Termination payments: CIOT Comments 7 October 2016

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Juliana Hudson
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Simplification of the tax and National Insurance treatment of termination payments: consultation on draft legislation Response by the Chartered Institute of Taxation 1 Introduction 1.

1 Simplification of the tax and National Insurance treatment of termination payments: consultation on draft legislation Response by the Chartered Institute of Taxation 1 Introduction 1.1 The Chartered Institute of Taxation (CIOT) sets out below its response to the government s technical consultation on draft legislation relating to the income tax and NIC treatment of termination payments. 1.2 The Office of Tax Simplification s (OTS) third report 1 in its employee benefits and expenses review recommended simplifying the tax treatment of payments made in connection with the termination of employment. The OTS suggested that the simplest way forward was for income tax relief to be only available in circumstances where the employee qualifies for a statutory redundancy payment. They also proposed a review of existing exemptions and reliefs, in order to determine whether they should be retained as part of a wider reform of the income tax and NIC treatment of termination payments. 1.3 In July 2015 the government consulted on proposals to (i) align the tax treatment of contractual and non-contractual termination payments, (ii) align the income tax and NIC treatment, (iii) reform the 30,000 exemption, and (iv) reform existing exemptions and reliefs which remove a liability to tax on all or part of a termination payment. 1.4 In Budget 2016 the government announced that (i) the 30,000 exemption would be retained but that employer s NIC would be payable on amounts above this, (ii) all payments in lieu of notice (PILONs) would be taxable (whether contractual or non-contractual) and (iii) relief will be removed from payments in connection with foreign service. 1.5 The CIOT s comments and recommendations on tax issues are made solely in order to achieve a better, more efficient, tax system for all affected by it taxpayers, their advisers and the authorities. 1 fits_and_expenses_final_report.pdf

2 1.6 In responding to this consultation we raise concerns about the lack of simplicity and clarity, and uncertainty that will arise if the government s proposals are introduced as they stand. 2 Executive summary 2.1 The CIOT is disappointed that the government has not taken the opportunity afforded by the work of the OTS to simplify the income tax and NICs treatment of termination payments. 2.2 The proposed PILON legislation to tax all payments not directly related to the termination of the employment is far too complicated and will create a huge amount of confusion for employers, employees and HMRC alike. 2.3 Furthermore, imposing employer NIC on termination payments in excess of 30,000 is revenue raising with no quid pro quo, eg an increase in the 30,000 threshold that has been unchanged since 1988, when the original intention was that any changes to the treatment of termination payments would be revenue neutral. 2.4 Also, the introduction of employer only NIC is not only complicated but could potentially could result in errors arising (eg as to whether and to what extent a payment made on the termination of an employment is liable to employer NIC, employee NIC, both or neither). 2.5 Finally, we would also urge the government to rethink its decision to remove Foreign Service Relief (FSR). We believe that it is a mistake to abolish FSR. FSR is as relevant today as it was when it was introduced. Termination payments arise in a whole range of circumstances including redundancy, breach of contract, irreconcilable differences between employer and employee, a personal thank you for a relationship that has endured over many years etc. and our view is that it is right to reflect FSR in deciding what should properly be sourced to the UK and what to non-uk service. This is logical and fair and has worked well in practice over many years. 3 Contractual and non-contractual termination payments, payments in lieu of notice (PILONs) etc 3.1 The government proposes the removal of the distinction between contractual and noncontractual termination payments such as PILONs. 3.2 When responding to last summer s consultation we agreed that, in principle, removing the distinction between contractual and non-contractual termination payments would mean one less step when determining the tax analysis and ought to introduce simplicity. Unfortunately, it seems the opportunity to simplify has been missed. 3.3 Firstly, the distinction between contractual and non-contractual payments has been retained. Secondly, a very complicated approach to determine which parts of a termination payment can benefit from the 30,000 exemption has been adopted. 3.4 We are now to have to grapple post-employment notice income in draft Section 402D, the default period, the trigger point, expected bonus income payments and other benefits by way of bonus that employees could reasonably be expected to receive (a) before the P/tech/subsfinal/ET/2016 2

