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

Pitfalls in faulty contracts – partnership and shareholder’s agreements

I have been writing elsewhere about the dangers of using templates and adapting borrowed contracts and agreements rather than paying for professionals to draw up new ones. It is time to be specific.

With regard to partnership business assets, there are generous, though one might say prudent, reliefs from inheritance tax which can amount to 100% of the value of the capital account and 50% of the share of buildings, land, and plant and machinery. That means that the heirs have the opportunity to receive up to the whole value of a deceased partner’s share of a business, depending on circumstances. However, partnership agreements understandably aim to preserve a business beyond the death of a partner, and therefore there is often a clause allowing the remaining partners to acquire the interest of the deceased member. That is a sensible arrangement, but a partnership agreement should give the living partners an option to purchase but not a requirement to do so. If they have an obligation that would be considered a debt due under contract in the eyes of HM Revenue & Customs, and business property relief would be lost, incurring a tax liability at 40% on what might be a very considerable amount.

A similar problem might arise if in a shareholders’ agreement, upon the death of a participator, shares which would otherwise have qualified for business property relief would not do so because the other members were obliged to acquire the shares of the deceased rather than having an option to do so.

Of course there is a lot more to this subject than I have mentioned. Every situation needs to be looked at separately and financial advisers may have solutions as to how help the still living members buy the interests of the deceased estate once we understand that they should not be obliged to do so.

As with all legal documents, with a partnership or shareholders agreement, get professional advice before diving in, and do not re-hash other people’s work because they might have got it wrong or the circumstances in which they were acting may have been different.

© Jon Stow 2009

Amateur tax management and why businesses need professional tax advice

I had a telephone call this week from a chap who said “I am phoning because I want to start a company”. My immediate reaction after thanking him for the call was to ask why he needed a company, if he meant a limited company. This is because from the tax point of view it is not necessarily a good idea to have a company, and there needs to be a commercial reason if profits are going to be limited initially or there might be trading losses which would be useful to an individual who is a current taxpayer-employee, or has recently been one.

It turned out that there was a commercial reason for having a company. The guy is going to do outsourced work for a Government department which insists on contracting its labour through a company. That in itself is laughable in an era in which HMRC has tried to crack down on such arrangements through IR35, attacked umbrella company arrangements, and whined, actually quite unreasonably, about “false self-employment” in the construction industry. One wonders whether the different branches of Government in Whitehall ever speak to each other.

My caller earned himself some “Brownie points” in my book by actually asking a professional adviser. So often people do not when they should, and I am not talking about the pensioners I mentioned in my previous piece, who frankly should not have to seek professional help.

As I said, my caller had a commercial reason for incorporating which was good to know. He had asked for help. However, many people spurn professional advice and just go ahead. A few months ago I came across an instance where two ladies had gone into business. They had formed a company but were struggling to get their business concept off the ground. I could understand why they wanted limited liability. However they had given personal guarantees in respect of borrowings so were not protected from their largest creditors. I felt that with early substantial losses and both having decent full time jobs as well, they could have done with having their losses set off against their personal income, so surely should have formed a partnership, though not necessarily a limited liability partnership where losses may be harder to relieve. They were right to consider commercial reasons first but those commercial reasons should include protecting cash flow through proper management of tax losses

There are lots of people who need help but will not pay to save tax, which will far outweigh the professional fees. Even this year's Finance Act (2009) and the loss carry-back provisions are a minefield, with incorrect loss claims likely to be quite costly for someone who does not understand the pitfalls. There are other tax reasons not to incorporate quite apart from the issue of early trading losses. If the business owner wants maximum tax relief on an expensive car, again he or she should consider operating as a sole trader or through a partnership. In the end, it is essential and cheaper to obtain professional tax advice. Of course I would say that, but then I am in a position to know.

One thing I had drummed into me on sales courses is that prospects don't know what they don't know. In tax or anything else, it is our job to help them, and it's for their own good, not to line our pockets.

© Jon Stow 2009