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HMRC internal manual

Business Income Manual

Specific deductions: staffing costs: statutory redundancy payments

S76-S80 Income Tax (Trading and Other Income) Act 2005, S76-S81 Corporation Tax Act 2009

If a deduction for redundancy-related payments is not allowable under general principles a deduction may still be available for:

  • statutory redundancy payments and approved contractual payments;
  • additional payments to redundant employees - see BIM47210.

Statutory redundancy payments

‘Redundancy payments’ is defined to have the same meaning as in Part 11 Employment Rights Act 1996 (ERA 1996) and the Northern Ireland equivalent legislation. Part 11 does not actually give a single meaning for redundancy payment but sets out (at length) when such a payment must be made and explains how to calculate the amount of the payment.

Such payments are commonly referred to as ‘statutory redundancy payments’.

Approved contractual payments

These are payments which, under an approved agreement, an employer is liable to make to employees on termination of their employment contracts. Such payments are made under a redundancy agreements set up by an employer with the agreement of the trade unions as an alternative to the statutory redundancy scheme. An agreement is approved if an order in respect of it is in force under S157 ERA 1996 or equivalent Northern Ireland legislation.

Such approved schemes are rare.

Statutory redundancy payments

The ERA 1996 sets out the conditions that must be satisfied before statutory redundancy payments are made. In particular, the employee must have been:

  • continuously employed for a period of two years,
  • made redundant, broadly speaking, because the business is ceasing or the requirements of the business have altered in such a way that kind of work carried out by the employee is no longer needed; (a change of ownership does not give rise to statutory payments, unless of course this leads to cessation or alteration as a result of which the employee is dismissed).

Employees may also be disqualified from claiming redundancy payments if they are entitled to payment of a pension deriving from the employment within 90 weeks of the redundancy. Although directors are not specifically excluded, it is arguable whether they are in fact covered by the Employment Rights Act. That said, where a company ceases to trade, statutory payments are in practice made to directors in relation to services performed as employees under contracts of service (whether written or not). It can be accepted that a deduction under these rules applies to such payments in the usual way.

On the winding up of a company, a director may be retained on an unpaid basis to realise assets, collect debts etc. Relief should not be denied merely on the grounds that the director still works for the company in this way.

The deduction

A specific statutory deduction for a statutory redundancy payment or approved contractual payment is allowable if a deduction would not be allowable under general principles.

A deduction can be made even if the payment would otherwise be disallowable as capital because rules which specifically allow a deduction generally override those which prohibit a deduction (see BIM42080).

If the employee’s employment was wholly in the employer’s trade, the whole of a statutory redundancy payment can be deducted. If the employment was only partly in the employer’s trade (for example, where the employee partly serves the employer in his private capacity), the payment must be apportioned on a just and reasonable basis between the employment in the trade and the employment in other capacities. Only the part of the payment relating to the employment in the trade can then be deducted in calculating the trade profits.

An approved contractual payment can only be deducted to the extent that it does not exceed the amount which would have been due to the employee if a statutory redundancy payment had been payable. Again, the amount deductible is reduced where the employment was only partly in the employer’s trade, by apportionment on a just and reasonable basis.

Payments direct to employees by a government department

Where the Secretary of State (that is a government department) makes a redundancy payment direct to an employee and then recovers all or part of the payment from the employer, the employer is entitled to a deduction for the amount paid to the government department as if it were a statutory redundancy payment or approved contractual payment.

Timing of deduction

Guidance on the timing of deductions is at BIM47215.