3 end of the employment, (b) during the default period, or (c) a bonus is which apparently not covered by either (a) or (b) (Section 402D(7)), an anti-avoidance provision in regard to arrangements to reduce G, coupled with a 3 year look-back rule and more. This will all combine to create a huge amount of confusion for employers, employees and indeed HMRC itself. 3.5 Even the definitions, eg in Section 402C of non-excluded termination award as an award that is none of the following are not simple to understand. 3.6 Furthermore, discretionary bonuses are inherently uncertain both in regard to their occurrence and their amount, so it is not possible to guess what bonus a departing employee may have expected to receive. 3.7 Additionally, the formulaic approach is likely to result in some skewed outcomes where, for example, an employee is or has been in receipt of Statutory Sick Pay or Statutory Maternity Pay etc in the period up to the termination as this will inevitably depress G. 3.8 Consequently, it seems to us that the legislative approach adopted to align the tax treatment of contractual and non-contractual termination payments is unnecessarily complicated. 3.9 We would suggest a rather simpler approach. The basic operative rule would be that payments made, or benefits provided, to an employee following termination of their employment in circumstances where the employee did not work for all, or part, of their notice period, and that would have been made, or provided, were the employment to have continued through that employee s notice period, shall be treated as earnings if they would not otherwise be such. To prevent manipulation this could be supplemented by a TAAR. All that would then be required is a definition of notice period. 4 National Insurance contributions 4.1 The government proposes that from April 2018 termination payments in excess of 30,000 will be subject to employer s NIC. 4.2 Although the additional revenue raised from this change has not been costed, the consultation document recognises that this change will indeed be an additional cost to employers. What is the anticipated amount of NICs that will be received from this measure? 4.3 The original intention was that and changes to the treatment of termination payments would not be revenue raising and yet, without a balancing increase in the 30,000 threshold, this change will clearly increase Exchequer revenues and thus will potentially be to the detriment of employees who have lost their job. This is because employers are likely to reduce termination packages to compensate for the additional cost of paying employer s NIC. 4.4 In addition, this NIC change potentially introduces a new trap for employers as they may well be confused by employer, but not employee, NICs applying to Section 401 termination payments over the 30,000 exemption. P/tech/subsfinal/ET/2016 3

4 5 Income tax-free threshold 5.1 Whilst we welcome the retention of the 30,000 exemption the reality is that its value has materially decreased since it was legislated in We think it should be increased and that this should be funded by the revenue raised by the imposition of employer s NIC on Section 401 ITEPA 2003 payments exceeding 30, Exemptions 6.1 We welcome the retention of exemptions in respect of termination payments arising further to death, disability or injury, for payments to a registered pension scheme, for liabilities and indemnity insurance, to HM Armed Forces personnel, etc. 6.2 We note that the exemption for payments in connection with the injury of an employee will be amended so that it does not apply in cases of injured feelings. In a recent Employment Appeals Tribunal case (Timothy James Consulting v Wilton) the Employment Tribunal ruled that injury to feelings payments are not taxable. This was despite the Upper Tax Tribunal, in Moorthy v HMRC, finding that any compensation received in connection with termination of employment is taxable, including a payment to compensate for injury to feelings arising from discrimination. Therefore, this change will, at least, mean that the law will now be clear. 6.3 The government also proposes removing Foreign Service Relief (FSR) from April 2018 [except for seafarers] on the basis that it has become outdated and unnecessary. 6.4 We believe that the government is wrong to remove FSR. FSR was introduced for good reason and, as noted, works well in practice. The government s proposal would mean that an individual who had worked 19 years outside the UK, came here for a year and then received a Section 401 payment would only receive exemption up to 30,000. And yet 19/20ths of their service had been outside the UK. This is surely not the right answer. 6.5 The consultation document acknowledges that today there is a global workforce. And indeed many UK residents spend a substantial part of their careers working abroad. As such, we consider it is vital that the UK continues to support its internationally mobile workforce. 6.6 Termination payments may happen at a single point in time but will generally recognise the time invested by an individual with their employer over a number of years. As such, we consider that it is right to recognise those parts of a termination payment that are sourced to periods of non-uk employment. This is precisely what FSR is intended to do. 6.7 Sourcing payments of earnings between UK and non-uk duties in order to determine what earnings are liable to UK tax is fully recognised in the tax code. So removing FSR would mean that Section 401 payments are actually treated less favourably than contractual payments, vesting of share options etc. We would strongly urge the government to revisit this matter. P/tech/subsfinal/ET/2016 4

5 7 Acknowledgement of submission 7.1 We would be grateful if you could acknowledge safe receipt of this submission, and ensure that the Chartered Institute of Taxation is included in the List of Respondents when any outcome of the consultation is published. 8 The Chartered Institute of Taxation 8.1 The Chartered Institute of Taxation (CIOT) is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it taxpayers, their advisers and the authorities. The CIOT s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer. The CIOT draws on our members experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work. The CIOT s 17,600 members have the practising title of Chartered Tax Adviser and the designatory letters CTA, to represent the leading tax qualification. The Chartered Institute of Taxation 7 October 2016 P/tech/subsfinal/ET/2016 5

National Insurance and Self-employed Entertainers Response by the Chartered Institute of Taxation

National Insurance and Self-employed Entertainers Response by the Chartered Institute of Taxation 1 Introduction 1.1 The Chartered Institute of Taxation (CIOT) is pleased to comment on the proposals to