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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 2003

You 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 always 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 apply to general earnings. Post-employment notice pay (see EIM13874) is an amount of general earnings. So, all amounts of post-employment notice pay are subject to the residence and domicile rules in Chapter 4 and 5 of Part 2 ITEPA 2003 (see EIM40001). Post-employment notice pay is ‘for’ the last tax year in which the employment was held.

However, those residence and domicile rules do not apply to payment and benefits which are chargeable to tax as specific employment income. All payments and benefits within the scope of section 401 ITEPA 2003, which are not post-employment notice pay, count as specific employment income as defined 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.

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).

There are circumstances where a person may qualify for exception from or reduction of the section 403 ITEPA 2003 charge where some, or all of the employee’s service counts as “foreign service”, see EIM13500 and following guidance for details. With effect from 6 April 2018, the exception and relief for “foreign service” is only available if the person is non-UK resident in the year the employment is terminated.