In the case of SCA Packaging Limited v HMRC, SCA appealed against a decision of HMRC claiming income tax on payments in lieu of notice (PILON) made on the termination of the employment of a number of employees on the grounds of redundancy.
As ever in such PILON cases the case heard by the Special Commissioners turned on the wording of a memorandum of agreement between the company and the unions.
The distinction made is a fine one between one agreement that says “in the event of termination…..you will be entitled to a notice period or payment in lieu of notice” (contractual salary effectively and taxable) and “ the employer may make a payment in lieu of notice…” (non contractual and discretionary damages which would be tax free).
Such wording could be important to employees who may wish to take such payment tax free and employers who may wish to make it without later suffering a challenge by HMRC which could lead to back pay of tax.
Careful consideration and expert advice can make the difference of thousands of pounds here so it pays not to take shortcuts that could be very costly in the longer term.
