What are golden handshakes?

Golden handshakes are payments to an individual upon termination of employment and may also be known as lump sum payments.

There are cases where such payments are not taxed at all, which are those post-death when an employee has died in service, and in some cases payments due to disability may qualify for exemption. Those are outside the norm.

For the most part termination payments are taxable under special rules. The first £30,000 of a leaving payment will be exempt from tax if it is an ex-gratia payment and therefore non-contractual. One may have to make the case to HMRC that the payment is not for services rendered and that there was no obligation on behalf of the employer.

Otherwise, payments in lieu of notice (PILONs- how we love these acronyms) are taxable if contractual in the sense that the employee's contract specifies that the employer will make a PILON if the employee is asked not to work notice.

If the contract does not specify this, being silent on the position where the employee is asked to leave without working notice, then the first £30,000 may qualify for the tax exemption because it then represents “damages” for breach of contract. However, if the employer habitually follows the practice of paying terminated employees in lieu of notice even though the contract does not specify this then HMRC may take the view that the first £30,000 is taxable because an employee would have the expectation and the employer probably the intention from the outset.

A true redundancy payment should qualify for the £30,000 exemption, but must be supportable as genuine on the evidence available.

If you are starting to think this whole area of leaving payments is a minefield, you would be right. If you are an employer planning on letting some of your workers go, you should get professional advice.

If you are an employee on the receiving end of both your notice and a proposed payment, you would also be wise to get professional advice before the agreement, and also in completing your Self Assessment Tax Return later. The level of taxation on any non-exempt amount might also depend on what level of income you have in the year you receive your payment, and often if you are not seeking further work you will benefit by having your termination payment at the beginning of a tax year in April or May so that it will not be aggregated with a whole year's pay.

The golden rule for golden handshakes is to seek professional advice.

© Jon Stow 2010

Scary tax planning in a changing world

I cannot remember a time when the tax regime in Britain was in a position of such flux. As we know the cost of the banking crisis and the recession has cost the government, or at least UK plc dearly. There is a huge deficit to be made up, exacerbated by the futile policy of reducing VAT from 17.5% to 15% for thirteen months. There is talk that after the election whoever is in power will have to raise VAT to 20%. There is not much we can do to mitigate this in advance, and from the Government's point of view, indirect taxation on sales is inescapable. We are all paying VAT on a daily basis, and we have to hope that any currently exempt or zero-rated goods and services will not have a charge imposed.

At these sorts of times and particularly in advance of an election the parties find themselves painted into a corner. Are they honest and admit that services will have to be cut and that charges will have to be made in the NHS and in education, or do they keep quiet and get on with doing what they perceive is necessary when in power after May (we still assume the election will be in May)? Will taxation be raised even more after May?

Regular readers of this blog will know that my view is that increases in taxation are counter-productive because they encourage dishonesty. I don't like it, but that is the reality, especially in the cash businesses HMRC hate, but frankly are not equipped to do anything about. Those professionally represented businesses have a close eye kept on them by the likes of us, but many who are not and particularly those who are not even registered at all (the black economy) are very hard to catch. This does not bode well for the immediate future because we then have a division between the honest and highly-taxed legitimate law-abiding business and the dishonest who are better off because they do not pay their taxes and are robbing HMRC and therefore all the rest of us doing our best to stay on the straight and narrow..

So, what do we professionals do? There is some tax planning which seems tempting in terms of the 2009 Pre-Budget Report. We know that the rate of income tax is going up to 50% for taxable income over £150,000. There is also a withdrawal of personal allowances on income over £100,000, which means that there is a marginal rate of 60% for incomes just over £100K and when you add in National Insurance the situation seems scary. What do we tell our clients to do? Have their bonuses now (unless they are in the bankers' trap), have them much later, or leave the country?

Well of course, it might be an idea for owner-managers to pay themselves dividends at 32.5% instead of 42.5% after April if they are in that sort of league. It might be sensible for spouses and partners to equalise their incomes to reduce rates, but frankly those sorts of arrangements may well be in place, especially as the income-shifting legislation is currently on the shelf because it was impractical and ill-thought out. However, being impractical and ill-thought out has not always prevented legislation from being introduced, and there is still the spectre of perhaps a higher charge on dividends in general or an imposition of NIC.

Our clients should talk to their financial advisers in view of the changes to the pension regime from April and the further restrictions on tax relief on premiums paid.

The whole point is that I cannot remember a period of so much uncertainty in the tax world. In past years we have planned ahead, but now we can and must take action on many fronts before April, because we know not what is round the corner. Our planning may not help our clients after April, but we must talk to them to see what we can do now.

From a business point of view, the one thing worse than a recession is the inability to plan ahead, because who knows what tax costs are round the corner? That is why I wish the party in power could be more candid about its general plan on tax increases. I wish the opposition would say that whilst it cannot reduce the proposed increases in the short term it will not invent any new taxes and that it will cut services, so that at least we know where we stand. The election is badly needed in terms of politics, but it is getting in the way of all our lives in terms of knowing where we stand or fall. How can a business make plans if it has no projection on costs?

