnings from the employment.
In SCA Packaging v HMRC this principle was extended to employees who were entitled to payments in lieu of notice arising from a memorandum of understanding between the parties which supplemented their contracts of employment. However, that is really saying the same thing, as the contractual entitlement arose in a slightly different way.
There is the further case of Cerberus Software Limited v Rowley which took the principle a little further by suggesting that where the contract gave the employer a right to make a payment in lieu of notice (but no right for the employee to insist upon it), the payment still arose as part of the contractual arrangements for the employee’s services and was therefore earnings.
In 2003 HMRC published a statement on the subject, highlighting that where a contract is terminated in accordance with its terms, any such payment is fully chargeable to tax as earnings. However, they confirmed that compensation for breach of contract does not represent earnings and qualifies for the £30,000 exemption.
Returning to Mr Goldberg, the Tribunal said that:
“The payment was a payment in lieu of notice and we dismiss the appeal… The only hard evidence before us is [a letter] to the effect that the payment was in lieu of notice. There was a further letter [from the company] confirming that to be the position as far as the company was concerned.”
They concluded that they had no alternative but to accept that the payment was a payment in lieu of notice. Well yes. But nobody
was disputing that it was a payment in lieu of notice. That does not make it taxable. What matters is whether the employee could insist upon receiving such a payment or whether the employer could insist on making one so that the payment fell within (and not outside) the terms of the contract.
Although the judgment is not entirely clear on the matter, there seemed to be no evidence that any such contractual entitlement existed and there was a clear breach of contract by the employer. Mr Goldberg was entitled to 12 months’ notice and was not given that notice. He received compensation instead.
It may be that there is more to this case than is apparent from the judgment, but it would certainly seem that a payment in lieu of notice was assumed by the Tribunal to be a description of a taxable category without regard to the fact that this applies only where a contractual right exists on one side or the other for the payment to be made.