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Tax liability advice following COT3

Customer Question

To Whom it may concern, I would like to ask a question on tax liability please. My employment was terminated end of May 2012 when I have settled ET case for discriminstion and signed COT3 , compromise agreement, with my former employer. As a result of my case I have suffered stress and ill health and submitted compensation request (schedule of loss) for £28,606.99. My former employer did not accept liability but agreed to compensate with condition that I would drop all claims and would settle all the claims as well as terminating my employment with them. I have also signed an confidentiality agreement. As a result of this agreement , I have received £70,000 in compensation.


I have fully paid NIC and income tax separately for any of  accrued holiday pay, payment in lieu of notice (PILON) until the termination of my employment on end of May 2012 as my former employer deducted this through PAYE system.


Due to ill health and giving birth, I have not been able to seek another employment since.


I have contacted HMRC in September 2012 but they have so far failed to provide any tax advice despite my chasing them several times. I understand Employment termination team is looking into my case for about 1 year now. They have asked for a copy of COT3 and employment contract previously but when I asked them to give me a formal request for disclosure of COT3 agreement as I was and still am legally bound by confidentiality agreement of COT3. They said they did not need the document and just wait for them to contact me. Can you please let me know what tax liability I have and how to work it out? What form do I have to submit to HMRC please? Thank you

Submitted: 3 years ago.
Category: Tax
Expert:  Nicola-mod replied 3 years ago.
Hello,

I've been working hard to find a Professional to assist you with your question, but sometimes finding the right Professional can take a little longer than expected.

I wonder whether you're ok with continuing to wait for an answer. If you are, please let me know and I will continue my search. If not, feel free to let me know and I will cancel this question for you.

Thank you!
Nicola
Customer: replied 3 years ago.

Dear Nicola,


 


Thank you for your update.


 


I really appreciate that you are trying hard to fine the right expert with all the relevant knowledge as I would like to get the right advice.


 


Please do carry on searching for the right expert.


 


Just out of curiosity. wouldn't a tax accountant on employment compliance have the knowledge?


 


I thought I ask as that is what HMRC told me who was supposed to look into my case.


 


If you require further information, please do not hesitate to ask


 


Thank you for your help with the matter


 


Regards


 


H

Expert:  Nicola-mod replied 3 years ago.
Hello H,

We will continue to look for a Professional to assist you.

Thank you for your patience,
Nicola
Expert:  Nicola-mod replied 3 years ago.
Hello,

I apologise as we have not yet been able to find a Professional to assist you. Do you wish for me to continue to search for someone to assist you or would you like for us to close your question at this time?

Thank you for your patience,
Nicola
Customer: replied 3 years ago.

Dear Nicola,


 


Thank you for your update.


 


I would like you to continue the search for the time being but obviously I can not wait indefinitely.


 


Can you please explain what is the reason for difficulties in finding an professional?


Is it because you do not have tax experts specialized in employment issues? In such case, there wouldn't be much point for the search to continue.


 


Please let me know


 


Thank you


 

Expert:  bigduckontax replied 3 years ago.
Hello, I am Keith and ready to assist you with your problems.

This is an easy one. The rule is:

'Certain types of damages are non-taxable – for example, compensation or damages awarded for personal injury whether received in a lump sum or over a period and whether awarded by a court or agreed in an out of court settlement.'

I suggest you let it rest with HMRC, as far as I can see these are agreed damages and thus escape income tax.
Customer: replied 3 years ago.

Dear XXXXX,


Thank you for your reply


Can you please explain to be or let me know what kind of damages are non taxable?


The compensation I received following COT3 agreement doesn’t specifically state it is for damages but sates it is to terminate the employment contract and for me to drop all the cases against my former employer.


It also states


For the avoidance of doubt, the settlement figure includes the sum of £9,203.16 which represents the maximum figure payable for statutory maternity pay to which the Claimant would have been entitled had she remained in employment with the Respondent


Therefore, I am concerned that HRMC will regard it as earnings or income or replacement for lost future income.


I understand if the settlement ( compensation) is related to termination of employment , first £ 30k is exempt from tax but rest is subject to income tax and/or NIC ( possibly) but my case is complicated as I had made claims for Injury to feelings and aggravated damages due to ill health I suffered.


Hence I would really appreciate it if you can give me some advice on how I can explained to HMRC what categories my case sits under so my compensation is not subject to full NIC and income and I have better understanding of my case for tax purposes when I go to HMRC tax office.


Please do not hesitate to contact me if you have any questions


Thank you for your help with the matter


Kind regards


H

Expert:  bigduckontax replied 3 years ago.
Statutory Maternity Pay is normally paid by the employer through payroll under PAYE. It is a taxable emolument. In this case it was not so paid so is liable to income tax, though the payer may well remit it to you having deducted tax at the basic rate.

Compensation settlements for illness or injury at a mutually agreed level or ordered by the Court are, as I said, not liable to Income Tax.

You are correct as to the 30K limit for compensation on termination of employment, but the payment for the illness/injury element falls outside the 30K limit.

I recommend that in such cases you always communicate with HMRC by letter and never verbally keeping copies of all correspondence. If finally an erroneous assessment for income taxis made (not an unusual occurrence) it can be immediately appealed.

Does this help?
Customer: replied 3 years ago.

Dear XXXXX,


Thank you for your update. but it is still not clear to me what damages are and how I can articulate my case to HMRC that they were damages. Because in the COT3 agreement, whilst it was mutually agreed, my former employer did not accept liability or state the settlement was for injury..


Therefore, what can I use to cite to support my settlement is damages/compensation for injury and not income?


