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bigduckontax, Accountant
Category: Tax
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Experience:  FCCA FCMA CGMA ACIS
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Tax Status Of Air Traffic Control Loss of Licence Lump Sum

Customer Question

Tax Status Of Air Traffic Control Loss of Licence Lump Sum Payment.
I would appreciate some information. I suffered suffered a mini stroke with an emergency hospital admittance. As a result, I have lost my medical licence to practice. My company operates a contractual loss of air traffic controller’s licence benefit scheme. This states that two years salary will be paid on termination of employment due to medical loss of the licence. The scheme is run by an insurer to which the company pays a premium. I am about to be terminated by my employer who has been excellent and ready to pay out the lump sum.
I always believed that any payment made under the loss of licence scheme would be exempt of income tax and national insurance contributions, as determined in the High Court ruling below.
EIM13610 - Termination payments and benefits: Section 401 ITEPA 2003: exceptions: payments on account of injury or disability: general
Section 406(b) ITEPA 2003
A termination (or change) payment or benefit is excepted from tax under Section 401 ITEPA 2003 (see EIM13000) if it is paid wholly on account of:
• an injury to an office-holder or employee, or
• the disability (see EIM13620) of such a person.
EIM13630 - Termination payments and benefits: Section 401 ITEPA 2003: exceptions: payments on account of injury or disability: meaning of disability: Hasted v Homer
Section 406(b) ITEPA 2003
The High Court decision in Hasted v Horner (67TC439) established two tests that must both be satisfied for the disability exception to apply:
• there must be an identified medical condition that disables or prevents the employee from carrying out the duties of the employment. Medical evidence confirming the precise nature of the disability must therefore be seen in all cases and it must be clear that the nature of the disability prevented the employee carrying out the specific duties of the employment
and
the payment must be made on account of that disability and on account of nothing else. This means that the facts demonstrate that was the sole motive of the payer.
I believe that I have fulfilled the above two conditions. I have sent all my medical and consultant’s reports to HMRC, and my company has sent all my employment records and contract to HMRC to obtain clearance from HMRC of a tax free payment.
HMRC initially confirmed the tax free status by letter, but now have reconsidered their position and state that tax and national insurance has to be paid as the loss of licence benefit was part of my contract, and discounts the disability aspect.
I’d be grateful for any insight or viewpoints as to this decision, and whether I should consider an appeal to the HMRC tax specialist
Thanks
Submitted: 2 years ago.
Category: Tax
Expert:  bigduckontax replied 2 years ago.
Hello, I'm Keith and happy to help you with your question.
Firstly, have HMRC given any reason for their change of ideas, any statutory supporting detail of case law etc, or are they just doing the classic HMRC try on in the hope that you will simply knuckle down and accept their decision?
I suggest that an appeal is necessary in this case. I would, however advise you that it is essential that you employ a trusted, local professional to handle the appeal process. They should be one well experienced in dealing with such disputes. An error on your part should you attempt to represent yourself could cost you dear. Remember the old adage that he who represents himself has a fool for a client!
I do hope I have shown you a way forward with your problem. Do not try to do it on your tod, though.
bigduckontax, Accountant
Category: Tax
Satisfied Customers: 3613
Experience: FCCA FCMA CGMA ACIS
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Customer: replied 2 years ago.

Thanks Keith,

Appreciate your comments.Will certainly take professional advice.

Best Wishes,

Gordon

Expert:  bigduckontax replied 2 years ago.

Delighted to have been of assistance, Gordon.

Thank you for your excellent support.

Customer: replied 2 years ago.

Hi Keith,

Would you mind if I ask a quick question. As I explained earlier I will receive a lump sum of two years salary about £130000 from my employer (from their loss of licence insurance policy) At the moment HMRC say the sum will be fully taxed. To minimise tax, my company have agreed to put £110000 as an employer contribution into my company pension using my unused pension allowance for this year. and using the unused carry forward allowance from the previous 3 years.Do you think the lump sum would be pensionable for full tax relief of the £110000

Thanks

Expert:  bigduckontax replied 2 years ago.
Remember, Gordon, that the first 30K of a redundancy payment is tax free.
It is a great pity that arrangements were not made for the insurance company to pay you direct. The moneys disbursed would thus probably escape taxation altogether. This is another item to put before whosoever you instruct in this matter.
Providing the contribution levels do not breach firstly the 100% of emoluments rule and the 50K limit imposed by the current administration on 13/14 & 14/15 tax years, 40K in 14/15 [this includes any contributions you yourself have made to pension funds] also then this would reduce any tax liability substantially.
Customer: replied 2 years ago.

Hi Keith,

Sorry for the late reply. Just been dragged shopping!!

I appreciate your reply and time spent. I realise the implications now of not being paid directly by the insurance company. My company has admitted the whole matter has been a steep learning curve for them as I've had to read up on HMRC legislation to get things moving.

Thanks for confirming my plan to put as much into my pension as possible using this years unused pension allowance and that of the three previous tax years. I think that really is my only option at present. I've a couple of employment lawyer friends studying the HMRC decision on the lump sum payment, so I think I may appeal if they feel that the HMRC decision is flawed.

You've been a fantastic fund of knowledge again, and I respect your judgement and explanations.

Thanks again,

Best Wishes,

Gordon

Expert:  bigduckontax replied 2 years ago.
Gordon
There is yet another opening. Your ex employers admit they made a horlicks of your redundancy. Why not pressure them to refund the tax and NI you have unnecessarily incurred by means of an ex gratia payment?
You might run that past your advisers in this matter.
Customer: replied 2 years ago.

Hi Keith,

Thanks again for the reply. Appreciate that idea. I will certainly mention this to my advisors and discuss the matter with them.

Best Wishes,

Gordon

Expert:  bigduckontax replied 2 years ago.
Best of fortune, Gordon.
Regards
Keith
Customer: replied 2 years ago.

Thanks Keith,

Appreciate your help and concern

Gordon

Expert:  bigduckontax replied 2 years ago.
Must respond to clear my question list, Gordon.
Customer: replied 2 years ago.

Sorry Keith,

Not quite sure what I do to clear your question list??

Gordon

Expert:  bigduckontax replied 2 years ago.
You don't have to do anything Gordon. Every time you put something on line for me it appears as a question awaiting reply in my question list and there it stays until I make some response which clutters up proceedings.

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