Termination payments and benefits: Section 401 ITEPA 2003: payments for counselling and other outplacement services
Section 310 ITEPA 2003
Payments for outplacement counselling that meet certain conditions are exempt from income tax.
When an office or employment is terminated, the employer may pay for the employee to receive professional advice and assistance designed to help the employee cope with the situation and find a new job. Such professional advice is known as outplacement counselling and may consist of anything from a single advisory interview to ongoing assistance for a period of several months. It has become a common feature of termination packages offered by employers, particularly where redundancy is involved.
Provided that specified conditions are met (see below) the exception applies to the provision of services in connection with termination (including fees for such provision) as well as to associated travelling expenses.
The conditions that must be satisfied are:
- the only or main purpose of providing the services is to enable the employee either (a) to adjust to the termination of employment or (b) to find other gainful employment or self employment
- the services provided must consist wholly of (a) giving advice and guidance or (b) imparting or improving skills or (c) providing or making available the use of computer equipment or similar facilities
- the person receiving the services must have been an employee throughout the two years ending either (a) when the services begin or (if earlier) (b) when the employment ends. This condition must be satisfied in respect of the employment that is terminating (and no other employment) Note: for tax years up to 2004/05 only the employment must have been full-time
- the services must be available generally to employees or to a particular class of them.
If travelling expenses are involved there is a further condition to be met. To test whether this condition is met, it is necessary first to assume that receiving these services is part of the duties of a continuing employment and that the expenses are incurred and paid by the employee. The condition is:
- the travelling expenses would either:
- qualify for mileage allowance relief under Part 4 Chapter 2 ITEPA 2003 if no mileage allowance payments had been made (see EIM31330),
- be deductible from earnings under Part 5 ITEPA 2003 (see EIM31610).
Note that Section 310 ITEPA 2003 acts solely as an exemption from tax. It does not enable employees to obtain a tax deduction for costs of counselling that they may incur, or that are not reimbursed by their employer.