New HMRC guidance on clearance for termination payments in UK

The Revenue has changed its policy on clearance for termination payments. As a result, binding answers outside the normal Non-Statutory Clearance process will no longer be available to taxpayers and employers – highly relevant if you are going to be making a termination payment and you are unsure about the tax treatment of any aspect of the payment. We’ll speak to a tax specialist about the impact of this change.

HMRC made the announcement in its February Employer Bulletin and has since updated its Employment Income Manual accordingly. 
Previously, HMRC’s guidance committed them to giving a binding answer if employers made enquiries on termination cases involving:

- the disability and injury compensation exception 
- the foreign service exception 
- how the £30,000 threshold applies to payments made by a third party and by the employer; and
- non-cash provisions 

As a result of the change, the Revenue will now only give guidance in respect of enquiries on termination cases involving the above matters through the Non-Statutory Clearance process. Moreover, the Non-Statutory Clearance service is only available to resolve what HMRC consider to be genuine points of uncertainty on the tax treatment of a termination payment. 

So, let’s get reaction to this. Chris Thomas is a tax lawyer advising clients on this. Earlier, I spoke to Chris by phone to understand the impact of this change on employers:  

Chris Thomas: “So the key thing that is changing is that the circumstances in which it's possible to apply to HMRC for clearance in an employment tax context are going to be significantly reduced and in reality in most cases it just isn't going to be possible to get a clearance going forward. So that's the key change. Whereas in the past it has been possible to apply to HMRC in cases, for example, where you're making a sizable payment and you're checking the availability of the disability exemption or, maybe, sometimes, in relation to injured feelings, that kind of thing, up until now there's been a facility where HMRC has been committed to considering that, and giving a view on whether it does or doesn't apply, but going forward, effectively, that's going to be a lot more restricted.”

Joe Glavina: ”As I understand it, Chris, it will still be possible to make an application to the Revenue if there is genuine uncertainty about how the law applies. So, in that case, especially if it’s a sizeable termination payment, that might be worth doing. Is that right?”

Chris Thomas: “Yes, I think that's fair comment because I think what this is going to affect is cases where if there's still a genuine real material uncertainty as to the actual application of the legislation in a particular case, so perhaps there’s some particularly unusual set of facts, or there's a real doubt over how the law applies, you can still apply for what they call a Non-Statutory Clearance, but what we're talking about is that host of other cases where, actually, it's not so much that the law is unclear, what is unclear is how the facts actually apply to it and that, often, is the point that clients are wrestling with to get to the bottom of exactly how does the law apply in our particular case. There are obviously a lot of judgments that need to be made there and in the past, perhaps, people have used the clearance facility to almost get comfort, I suppose, that the interpretation they think probably applies, HMRC would accept. So, going forward, that won't be the case anymore so, yes, it does make it perhaps even more important to be getting legal advice to try and clarify, as far as you possibly can, what the correct analysis is and, obviously, as legal advisors we see a lot of these cases and are quite well placed to form a judgment on them.”

Joe Glavina: “Just thinking about the settlement negotiations with the employee, if employers assume from the outset that a payment qualifies for tax relief but they are actually wrong about that, for whatever reason, which could now be a problem because it means you could end up with an unforeseen tax bill imposed by HMRC. So how should clients deal with that uncertainty?”

Chris Thomas:  “I think probably what it means is that they need to be probably a little bit more cautious about making representations to the effect that they’ll be able to make this payment gross, subject to getting a clearance because whereas in the past it was quite common practice to do that but, actually, now you're probably not going to be able to get a clearance and so it's going to be actually for the company to get comfortable itself as to what the tax treatment is going to be.”

Joe Glavina: “So, given the change, presumably the advice to clients is if in doubt seek specialist legal advice and do that at an early stage?” 

Chris Thomas: “Yes, I think that's right. I mean, frankly, we would always recommend having that conversation as soon as possible because, generally speaking, it's always best to have got a good feeling for how a payment is likely to be taxed before you make any commitments or suggestions to the relevant employee or, indeed, even for internal sign-off purposes because it can be pretty material, the amount of the difference here if something's taxable or if it isn't. On large payments it could be tens of thousands of pounds, potentially, that can be at stake.”

HMRC announced this change in February’s Employer Bulletin, reminding employers and advisers that a Non-Statutory Clearance application should only be used in cases of genuine uncertainty on the tax treatment of a termination payment. The full details of the policy change are set out in HMRC’s Employment Income Manual. We’ve put a link to both in the transcript of this programme for you. 

LINKS
- Link to HMRC’s February Employer Bulletin
- Link to HMRC’s Employment Income Manual (EIM12800)