Simplification of the Tax and National Insurance Treatment of Termination Payments

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1 Simplification of the Tax and National Insurance Treatment of Termination Payments Consultation document Publication date: 24 July 2015 Closing date for comments: 16 October 2015

2 Subject of this consultation: Scope of this consultation: How to make the tax and National Insurance treatment of termination payments simpler and fairer. The purpose of this consultation is to explore how the tax and NICs treatment of termination payments can be made simpler and fairer. Who should read this: The government would like to hear views from anyone who is affected by or interested in these proposals including employers, employees and the accountancy profession. Duration: The consultation will run from 24 July to 16 October Lead official: How to respond or enquire about this consultation: Sarah Radford, HMRC. Responses to the consultation can be ed to: Alternatively written responses can be sent to the Employment Income Policy Team, Room 1E/08, 100 Parliament Street, London SW1A 2BQ. Additional ways to be involved: Meetings with external representatives will be arranged. If you are interested in attending a meeting please contact us using the details above. If you require the text of this consultation document in Braille or Welsh then please contact us using the details above. After the consultation: Getting to this stage: The government will publish details of the consultation responses and expects to make an announcement at Autumn Statement 2015 on any decisions made in light of those responses. This consultation is in response to the Office of Tax Simplification s final report on employee benefits and expenses. OTS final report: employee benefits and expenses 2

3 Contents 1 Background 5 2 Office of Simplification report into the taxation of termination payments 7 3 The case for reform 9 4 Proposed reforms 10 5 Summary of Consultation Questions 19 6 The Consultation Process: How to Respond 21 Annex A Legislation 23 On request this document can be produced in Welsh and alternate formats including large print, audio and Braille forma 3

4 Foreword I am very grateful to the Office of Tax Simplification for their excellent work on benefits and expenses. They have identified the tax treatment of termination payments as a very complex area of the tax system. Their work has been invaluable in informing our initial proposals for consultation. I want to reform the tax and NICs exemptions for termination payments so that above all else an employee has certainty about the amount of money they will receive when they lose their job. I also think that these proposals can bring about real simplification for businesses in this area of the tax system. However, it is vitally important that we are able to understand how these proposals for reform will affect people and we ensure that any new tax and NICs exemption is properly targeted and fair. We want to hear from you so that we are able to draw on your practical experience to improve these proposals. This will ensure better legislation is implemented which is one of this government s key objectives. 4

5 1. Background Tax and NICs treatment of termination payments 1.1. Termination payments are made for a variety of reasons connected with an employee leaving their employment. When an employer provides a financial package to their employee on termination of the employment, it can be made up of several different elements. These might include damages, statutory redundancy, payments in lieu of notice (PILON) and compensation for loss of office Generally, the elements of the termination payment that are from the employment or that an employee is contractually entitled to, are subject to income tax and National Insurance contributions (NICs), in the same way as other payments of salary. Conversely, the elements of any termination payment that are not from the employment are only liable to income tax on the amounts exceeding 30,000. Employer and employee NICs are not payable on the elements of termination payments which are not derived from the employment The termination payment can be made up of several different elements, even where the employee is made redundant, so the employer is required to look at each element separately. They then must consider whether or not each element should have income tax and NICs deducted. Example 1 Pat gets made redundant after working for a company for 10 years. Pat gets a termination payment of 13,750. This is made up of: 4,750 statutory redundancy 5,000 ex-gratia payment for loss of employment 3,000 PILON 1,000 of holiday pay Under the existing rules 4,000 (PILON and holiday pay) of the termination payment will have tax and NICs deducted at the employee s marginal rate and the employer will need to pay employer NICs on this part of the payment, as this will be classed as earnings. The 9,750 (statutory and ex-gratia payment) is within the exemption for termination payments. Because the total of this payment is less than 30,000 there is no liability to income tax, neither is there a liability to employer or employee NICs. Exemptions which remove the liability to income tax 1.4. There are various exemptions, reliefs and reductions applying to termination payments in addition to the tax-free threshold. For these exemptions to apply the payment to the employee must not be contractual or salary. If the conditions of the exemption are met then there is no income tax liability even on the elements over 30,000. These include payments made: 5

