PAYE corrections: tax advisers as spectators

It might be thought that the audit of the PAYE system which has brought to light the overpayments and underpayments of tax under PAYE would bring in work for accountants and tax practitioners. This is not going to happen.

Overpayments of tax will be refunded by HMRC automatically. Those who have underpaid will fall into two categories. The first will be the people who knew their Codings were likely to be incorrect because they actually looked at them when the brown envelopes came through the post. Any anomalies will be because the benefit figures were wrong or the tax rates or allowances were wrong because there was a second job or a change in circumstances. It is likely that those who did not correct Codings which were wrong hoped that HMRC would not notice.

The second category will be those ostriches who never looked at their Codings. They will still not look; they will shrug their shoulders when they get notification of an underpayment.

Neither category of taxpayer will want to appoint an agent to manage the situation. It would be adding insult to injury to have to pay someone a fee when they already have to cough up some more tax. Anyway, in general it would not be worthwhile for agents to take anyone on as a client to look at their coding history. The fees which could be charged would not be sufficient to cover an agent's costs. Most of the people affected would not have a Universal Tax Reference (UTR) as they would not be filling in Tax Returns. That would mean that authorisation would have to be done with a paper application which would probably take three months for HMRC to process, by which time the Codings issue would be water under the bridge,

None of we agents' existing clients will have a problem. They will have had Tax Returns completed for them. Any overpayment or underpayment will have come out in the wash of Self Assessment.

So we can only look on, shake our heads, wonder at the noise and know that those who have underpaid probably knew there was an issue as they hid their heads in the sand.

What are golden hellos?

Having talked about golden handshakes I ought to mention the “golden hello”, which is a payment made to a future director or employee. It is just possible (only just!)that a payment received from someone other than the new employer – a third party - could be construed as non-taxable.

Where a lump sum payment is made to a prospective new employee, it will be taxed as advance pay for future services unless it represents compensation for some right or asset given up on taking up the employment. An example going back to the 1950s was where an amateur rugby player gave up that status upon turning professional. In those days there was no turning back to amateur status and therefore to return to Rugby Union from the professional Rugby League. His payment was held not to be taxable. In modern times the case for a payment escaping tax would be hard to sustain given the general attitude of HMRC where even a perfectly arguable situation would fall in the face of the expense of defending it.

Usually a payment to a prospective employee about to join will be an emolument of his or her employment and therefore subject to tax and NIC. Effectively it is a signing-on fee similar to that offered to former England goalkeeper Peter Shilton upon his transfer from Nottingham Forest to Southampton (Shilton v Wilmshurst (64TC78) 1991). Lord Templeman explained “An emolument 'from employment' means an emolument 'from being or becoming an employee.' The authorities are consistent with this analysis and are concerned to distinguish in each case between an emolument which is derived 'from being or becoming an employee' on the one hand, and an emolument which is attributable to something else on the other hand.'”

Peter Shilton's payment was found to be taxable in full and almost always this will be the rule for payments made to employees prior to or upon their starting a new job.

© Jon Stow 2010

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