Don’t Be Naughty with Notice.

Next week, we’ll be presenting a breakfast seminar on settlement agreements which will include looking at one issue which has reared its naughty head on several recent occasions.  It’s where either the employer or the employee wants to suggest that either notice was given or employment was terminated on a date which differs from the reality.

Firstly, you can’t just pretend that one party gave the other notice on a particular day because it’s more tax-efficient to say so.  It actually needs to have happened.  If notice (or any part of the notice period) wasn’t actually worked, the rules on post-employment notice pay (PENP) will apply and it will be necessary to tax a sum equivalent to salary (and salary sacrificed) for any unworked period of notice in accordance with the PENP rules. 

The first £30,000 of genuine compensation is usually tax-free with the balance (at present) being subject to income tax only.  From 6 April 2020, employer’s NI contributions will also be payable in respect of the balance over £30,000.  However, if the employee has not worked all of their notice period, then part of the compensation sum must be fully taxed under the PENP rules.

If a settlement agreement suggests that all of a notice period was worked when this wasn’t the case, the PENP anti-avoidance rules would kick in and the parties could also be at risk of breaching the anti-facilitation of tax evasion laws and thereby committing a criminal offence. 

When an employee takes a settlement agreement to their solicitor to obtain independent legal advice on its terms, the solicitor will be obliged under their regulatory duties to provide a certain standard of service which would include identifying any concerns regarding the correct tax status of the payments being made under the agreement.  The solicitor may not be a tax specialist, but is likely to know that falsifying the date when notice was given or employment terminated would result in a lesser amount of tax being paid than that required by the PENP rules.  If such a concern is identified, notified to the employer, but not remedied in the version of the agreement signed by the solicitor, both the solicitor and the employer put themselves at risk of committing a criminal offence of facilitating tax evasion (depending on the circumstances). 

So when it comes to settlement agreements, don’t be naughty just to help the employee pay less tax as HMRC won’t be nice.

The contents of this article are intended as guidance for readers. It can be no substitute for specific advice. Consequently we cannot accept responsibility for this information, errors or matters affected by subsequent changes in the law, or the content of any website referred to in this article. © Mundays LLP

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