Furthermore, HMRC states in their website that



Many terminations are dealt with by a compromise agreement (see EIM12955) and will refer to claims that the employee has made against the employer before an Employment Tribunal or the Courts. Since the compromise agreement will “settle all claims” it settles those claims and some of them may relate to issues other than disability. It follows that some part of the payment must be apportioned to those claims and taxed accordingly. For example, if a claim for compensation for unfair dismissal has been made to a Tribunal and the compromise agreement “settles all claims” then that claim has been dealt with by the agreement. Part of the payment then relates to compensation for unfair dismissal and falls within s401 ITEPA 2003 but because it is paid for a reason other than disability it cannot qualify for full exception under s406(b) ITEPA 2003. Such apportionments are made on a “just and reasonable” basis.




Therefore I feel that HMRC may seek apportionment. In such case, I need to know how to categorise my settlement correctly so I can ensure the apportionment is appropriate and right categorisation has been done.


I would appreciate it if you can expand on your previous on answer what damages are or ‘Compensation settlements for illness or injury at a mutually agreed level or ordered by the Court are not liable to Income Tax’ means.


In summary, I would like to know:



  1. even if my COT3 states my former employer did not accept any liability, can I still claim settlement as compensation settlement for injury and therefore does not attract income tax? As you know COT3 is not a court decision but compromise agreement with ACAS where negotiation has been reached to settle the case. Therefore I am a bit confused if it can be seen as awarding for damages/compensation for injury or not.

  2. As you know all the COT 3 states that, this agreement is to ‘settle all claims’. If HMRC were to seek apportionment because the phrase ‘settle all claims’ was used, what can I use to support my appeal? I have read ‘Oti-Obihara v. HMRC’ case and wondered if it applied to my case.

  3. Under what section, does my case sit under? Is it Section 406(b) ITEPA 2003 of EIM13630? Or Section 406(b) ITEPA 2003 of EIM 13637? Or Is this part of income tax area or just exemptions? I would like to know if HMRC is applying right rules for the case.

  4. You advised communicating with HMRC by writing; does this mean I should not visit their tax office to discuss my case?


 


Thank you for your advice in advance and look forward to hearing from you


 


Kind regards


H

Expert:  bigduckontax replied 3 years ago.
Yes, I am. I would never visit an HMRC office to discuss a case. The only time I did I was faced with an Inspector who constantly got hold of the wrong end of the stick if he could even find the stick at all!

From what you say HMRC would appear to have made an assessment. You appeal such an assessment by simply writing a letter to them telling them that they are wrong. Compensation, whether awarded by the Court or by way of an out of court settlement is not income and not liable to income tax. You may have to plod your way through the layers of
HMRC bureaucracy until you reach someone who actually knows the rules. There is no point in getting involved in Sections of the various Acts.
Customer: replied 3 years ago.

Dear XXXXX,


 


Thank you for your endeavor thus far.


 


Unfortunately I feel your answers are too high level and do not address my questions. I am seeking more specific answers and guidelines that are tailored to my case.


 


On this occasion, I would like my questions to be referred to another expert who might be able to provide more in-depth response please.


Thank you

Expert:  bigduckontax replied 3 years ago.
I feel I answered your question correctly.

If HMRC have made an assessment then you merely lodge an appeal by writing a letter to them telling them that the sums assessed were compensation not income. Only after this simple paper process, and it may take several letters, has failed need you pursue other routes. If HMRC have not actually issued an assessment you need do nothing.

At this stage your problem is simple and there is no need to get involved in minutiae.

As I said I believe I answered your inquiry honestly and correctly, but I will refer it if you insist.
Customer: replied 3 years ago.
Relist: Answer quality.
Answer was too high level and did not address my question
Customer: replied 3 years ago.

Dear XXXXX,


Thank you for your prompt reply.


Please refer my case to another expert.


I would like to know base on what ground I need to make my appeal and I need more in-depth information as I have stated


Thank you

Expert:  Nicola-mod replied 3 years ago.
Hello,

It seems the professional has left this conversation. This happens occasionally, and it's usually because the professional thinks that someone else might be a better match for your question. I've been working hard to find a new professional to assist you with your question, but sometimes finding the right professional can take a little longer than expected.

I wonder whether you're OK with continuing to wait for an answer. If you are, please let me know and I will continue my search. If not, feel free to let me know and I will cancel this question for you.

Thank you!
Nicola
Customer: replied 3 years ago.

Dear Nicola,


 


Please continue the search for the right professional


 


Any questions, please do not hesitate to ask


 


Thanks

Expert:  Nicola-mod replied 3 years ago.
Hello,

We will continue to look for a Professional to assist you.

Thank you for your patience,
Nicola
Expert:  Nicola-mod replied 3 years ago.
Hello,

I apologise as we have not yet been able to find a Professional to assist you. Do you wish for me to continue to search for someone to assist you or would you like for us to close your question at this time?

Thank you for your patience,
Nicola
Customer: replied 3 years ago.

Dear Nicola,


 


Thank for trying to find an expert.


I will wait for a couple of more days and if you can't find anyone, please close my question and refund me as it has been quite a few days.


 


Kind regrads

Expert:  Nicola-mod replied 3 years ago.
Hello,

We will continue to look for a Professional to assist you. Please let me know if you want us to close the question and issue a refund.

Thank you for your patience,
Nicola
Customer: replied 3 years ago.

Dear Nicola


 


As I have not heard from you for a week and no expert has been found, can you please close my question and refund my £ 22.


 


Any issues, please let me know


 


Thanks


 


 

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