Clinton v HMRC 2009 UKFTT 337

Ms Clinton commenced employment with Bristol Myers in October 1996. In 2003 she resigned claiming constructive dismissal when her role changed and was unacceptable to her. Bristol Myers did not accept that she had been constructively dismissed but as a goodwill gesture offered to make a lump sum payment equal to 3 months’ notice but with no pension contribution, health care cover or life cover or to make monthly payments for the 3 month notice period with those additional benefits. She accepted the first option. Bristol Myers made a lump sum payment deducting income tax and employee NIC’s. She sought repayment through her self-assessment tax return on the basis that the lump sum paid by Bristol Myers was compensation for constructive dismissal or was an ex gratia payment and was therefore a termination payment that should have been paid tax free.  

The Revenue disagreed claiming that the payment made on termination was made under the terms of the contractual PILON or based on a term implied by custom and practice or was made pursuant to the agreement to terminate the employment forthwith without notice and therefore taxable in full. The tribunal held that the taxpayer would succeed in her appeal as the termination payment was either an ex gratia payment or a payment to settle her constructive dismissal claim. The tribunal rejected the Revenue’s contention that a PILON term was implied into her contract by custom and practice.

Key point: The case illustrates the importance of ensuring that an employer’s correspondence with and from the employee clearly refers to the reason for the termination and that any settlement agreed is to compromise an unfair dismissal claim or notice as the case may be. Payments that are similar to PILONs are not necessarily PILONs and therefore will be taxable in full.