PAYROLL INSIGHT
PENP or PERP?
Duncan Groves, director and head of employment taxes at PSTAX, explains how new tax law has created unintended consequences and reveals employers need to be vigilant
A pparently, according to dictionary. com, ‘perp’ is police slang for the perpetrator of a crime. After wrestling with the interpretation and ramifications of the PENP (post employment notice pay) rules, I’m beginning to wonder whether this is merely coincidental… My colleague’s article on this subject printed in the September edition, alluded to the issue of the ‘relevant termination award’ (RTA) and its significance in the decision to use the formula to calculate a PENP or, alternatively, to ignore PENP and treat the termination payment as subject to the rules in section 401 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA): namely tax free up to £30,000 and, because it does not constitute earnings under the relevant social security legislation, also free from National Insurance contributions (NICs). Of course, all readers will appreciate that a payment in lieu of notice (PILON) is a RTA. Nine months down the road
from the legislation taking effect, it is well understood that its aim is to ensure that all PILONs are subject to tax and NICs, regardless of how they are ‘dressed up’. The new rules clearly exclude statutory redundancy pay from the definition of a RTA. The effect of this is for the statutory redundancy to bypass PENP and go straight to section 401 where it can be paid tax/NICs-free (barring the unlikely scenario that it exceeds £30,000). It would be logical for this same treatment to apply to all redundancy payments. Public bodies will always pay in excess of the statutory amount, but the non-statutory or ‘enhanced’ redundancy will generally be linked to a similar pre-determined formula relating to number of years’ service. It wouldn’t be possible for a public body to use the enhanced redundancy in any way to create a tax advantage, for example by offering it to an employee as a replacement for
a PILON. So, it would seem perfectly reasonable for enhanced redundancy also to be excluded from the definition of a RTA. Although our reading of the law and HM Revenue & Customs (HMRC) guidance indicated that non-statutory redundancy could not be so excluded, we were persuaded to put the matter to our HMRC technical contacts. See opposite page for what we got back. (The ‘EIM’ references and links are to content within HMRC’s Employment Income Manual .) Hopefully you will be following the logic (and staying awake), but it is time to start putting together some scenarios and numbers so that the “unintended consequences” can be highlighted. Opposite are two case studies: the first describing a fairly typical scenario where there is a PILON; and the second the more likely scenario for a public body. The somewhat unfortunate recipient of the £13,000, less around £1,700 tax/NICs, in case study B will not be overly impressed at having suffered this deduction, especially if s/he was not advised that this would be the outcome of the counter-notice. Perhaps,
...seem perfectly reasonable for enhanced redundancy also to be excluded from the definition...
| Professional in Payroll, Pensions and Reward | December 2018 / January 2019 | Issue 46 22
Made with FlippingBook - Online magazine maker