Simplifying the multitude of different tax and national insurance rules governing employee benefits and expenses is a worthy goal, and the Office of Tax Simplification (OTS) has published its interim report identifying a number of "big picture" issues and potential "quick wins" to make things simpler for employers.
Termination payments - £30,000 tax exemption to be reviewed?
Buried deep within the report is a call for the £30,000 tax exemption on termination payments (which was set at the current level in April 1988) to be reviewed and increased, in line with the retail price index, to £71,000. Alternatively, if HMRC is minded to review the exemption, thought could perhaps be given to increasing it to the upper limit on unfair dismissal compensatory awards (currently £74,200)? This would certainly simplify things when it comes to settlement discussions and tribunal awards, as currently a tribunal is required to 'gross up' any award in excess of £30,000.
Unfortunately, any policy recommendation to increase the level of exemption is beyond the remit of the OTS's review but it is clear that this is an area which requires further consideration as the current level of exemption seems somewhat arbitrary in relation to most well-paid jobs and, as the OTS points out, it has become unclear what the policy objective is behind the exemption when someone loses their job and whether the tax system is really supporting that objective.
"Auto Pilons" - clearer guidance needed
The OTS has also called on HMRC to review its controversial policy on "auto-PILONs". The tax treatment of payments in lieu of notice (PILONs) can be a tricky area. Much will depend upon the provisions of the employment contract. However, the real difficulty arises in relation to the HMRC's policy in relation to "auto-PILONs". This applies where the contract of employment is silent on the employer's ability to pay a PILON, but where a PILON is paid automatically by the employer without a "critical assessment" being made by the employer as to the employee's likely losses. The difficulty for any employer is in showing that it has carried out a "critical assessment".
The policy is controversial as there is no legislation or case-law to support it. HMRC has confirmed that it would like to see legislation to clarify how these types of payments should be taxed but until then, the risk remains that non-contractual PILONs may still be subject to tax as earnings in the normal way, unless the employer can show that it has followed a procedure for making a "critical assessment" in the making of a PILON payment.
Termination payments and overseas employees
The OTS has also noted that the operation of the current tax regime in relation to internationally mobile employees is unnecessarily complex and in need of revision and clarification.
Increasingly individuals are being assigned to work overseas or being employed to work in a number of jurisdictions. Such assignments can give rise to a number of issues, not least on termination. It may be possible to structure termination payments so that the employee enjoys tax relief in relation to periods of foreign service. However, consideration also needs to be given to whether the payment (in full or in part) may be taxable in another jurisdiction. The rules on this are complex and the arrangements, and appropriate protections for both the employee and employer, should be addressed and properly set out in any settlement agreement.
For further advice on the issues arising from the OTS interim report, please do not hesitate to contact any member of the team.