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Sam, Accountant
Category: Tax
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Experience:  26 HMRC expertise, PAYE, Self Assessment ,Residency, Rental Income, Capital Gains, CIS ask for Sam Tax
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Sam In 2013 I was obliged to sign a mutual agreement with

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In 2013 I was obliged to sign a mutual agreement with my previous employer following an investigation and the threat of being dismissed misconduct. The company initially offered me £100 covenant. My lawyer asked month gross salary of which the £30k tax free or at the very least 3 months in lieu of notice as my employment was being terminated.
The payment was made as payment in lieu of notice and fully taxed.
Could I claim back tax on 30k of these 3 months or because they appear as PYLON I'm not?
, I'm Keith and happy to help you with your question.
According to Martin Searle [Solicitors] the following rules apply:
'Pay in lieu of notice (PILON)
Whether pay in lieu of notice is taxable depends on whether such payments are allowed a person’s contract of employment. This information could also be in an employee handbook rather than the written contract. Where they are allowed, they will be taxable like other contractual payments. Where they are not, they can be paid gross and will count towards the £30,000 exemption.
Where it is the custom and practice of an employer to make a payment in lieu of notice (PILON) even if it is not part of the contract, HM Revenue & Customs may consider that tax should be deducted. The question is whether payments are made automatically or considered on each occasion.
Compensatory and ex-gratia payments (non-contractual) payments
Compensatory, ex gratia (non-contractual) payments made of office or employment are exempt from tax on the first £30,000.'
From this it appears to me pretty clear that your situation mirrors the last example and the first 30K should be tax free but HMRC are sure o stick to the 'custom and practice' route quoted earlier.
You should take this up with your tax office and demand relief 30K, but I fear that you will be in long fight before you grind them down.
I do hope I have shed some light on your conundrum and shown you a way forward in this matter.
Customer: replied 3 years ago.

Many thanks,

just one last clarification.

As this seems a bit tricky, would you consider appropriate to include it in my self assessment? If I do I will receive any tax due back and if then they don't agree I would have to return a hefty sum back. Would you just take it up after sending my self assessment?

Many thanks again

I would prepare your self assessment returns using the figures quoted in your P45 or your P60, both supplied by your employer. As you have been discharged then, of course, you will not get a P60, just a P45.
From the tenor of your question these figures will include the full tax deducted and you could make an entry in the notes box indication that 30K of your emoluments from this employer are not taxable.
Once you have received HMRC's statement of tax due you can raise the matter with your tax office if the 30K has not been allowed.
Please be so kind as to rate me before you leave the Just Answer site.

As you had asked answer your question and I am an ex HMRC employee - this payment WOULD be liable to tax, so your employer have acted appropriately, and there is no recourse payment to fall under the tax free consideration of the first £30,000 being tax free.
My colleague has quoted information from a solicitor and not from HMRC guidance (which after all is the where the final decision of the treatment of any payment sits)and its one mans opinion not legislation
The fact that your lawyer was asking in lieu and this is the condition under which they were made, in itself actually formed a contract making these payment taxable by
1) reason of employment
2) Made within the new contract formed due to your dismissal
3) That it would appear you were accused of gross misconduct following an investigation - rather then the employer failing to meet their contractual obligations - so this cannot be argued as a compensation payment
Once its been established what the payment could not have been - and when this exhausts all the reasons under which it could have been paid tax free. it leaves the payment taxable under Section 62 IEPTA 2003.
So you do declare the lump sum payment on your self assessment with the tax suffered but are NOT due the first £30,000 tax free and my colleagues comment
"You should take this up with your tax office and demand relief 30K, but I fear that you will be in long fight before you grind them down" is because there is no fight to be had - or HMRC would agree straight up to the tax free position, so the fight will cost you time money, and also - if you through self assessment have the tax refunded, and then have to pay it back - interest and possible prnalties incorrect tax return submission - so will be worse off.
SO I urge you to think carefully before asking tax refund to be made through self assessment.
My advise submit the tax return and allow the tax to stay in place, and NOT claim the £30,000 tax free, then write to HMRC asking consideration (I wont lie - they will come back and advise this is fully taxable reasons advised above) but you then have fully satisfied yourself that you are asked, and established the correct position rather than wonder "what if"
let me know if I can assist any further

HMRC guidance must always be taken with a pinch of salt. They always tend to interpret legislation as they would like it to be framed, not what it actually is which perhaps explains that they loose the majority of their disputed demands on appeal.

You can safely make a request refund over the 30K, and your tax office may well jib. I did warn you of this possibility and the need to prepare yourself dispute with over this matter. In the end the authorities can only say no and you are not out of pocket from the exercise.

I am so sorry you must be so confused which is NOT what Just Answer is meant to be about. Its meant to be a service that offers accurate and legislatively sound advise from UK tax experts - which is not always the case I am afraid and in my time working (26 years) and providing accountancy services (since 2008) none of their legislation has ever fallen into the category of "take with a pinch of salt" (would be lovely it it was!)

If you wish to questions, please do feel free to do so, and just indicate whether you wish to take mine or Keiths advise as I would not wish you to be compromised further.

Thanks Sam

Long experience of HMRC and their strict adherence to their manuals, which reflect the law as they would like it to have been drafted, not necessarily as it is expressed, has always made me regard their opinions with a pinch of salt.
As I told you, you have already had the tax deducted and it costs you but a second class stamp to ask refund and if you do not succeed well you will have lost nothing.
Customer: replied 3 years ago.

Thanks to both of you,

Sam can I ask I final clarification please.

As I was forced to sign the agreement due to the threat of gross dismissal and they first wanted just to give 100£ due to confidentiality,

all of this despite I did nothing wrong in fact the regulator granted my licence back. My lawyer had asked month gross or at least 3 months in lieu considering they were a small sum compared to the bonus that would have been due to me. Apart from the stress the huge amount of money spent of lawyer I did get in the end a very small amount on which I was after all taxed. Would you think HMRC cares about any of this or just because my final doc says PILON then no tax reimbursement is due to me. Thank again

I did caution you that the situation was not clear cut and my colleague gave you the standard HMRC opinion. I would try a claim; maybe it will be allowed and if it is not well you are not out of pocket as the tax has already been paid.
Please don't forget my rating.

Thanks just to let you know I am replying now

Thanks to respond, much appreciated

My answer is a careful reviewed technical answer (I never do things as standard!! or people would pay too little tax or not enough , which would defeat the object of my current accountancy and tax consultant position and make a mockery of me charging them fees advise I give! )

The issue here is that you were to be sacked dismissal and so as if it was you in breach on contract (in essence) this payment was made under those terms - and whilst I full appreciate the terrible price you have paid in view of the fact you have been cleared of any wrong doing, as you got your licence back,

HMRC can ONLY deal with the facts as they were at that time (mores the pity) Now you advise this was in recognition of the lost bonus, as they were going to sack you should you not accept the payout ,its even more a position of a payment liable to tax.

Buts all PILONS - are paid to suggest/indicate that an employee is NOT required to work notice and goes with immediate affect and the payment made in compensation of that legal entitlement. Even if your employment contract stated that you only had to work a months notice, the fact the payment was made instead of the bonus, instead of being sacked - and it was called PILON and not compensation - all amount to why all the payment was liable to tax and will remain so

Thanks Sam

Sam, Accountant
Category: Tax
Satisfied Customers: 14195
Experience: 26 HMRC expertise, PAYE, Self Assessment ,Residency, Rental Income, Capital Gains, CIS ask for Sam Tax
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