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Replies to Queries -- 4 -- Late retirement

04 July 2001
Issue: 3814 / Categories:

A 75 year old female employee of a company client is about to go into hospital for treatment in connection with a serious health problem, and is thinking of 'calling it a day' as far as the employment is concerned. The employee has been employed by the company for some forty years, having 'retired' at age 60 from when she commenced to draw a pension from the company's approved pension scheme. In addition to her pension she receives £8,000 per annum in her capacity as payroll assistant.

A 75 year old female employee of a company client is about to go into hospital for treatment in connection with a serious health problem, and is thinking of 'calling it a day' as far as the employment is concerned. The employee has been employed by the company for some forty years, having 'retired' at age 60 from when she commenced to draw a pension from the company's approved pension scheme. In addition to her pension she receives £8,000 per annum in her capacity as payroll assistant. There is no question of redundancy and the employer is anxious to secure a tax-free payment to the employee in a modest amount of several thousand pounds.

Statement of Practice SP10/81 confirms the Revenue's understanding that paragraph 3(b) of Schedule 11 to the Taxes Act 1988 is an exclusion from the tax charge under section 148. What does concern us is section 148(1) which refers to 'payments and other benefits not otherwise chargeable to tax'. Does this mean that, particularly with the age of the employee, the Revenue could argue that the payment is taxable under the punitive legislation on payments to non-approved retirement benefit schemes or under some other section? Does the age of the employee have any bearing on the matter?

Suggestions to ensure that the payment is made tax free would be helpful.

(Query T15,835) – GEG.

 As the proposed payment is not to exceed £30,000, any charge under section 148(1), Taxes Act 1988 is wholly excluded, and Schedule 11 provides further exclusions. Inland Revenue Statement of Practice SP10/81 could have helped had larger payments been intended.

Instead, it is necessary to focus on section 19, Taxes Act 1988 which, in relation to any employment, charges emoluments 'therefrom'. The fact of (long) employment is the most obvious reason for the proposed payment, but such recognition attracted tax in Weston v Hearn 25 TC 425.

However, it is possible that the directors may have an appreciation of this lady beyond her employment and intend an ex gratia payment by way of personal testimonial, which might escape tax as in Commissioners of Inland Revenue v Morris 44 TC 685.

As 'GEG' suggests, the Revenue may seek to attack under rules in Chapter I in Part XIV, Taxes Act 1988. Section 612 interprets relevant benefits as including an ex gratia payment made in connection with an employee's retirement. Inland Revenue Statement of Practice SP13/91 contends that a scheme ('other arrangements') within section 611 can arise from a decision taken at a meeting, a payment by a personnel manager under delegated authority or payments made as a matter of practice to a particular class of employee. The statement suggests an approach for clearance but care should be taken to fulfil the requirements of Inland Revenue Code of Practice 10 (Information and Advice leaflet). – Elder.

  'GEG' has observed correctly that section 148, Taxes Act 1988 applies only to items that are not otherwise chargeable to tax, meaning, by section 832(3), Taxes Act 1988, income tax. Therefore, as in every case where a termination package is being provided, all other possibilities for assessment have to be excluded before section 148 becomes relevant. The 'thought process' can be analysed as follows.

Is the sum an emolument from the employment within section 19, Taxes Act 1988? It is clearly an emolument, but care needs to be taken to exclude the possibility of it being treated as being from the employment. It will be so treated if it can be construed either as consideration for services rendered or as arising from the bundle of contractual rights that comprise employment in general law. Therefore, it is crucial that so far as possible any payment is made unilaterally by the former employer after the employment has ceased. In cases where the employee agrees the termination payment with the employer before the employment ceases, the Inland Revenue has been known to challenge the payment as arising from an oral variation of the employment contract. In some cases such challenges can be difficult to resist.

If section 19 does not apply, the next step is to ask whether what is provided could be assessed as a benefit in kind under section 154, Taxes Act 1988. On the face of it, the employee is not within Chapter II in Part V, Taxes Act 1988 because her emoluments are at a rate of less than £8,500 per annum. It would be worth checking that the correct calculation of emoluments has been done in accordance with section 167, Taxes Act 1988. This is because, although section 155(4) Taxes Act 1988 excludes 'any pension, annuity, lump sum, gratuity or other like benefit to be given on the employee's … retirement', that phrase does not include non-cash benefits, for which a charge under section 154 would still be possible if it could be shown that what was provided was to any extent provided by reason of the employment.

If sections 19 and 154 do not apply, then the next hurdle is section 596A, Taxes Act 1988. This is widely drafted anti-avoidance legislation and can tax sums that were (before 27 July 1989) within section 148 where the employee is at or near retirement age. It functions by taxing any scheme for the provision of benefits 'consisting of or including relevant benefits' (section 611(1), Taxes Act 1988). Relevant benefits are defined in section 612(1), Taxes Act 1988 as 'any pension, lump sum, gratuity or other like benefit given or to be given on retirement … or in anticipation of retirement, or, in connection with past service, after retirement …'. There is an exception where benefits are afforded 'solely by reason of the disablement by accident of a person occurring during his service … and for no other reason', but the client here seems to be suffering from a chronic health problem that would not fall within that restrictive definition.

Some concessional relief from the grip of section 596A is provided by Statement of Practice SP13/91, but it may well not help 'GEG' because the employee already has a pension and, depending on its terms, SP13/91 may not apply. Clearance can be obtained from the Pension Schemes Office as the Statement of Practice describes, if 'GEG' feels that his client has a chance of success.

However, widely-drawn though section 596A is, it does not cover everything. In particular, a retirement benefit provided entirely in kind, with no cash element at all, falls outside section 596A because an asset on its own is not a relevant benefit. Therefore if, as seems likely, section 596A is indeed in point, the answer would be to give an asset to the retiring employee. Section 596A would then have no application.

It would of course be necessary to take care that section 154 did not apply to the provision of the asset, since, as mentioned above, although cash benefits on retirement are excluded from its ambit, provision in kind is not.

If section 596A can be avoided, then section 148 is indeed in point. Following SP10/81, it would seem that paragraph 3(b) of Schedule 11 to the Taxes Act 1988 would exclude the operation of section 148; but reference to the Schedule is not really necessary, because the value of the benefit provided is less than the £30,000 exemption ceiling and so no tax would be payable anyway.

On a tactical note, it is known that termination payments are a current area of great interest to the Inland Revenue's Employer Compliance Units, and so 'GEG' should take the greatest possible pains to ensure that the documentary background to this ex gratia payment supports the tax treatment that his client desires. At the very least, any correspondence with the employee should be carefully drafted to exclude any reference to past service and to focus entirely on the employee's declining health as the motivation for the payment. – Andrew Gotch, Professional Training Partnership.

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