Tax-free termination payments at risk

first_imgTax-free termination payments at riskOn 1 Sep 2003 in Personnel Today Previous Article Next Article Comments are closed. Related posts:No related photos. Liquidateddamages clauses in compromise agreements put tax-free termination payments atrisk, according to recent Inland Revenue decisions.Suchclauses require the employee to repay any compensation received under thecompromise agreement if they claim unfair dismissal and receive damages. Butthe Revenue has said that because compensation may have to be repaid at a laterdate, this renders it “employment income” rather than genuinecompensation, and is therefore chargeable for tax and National Insurance.EmmaBartlett, a solicitor at Speechly Bircham, warned employers not to includeliquidated damages clauses at all, to be on the safe side. “Aliquidated damages clause should be unnecessary as a properly draftedcompromise agreement will be capable of preventing the employee from bringingproceedings. A [liquidated damages] clause is probably unenforceable anywayunder the Unfair Contract Terms Act 1977.”Bartlettadded that an employer does not want to rely on a waiver in the compromiseagreement, it should make it clear that it should be permitted to offsetcompensation against any future award it is ordered to make. “Asthe employee is not then required to repay any sums to the employer, thisshould ensure the compensation is purely ‘compensation for termination ofemployment’ and so not taxable.” Butshe added this had not yet been tested. last_img

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