COMPLIANCE
Justine Riccomini MSc FFTA AIPA Chartered MCIPD ChFCIPP, head of taxation, the Institute of Chartered Accountants of Scotland (ICAS), outlines what happened when a termination of employment settlement agreement relating to a restrictive covenant payment arrived before the First Tier Tribunal (FTT)
Main points l Mrs A’s employer deducted tax from a payment made to her under a settlement agreement l Mrs A submitted an overpayment claim on her tax return l the FTT ruled that the payment was a restrictive covenant and should be taxed in full.
T ax cases relating to termination payment settlements aren’t as common as they used to be. This case, known as ‘Mrs A v HM Revenue and Customs (HMRC)’ was heard at the FTT and the decision issued at the end of 2022. Background HMRC issued a closure notice to Mrs A in respect of a claim she had made in her
2018/19 tax return, which would have resulted in an overpayment of tax amounting to £467,684. The claim was reduced to £6,136. Therefore, the appeal to the FTT involved a considerable sum of money (£461,548). Mrs A had received a termination settlement amounting to £1,055,000 in May 2018 in return for her agreement to discontinue a claim to the employment
tribunal and respect confidentialities. HMRC considered that the settlement was taxable under Sections 401(1) and 403(1) of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003), allowing for the first £30,000 to be exempt from taxation. Mrs A argued the payment received wasn’t connected to the termination of her employment but was made in return for her agreement to respect the confidentialities.
| Professional in Payroll, Pensions and Reward | June 2023 | Issue 91 20
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