HMRC taxes employee for whole of termination payment by reclassifying it as a PILON, rather than damages for breach of contract

David Reid
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An employee who negotiated a payment for damages with his employer after his employer breached his contract by failing to make him a payment in lieu of notice (PILON), was liable for tax on the entire amount, even though the payment he negotiated was less than the PILON itself.

Ordinarily, payments for damages for breach of contract on termination of employment will be exempt from taxation if the payment is under £30,000. However, in this case, HMRC made its assessment on the basis that the termination payment was in fact a re-negotiated PILON, rather than compensation for the breach of contract. The fact it was less than the PILON the employee should have received under the contract did not turn it into damages.

This case demonstrates the importance of correctly designating payments under the terms of any termination package, and to establish who will be responsible for any taxation that may be due. It also demonstrates the much harder line on this issue that HMRC has been taking in recent times.

The full case can be found here (Case name: Goldman v HMRC UKFTT 2012/ TCO 1999).

Topics: PILON