Be responsible and pay your tax

Last Spring I wrote a piece entitled “Render unto Caesar...” which pretty much sets out my view concerning tax avoidance and those who are reluctant to pay tax. For the record I reiterate that I have no objection to people taking sensible uncomplicated steps to pay less tax. That is no different from choosing to fill your car with petrol, diesel or gas at a particular establishment which charges a little less than the one down the road. Daily essentials everyone buys on price because the value is the same. Complicated and artificial tax avoidance schemes really have no place in a responsible society.

There is a moral case to pay a fair share of tax. We may not like a particular Government but we all use the infrastructure, the roads, education, the health service and so on, and we should cough up according to our fair share. There are occasional refuseniks who choose to withhold a portion e.g. of their perceived share of the defence budget, quoting moral grounds, and they may at least appear principled if foolhardy in making a futile stand against the system, though at least gaining publicity for their cause.

What really gets my goat is those who dodge the system, take cash so that it does not go through their books and appear in their accounts (“save the VAT, mate?”) and those who fiddle in other ways, such as inflating their business expenses. None of these people are clients of us professional practitioners of course, because if we sign them up they are in the system they wish to avoid, and subject to our scrutiny.

Just the same, it is certain that there are still many tax dodgers and if any are reading this, let me tell you that if you have dodged £5,000 of tax you have stolen it from the Government and from us taxpayers and it is no different from stealing £5,000 from the state-owned Post Office. The punishment on getting caught may not be the same, but perhaps it should be? It is money taken from our back pockets.

The financial penalties for tax evasion have been raised subject to various targeted initiatives in particular areas. Should we see more custodial sentences? How can more dishonest tax evaders be caught given the limited resources of HMRC? What do you think?

© Jon Stow 2010

HMRC tackles the medical profession with the Tax Health Plan

We professionals in the tax business are fond of offering tax health checks to prospective clients, but now we should be offering health checks to medical professionals, who are the target of HMRC's latest campaign to collect tax from perceived miscreants. I am sure the Revenue is not suggesting that all in the health business are into dodgy dealing and falsifying their tax returns, but presumably there must be a supposition that “extras” such as giving references to patients, signing passport applications and getting payments from pharmaceutical companies slip through into doctors' pockets unnoticed by their accountants or tax advisers. Those targeted who have something to report must notify their intention to do so by 31st March 2010 and have until 30th June 2010 to have made the disclosure and arranged to pay any tax that is due.

Given that we have had two opportunities for people to disclose their offshore bank accounts and we have the ongoing Liechtenstein Disclosure Facility, the HMRC tactic is simply to concentrate the minds of a particular group of taxpayers. I doubt that doctors are any worse or any better than many other trades or professions. I assume this must be the first of many initiatives targeting various sections of the business community.

Who will be next on the list? Pharmacists? Tyre fitters? Plumbers? Wheel-tappers and shunters? Accountants and allied professions? It is a novel idea to put each sector under the microscope, but it will take an awfully long time to get through the list. I hope HMRC gets some tax dodgers to confess, but doubt the tax take will be significant from each campaign, especially given the disappointing response to the recently closed second campaign on offshore accounts.

© Jon Stow 2010


Details of the HMRC Tax Health Plan

A tax practitioner's view of the economy - why we have reason to be worried

Dealing as I do with the nitty-gritty results of small business owners' efforts, I am puzzled by some of the predictions for the economic recovery and in relation to the recent short term sales figures of certain more successful stores, notably John Lewis, Marks and Spencer, and House of Fraser.
 
My perception is that service businesses have had a very poor year, and it is perhaps poorer in 2009-10 than for the 2008-09 period to March last year.
 
I believe there is a huge gap between the self-employed (and I include micro businesses operating through companies) and those still in employment, living on at least the same salary or wage that they have had previously. The latter group has benefited from slight deflation and the desperation of the stores to shift goods at smaller margins, but I believe principally because the crash in interest rates has given employees with mortgages extra cash to spend. I remember from childhood the game we used to play, calling out "I am on Tom Tiddler's ground". Those still waged or salaried with lower household costs are spending what used to be the mortgage money at the sales, rather than saving it for a rainy day as many of us might think they should. They are in the privileged if uncertain position of Tom Tiddler's ground. Saving is bound to be rather discouraged also because of the lower interest rates, but people have forgotten how to be prudent and save.
 
I worry that the whole effect of a 0.5% bank rate is to distort the true economy (understandably in many ways) but means that many more chickens are likely to come home to roost as small business struggles along, the jobs market contracts on some of the current big spenders, and the tax hikes bite after the election. The latter will come, no matter who is in Government. Thus the double-dip graph of the nation's economic forecast - a "W" - seems the most likely scenario with little sustained improvement for two or three years.
 
That is how it seems on the ground as a small business owner looking after other small business owners, and I wish it were different.
 
© Jon Stow 2010
 

Business, Small business, House of Fraser, Employment, John Lewis, Money, Economy, Marks & Spencer, interest rates, double-dip, taxation, hike, tax increase