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HMRC internal manual

Employment Income Manual

Termination payments and benefits: Section 401 ITEPA 2003: foreign aspects: Nichols v Gibson (68TC611)

Section 401 ITEPA 2003You may come across a claim that Section 401 ITEPA 2003 cannot apply to a payment because the ex-employee was not resident in the UK for tax purposes. That is not correct.

Chapters 4 and 5 of Part 2 ITEPA 2003 contain detailed rules about how a person’s tax residence and domicile affect an income tax charge (see EIM40001 for details). Those rules do not apply to charges within Section 401 ITEPA 2003. This position was confirmed in Nichols v Gibson (68TC611), in which a person not resident in the UK was taxed on a termination payment under Section 148 ICTA 1988 (the predecessor of Section 401 ITEPA 2003).

Section 403 ITEPA 2003 provides that a charge under Section 401 counts as employment income. Because of that, such a charge is called specific employment income by Section 7(4) ITEPA 2003. Section 6(3) ITEPA 2003 states that the rules about residence and domicile mentioned above do not apply to specific employment income. So when deciding whether a charge arises under Section 401 on a termination or change payment (see EIM13012) it is not necessary to consider residence and domicile under EIM40001.

But a person may qualify for exception from or reduction of the Section 401 ITEPA 2003 charge, see EIM13500 and following guidance for details.