Introduction

This Tax Tribunal decision was concerned with a payment made by an employer (CSL) to an employee (Ms Cornell) on the termination of employment.

The Facts

Ms Cornell commenced employment with CSL on 17 January 2005. Her employment was governed by an employment contract and her probationary period was three months from 17 January 2005 to 17 April 2005. Prior to the end of the probationary period, on 13 April 2005, CSL wrote to Ms Cornell to inform her that her post was at risk of redundancy. On 13 April 2005, Ms Cornell was asked to clear her desk and go home. In the period from 13 April 2005 to 27 April 2005, Ms Cornell was required by CSL to remain away from the workplace, and she did not have access to her office. She continued to be paid her salary for that period and she did not resign from her employment.

On 27 April 2005, during a meeting with a director of CSL, Ms Cornell was handed a draft Compromise Agreement which stated that Ms Cornell believed that she may have claims against CSL for holiday pay and breach of contract and under which CSL agreed to pay her a sum of £17,971.26 in full and final settlement of the complaints and proceedings. The agreement also stated that Ms Cornell's contractual notice period was 3 months and she would receive pay in lieu of notice for this period. Ms Cornell did not agree that the contractual notice period was three months, and wishing not to prejudice her position regarding her claim that the payment should be exempt from tax, she refused to sign the Compromise Agreement. Albeit that the Compromise Agreement was not signed, the payment was made to Ms Cornell, subject to deductions for tax and national insurance contributions.

Ms Cornell argued that apart from an amount equal to one weeks salary which she accepted was taxable, the payment was not a payment in lieu of notice and thus was not table as employment earnings. Ms Cornell's argument was on the basis that CSL had been in breech of her employment contract by sending her home and failing to provide her with work. She also argued that the redundancy consultation procedure was flawed and that this amounted to breech of contract. Ms Cornell appealed the HMRC's amendment of her self assessment for the tax year 2005–2006.

Issue

Whether the payment of £17,971.26 was payment in lieu of notice in pursuance of a provision to this effect in Ms Cornell's contract of employment and thus chargeable to income tax or whether the payment, apart from one weeks salary, was exempt from tax as being below the £30,000 threshold.

The Decision

The First-tier Tax Tribunal dismissed Ms Cornell's appeal on the basis that there was no breach of the employment contract in the period 13 April 2005 to 27 April 2005 on the basis that CSL were not obliged under the contract to provide work for Ms Cornell, and although a failure to consult can result in an unfair dismissal, this in itself was not a breech of contract. Furthermore, under the terms of Ms Cornell's contract of employment, she was entitled to three months’ notice at the time of the termination of her contract on 27 April 2005. The payment was to be treated as payment in lieu of notice for the three-month period and taxable under ITEPA 2003, Pt.2, Ch. 2.

The determination is available on-line at http://www.financeandtaxtribunals.gov.uk/Aspx/view.aspx?id=4466/TC00108.doc