Section 401 of the Income Tax (Earnings and Pensions) Act (ITEPA) states that payments received in connection with “the termination of a person’s employment” are only taxable to the extent that they exceed £30,000. In Turullols v The Commissioners For Her Majesty’s Revenue & Customs, the First-Tier Tax Tribunal held that payments under an interim relief order constitute payments in connection with termination.
Ms Turullols had worked as an internal auditor within an international group of companies since 2005. Although her offer letter of employment stated that she was entitled to one month’s notice, she was informed by e-mail on 15 October 2009 that her employment was being terminated with effect from the following day.
She applied to an employment tribunal for interim relief, claiming that the principal reason for her dismissal was that she had made a number of protected disclosures (in other words, because she had blown the whistle).
The tribunal ordered her employer to continue her contract in terms of paying her until the full case was heard. From early December 2009 until early January 2011, the company therefore paid Ms Turullols her monthly salary, minus income tax and national insurance contributions under the PAYE system.
At the substantive hearing of her unfair dismissal claim, the tribunal held that she had been unfairly and wrongfully dismissed (although not because she had made a protected disclosure). She then entered a settlement agreement with her employer, which provided for certain of her costs to be paid. She was advised that she was not entitled to any compensation for unfair dismissal as it would be covered by the payments she had received during 2010 under the interim relief order.
However, as she thought that the payments under the order were part of her entitlement to compensation for the termination of her employment, she believed that the first £30,000 should be exempt from tax. She therefore submitted a tax return claiming repayment of the tax deducted by her employers, but HMRC denied her application.
Section 130(1)(a) of the Employment Rights Act specifically states that when an interim relief order is made “the contract of employment continues in force” but only for certain stated purposes, including pay and benefits.
First tier tax tribunal decision
The first tier tribunal (FTT) held that the question was not whether the payments arose from the employment contract, but whether they arose from the employment itself.
It was quite clear, according to the FTT, that as a matter of law Ms Turullols’ employment ended on 16 October 2009. Otherwise she would not have been entitled to claim interim relief. When the tribunal granted her request, it did not mean she had been reinstated, just that she was entitled to receive certain payments and other benefits as if her employment had continued under section 130 of the Employment Rights Act. Those rights could only arise once her employment had terminated.
And what would have happened had she lost her tribunal claim? Her employment would still have terminated, and given the way in which income tax law is framed, the interim payments would still undoubtedly have fallen within section 401 ITEPA as having been “received directly or indirectly in consideration or in consequence of, or otherwise in connection with…the termination of [her] employment”, and therefore exempt from income tax up to £30,000 (but taxable thereafter).