6 because of the death, disability or injury of employee; under a tax exempt pensions scheme; to a registered pension scheme; for liabilities and indemnity insurance; to HM Armed Forces; by a foreign government; where the employee has a certain type of foreign service; or in respect of certain legal costs More information about the rules for applying these exemptions can be found in the employment income manual at: The exemptions and whether they should be retained under the new simplified system are discussed in more detail in Chapter 4. 6

7 2. Office of Tax Simplification Report into Termination Payments OTS Conclusions 2.1. The government created the Office of Tax Simplification (OTS) on 20 July 2010 to provide independent advice on simplifying the UK tax system. The OTS carried out a review of Employee Benefits and Expenses, and published their findings and recommendations in reports in July 2013 and January and July In their final report in July 2014 the OTS published their conclusions following their review of termination payments. They concluded that the system was fraught with confusion and uncertainty. They found that employers want to pay the correct amount of tax but the complexities of the system often prevent this from being achieved. The OTS concluded that above all employers want a system that is clear and easy to administer and employees want certainty about the amounts they will receive The OTS found cases where employees and employers had been asked to pay additional tax following departure from the employer; and cases where employers had deducted too much tax because they were unable to determine the correct tax treatment because of the complexity of the rules The OTS found that the confusion and complexity arises from: the widespread but mistaken belief amongst employees and employers that the first 30,000 of any pay-off is not subject to income tax and NICs. This often leads to difficulties when employees discover that the exemption does not apply to their circumstances and that income tax and NICs are due on the full amount; many employers being unclear about how the exemption operates. Much of the confusion arises from the lack of understanding by employers about the difference between contractual and non-contractual payments; and employers and HMRC finding it difficult and time-consuming to establish the true nature of each separate element of a termination payment. They particularly highlighted the treatment of contractual payments in lieu of notice (PILON) and non-contractual payments in lieu of notice (auto-pilon) arrangements; and payments around retirement age The OTS also concluded that the current system is unfair because those who are better paid and better advised are often able to structure their affairs so that they benefit from the tax exemptions. 7

8 OTS Recommendations 2.6. The OTS suggested that the government should consult on reforming the taxation of termination payments. They also made a number of suggestions about how they could be reformed. These included: removing the distinction between contractual and non-contractual termination payments; alignment of the tax and NICs treatment of termination payments; and that the existing exemptions are reviewed, with consideration given to removing some, or all, of the existing exemptions The OTS also considered that the current 30,000 threshold was probably unaffordable if the distinction between contractual and non-contractual termination payments was removed The OTS suggested two potential options for reform of the taxation of termination payments. One suggestion was a blanket exemption, the other was to link the availability of any tax exemption, to the payment of statutory redundancy. However, the OTS acknowledged that there would be difficulties with this system as there are a number of people who are not able to benefit from statutory redundancy. 8

9 3. The case for reform The Government s View 3.1. The government recognises the difficulties with the taxation of termination payments that the OTS describes. The government therefore wants to review the tax treatment of termination payments with the aim of creating a regime that is easy for employers to administer and for employees to understand The government understands that employees want certainty when they are leaving employment and that for many employees this will be a very difficult and uncertain time. The government thinks that it is not right to have a system that is so complex that many people are not able to have certainty that they have paid the correct amount of tax and NICs when they leave a job HMRC has evidence that some employees and employers attempt to change the nature of their termination payments. This is so the employee can benefit from the 30,000 exemption and the employer isn t liable for employer NICs. For example there have been cases where employees and employers argue that a PILON (subject to tax and NICs) is actually a payment for breach of contract, so there is no NICs liability and the payment is only taxable on amounts over 30,000. With such a complex tax treatment of termination payments it is often difficult for HMRC to disprove such claims. These employees are generally those who are well advised (and generally better paid) Therefore, the government intends to reform the way that termination payments are taxed and which termination payments are chargeable to tax and liable to NICs. Aims of the reform of termination payments 3.5. The government s aim is to reform termination payments so that they meet the following criteria: the new system must be simple for employers and employees to understand; it must provide certainty for employees about what the tax and NICs treatment is so that there is no additional distress at what is already a difficult time; the tax and NICs treatment must be easy for employers and HMRC to administer; the tax and NICs treatment must be fair, so that those who are better paid and better advised (because they are able to afford to pay for advice) do not receive a more favourable tax and NICs treatment than those who are lower paid; and it must be affordable for the Exchequer. 9

