Friday last week saw the release of an almost comical consultation document setting out HMRC’s proposals for the simplification of the tax and NIC treatment of termination payments.

As many people will know, the tax treatment of termination payments depends on the reason for the payment.  The most often confused aspect is whether a payment in lieu of a notice is taxable.  If there is a contractual right to pay the employee in lieu of notice (a so called PILON), the payment is taxable.  In the absence of a contractual right to pay, the payment in lieu of notice is not taxable (at least up to a maximum of £30,000) – essentially because this latter payment is damages for breaching the contractual notice provision.  Failure to adhere to the contract in this way gives rise to a wrongful dismissal claim (remember that phrase for later!).

HMRC propose to do away with the artificial distinction between contractual rights to pay in lieu of notice and payments in lieu that aren’t contractual.   The tax exemption is not to be available for either a PILON payment or a payment for breach of the notice provision (but see below for the general exemption that is available if there is a statutory redundancy).

However, elsewhere in the document HMRC have suggested that a separate exemption should be available for payments made in respect of unfair or wrongful dismissal.  I’m sure I’ve seen a reference to wrongful dismissal somewhere else.  Oh yes.  It’s the term of art used to describe a dismissal that is not in accordance with the contractual agreement.  So pay in lieu is taxable while wrongful dismissal compensation (being exactly the same thing at law) is not.  Right hand, meet left hand.

The consultation goes on to propose that the main exemption for termination payments will only be available for statutory redundancy situations.  The suggestion is to provide a basic exemption limit (£6,000 is the amount used in the examples in the consultation document) that kicks in when the dismissal is for one of the statutory redundancy reasons and then to increase that amount annually (£1,000 in the consultation document).  The exemption will cover all payments be they statutory redundancy, PILON, ex gratia and even (apparently) contractual entitlements like accrued holiday pay.  Not wishing to be cynical or anything, but doesn’t that mean everyone will want to be made redundant?   Often terminations for being rubbish at one’s job or for sickness are dressed up as redundancy to give the poor soul a chance of getting a new job.  These “redundancies” are accompanied by explicit warnings of dire consequences if the employer supports an employee’s assertion to, for example, an insurance company to allow him to claim under a policy that pays out in the event of a “redundancy”.  The redundancy label is really just a less ugly wrapper for the dismissal.   Even more dire warnings would need to be issued to help make sure that employers aren’t complicit in dodging tax if the consultation leads to these proposals being introduced.

And in a finale of silliness comes the proposal to take away the problems of apportioning compensation for discrimination (which will continue to be receivable tax free) by requiring that the tax free nature of these payments will only be available if the award is made by an Employment  Tribunal.  So rest assured, you sensible employers out there, no sensible employee is going to settle a half decent discrimination case before going to Tribunal because to do so would mean that the compensation will be taxable.

It seems unlikely that the proposals will be adopted in anything like their suggested format – at least I hope so.  Even accepting that it is only a proposal, the document shows a wholly disconcerting lack of awareness of basic contractual principles of how and why employment settlements are reached and of the likely consequences for both employees and employers of making such agreements harder and more costly to reach.  It is impossible to avoid the conclusion that this is not about simplicity and fairness at all, but is actually an overt tax-grab regardless of the consequences.