Statement of Practice 1 (1994)
Published 17 February 1994
© Crown copyright 1994
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1. Section 309(1) and (3) Income Tax (Earnings and Pensions) Act (ITEPA) provide that statutory redundancy payments shall be exempt from Income Tax as employment income, with the exception of any liability under section 401 of that Act.
2. Lump sum payments made under a non-statutory scheme, in addition to, or instead of statutory redundancy pay, will also be liable to Income Tax only under section 401 ITEPA 2003 provided they are genuinely made solely on account of redundancy as defined in the Employment Rights Act 1996. This will be so whether the scheme is a standing one which forms part of the terms on which the employees give their services or whether it is an ad hoc scheme devised to meet a specific situation such as the imminent closure of a particular factory.
3. However, payments made under a non-statutory scheme which are not genuinely made to compensate for loss of employment through redundancy may be liable to tax in full. In particular, payments which are, in reality, a form of terminal bonus will be chargeable to Income Tax as earnings under section 62 ITEPA 2003. Payments made for meeting production targets or doing extra work in the period leading up to redundancy are examples of such terminal bonuses. Payments conditional on continued service in the employment for a time will also represent terminal bonuses if calculated by reference to any additional period served following issue of the redundancy notice.
4. HM Revenue and Customs (HMRC) are concerned to distinguish between payments under non-statutory schemes which are genuinely made to compensate for loss of employment through redundancy and payments which are made as a reward for services in the employment or more generally for having acted as or having been an employee. As arrangements for redundancy can often be complex and provide for a variety of payments, it follows that each scheme must be considered on its own facts. HMRC’s practice, in these circumstances, is to allow employers to submit proposed schemes to their Inspector of Taxes for advance clearance.
5. An employer or any other person operating a redundancy scheme, who wishes to be satisfied that lump sum payments under a scheme will be accepted as liable to tax only under section 401 ITEPA 2003 should submit the full facts to the inspector for consideration. Applications for clearance should be made in writing and should be accompanied by the scheme document together with the text of any intended letter to employees which explains its terms.
Statement of Practice 13 (1991)
Paragraph 10 redundancy payment for redundancy caused by accident.
Note: HMRC practice was revised following the decision of the House of Lords in Mairs v Haughey (1993) STC 569, and this statement replaced Statement of Practice 1 (1981). This statement was revised in IR 131 (August 2003).