10 4. Proposed Reforms Tax and NICs treatment of contractual and non-contractual payments 4.1. To simplify the existing treatment the government agrees with the OTS that the first step is to remove the distinction between the tax and NICs treatment of contractual and non-contractual termination payments. This will remove the majority of the complexity and misunderstanding within the existing system. Part of this change would be to treat all PILONs in the same way, as the government understands that there is widespread confusion over the treatment of these types of payments As suggested by the OTS, by removing these distinctions the government intends that all payments made in connection with termination of an employment will be earnings and subject to income tax and employer and employee NICs. This will mean that employers will no longer need to consider which parts of a termination payment are taxable and which parts are not However, the government believes that there is a principled case for providing support in the form of tax and NICs relief when someone loses their job. This is because removing the exemption would have a significant cost impact for some people, especially those who receive smaller termination payments. Therefore the government intends to introduce a new exemption from income tax and NICs. Q1 Do you agree that the distinction between contractual and noncontractual termination payments should be removed? Please provide reasons for your answer. Q2 Do you agree that removing the different tax and NICs treatment of different types of PILONs will help remove complexity for termination payments? Please provide reasons. Alignment of income tax and NICs treatment of termination payments 4.4. The OTS suggested that any simplification should also align the income tax and NICs treatment of termination payments. They concluded that it was illogical that the income tax and NICs regime that applies to termination payments operates so differently. The government understands the logic of the OTS proposal and agrees that aligning the tax and NICs treatment would provide additional simplification There is also a fairness principle that where an employee is asked to contribute by paying income tax and possibly employee NICs that their employer should also contribute by paying employer NICs. The government wants to ensure that the tax and NICs treatment of termination payments are fair The government would like to understand stakeholder s views on whether the income tax and NICs treatment of termination payments should be aligned. 10

11 Q3 Do you think that the income tax and NICs treatment of termination payments should be aligned? Please provide reasons. Q4 Do you think that aligning the income tax and NICs treatment of termination payments will make termination payments easier to administer and easier to understand? Please provide reasons for your answer. Options for reform of the tax and NICs exemption 4.7. The government has considered a number of options including those set out by the OTS. Blanket Exemption 4.8. The OTS suggested a blanket income tax exemption for all payments on termination but acknowledged that this would not be affordable at the existing 30,000 exemption. Their proposition was that the exemption would apply to all termination payments without the employer needing to consider each element of the payment separately This would mean that the employee would only be subject to income tax (and possibly NICs) to the extent that their termination payment exceeded a set amount, which would be lower than the current 30,000 exemption. This would apply regardless of the time that the employee had worked for their employer or the reason that their employment had been terminated. In contrast the rules for statutory redundancy require two years of service before an employee is eligible to receive it However, the OTS recognised that whilst having such an exemption would be simple and easy to administer there are avoidance opportunities with such a regime. The OTS also recognised that because of the reduced threshold many more termination payments would be liable to tax so thought this would potentially add to the complexity The government agrees with the OTS conclusions and does not think that a blanket exemption will meet its stated aims. Exemption linked to statutory redundancy The OTS also suggested that a new exemption could be linked to statutory redundancy pay. They suggested that the exemption would be a multiple of the employee s statutory redundancy payment. The OTS concluded that this would have in-built anti-avoidance rules as only those who are being made redundant are able to claim statutory redundancy However, as identified by the OTS, there are a number of people who would not be able to qualify for statutory redundancy. These include, employee shareholders, parliamentary staff, civil servants and those employed in public office. There is no reason why these employees should not be treated in the same way as all other employees. The government is concerned that additional 11

12 legislation would be required to allow these groups to receive the tax and NICs exemption but, that doing so may add complexity to the system Whilst the government agrees with the rationale of linking any exemption to statutory redundancy payments, it is concerned about the level of awareness by employees about their entitlement to statutory redundancy. The amount of statutory redundancy that an employee is entitled to varies depending on the age of the employee, the length of service and the amount they are paid. Additionally, because of the large groups that are not entitled to statutory redundancy the government is concerned that linking any tax exemption for termination payments would cause additional confusion. As a result of these concerns, the government is not minded to link the tax and NICs exemption for termination payments to statutory redundancy payments However, the government agrees that linking the availability of any tax relief to statutory redundancy removes many of the avoidance opportunities and are minded to introduce something similar. New exemption proposal One approach the government is considering is to create a new exemption which increases proportionately with the number of years of service the employee has completed. This would create a new fairer exemption which will proportionately reward long serving, lower paid employees. Linking the availability of relief to the length of service of the employee would create a simple system that is easy to understand and easy for employers to administer The employee would qualify for the exemption once they have completed two years of service. This would mean that anyone who receives a termination payment after completing two years of service would not have to pay tax and NICs on some, or possibly all, of their award (depending on the size of their award). The level of the tax and NICs exemption would then increase at a set rate with each year of service completed up to a maximum amount To count for the exemption the years of service would need to be with the same employer or with an associated employer such as employment within another company within the same group. The years of service would also include any change of employment where the employee s change of employer was under a Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) scheme The government is also considering only providing tax and NICs relief where the termination payment has been made in connection with a redundancy as defined in section 139 of the Employment Rights Act This would mean that only those payments made where the termination of the employment is wholly or mainly attributable to: the employer ceasing, or intending to cease, to carry on the business for the purposes of which the employee was employed; 12

13 the employer ceasing or intending to cease to carry on that business in the place the employee was employed; the requirement for the employee to carry out work of a particular kind of work has ceased or diminished or is expected to cease or diminish; or the requirement to carry out work of that particular kind in the place where that employee was employed has ceased or diminished or is expected to cease or diminish This definition would also include voluntary redundancy. The government understands that businesses often prefer to offer redundancy on these terms and the consequence of them not being accepted is often compulsory redundancy. Therefore if this proposal was legislated the government would not differentiate between compulsory and voluntary redundancy for the termination payments tax and NICs exemption. Example 2 Pat has been working for a company for 10 years when made redundant. Pat gets a termination payment of 13,750. This is made up of: 4,750 statutory redundancy 5,000 ex-gratia payment for loss of employment 3,000 PILON 1,000 of holiday pay If the exemption was set at 6,000 after 2 years of service and then an additional 1,000 for each year of additional service then Pat would have a tax and NICs exemption of 14,000. Because Pat s employer has stopped doing this type of work Pat meets the definition of redundancy in the Employment Rights Act. This means that Pat would not need to pay any tax or NICs on the termination payment and neither would Pat s employer. Example 3 Chris has been working for a firm for 3 years but his performance isn t what his boss expects Chris has lost the company a lot of money. However, Chris contract entitles him to a 100,000 payment if he is asked to leave. Because Chris hasn t been made redundant he is not entitled to any tax or NICs relief on his payment Linking the exemption to those who have been made redundant would target the relief at those who are most in need. This would provide similar built in antiavoidance provisions to those that the OTS suggested could be achieved by linking the exemption to payments of statutory redundancy. 13

14 Q5 The government would like to explore what level the threshold for the termination payment tax and NICs exemption should be set and would welcome views. Please provide reasons for your answer. Q6 Do you agree that a relief based on length of service and those who are being made redundant would be easier for employers to administer? Please provide your reasons. Q7 Do you think that structuring the relief based on length of service and redundancy will be easier for employees to understand? Please provide reasons. Q8 Are there any alternative ways that the income tax and NICs exemption could be structured that would better meet the government s stated aims as set out in at 3.5 of this document. Please provide details with your answer. Anti-avoidance provisions The government wants to ensure that any new tax and NICs exemption for termination payments cannot be used as a form of tax free remuneration. For example where an employee agrees at the start of their contract to sacrifice some of their salary in return for a tax and NICs free termination payment when they leave. Therefore if any of the payments are made through salary sacrifice arrangements, flexible benefit schemes or other similar arrangements they will not qualify for the exemption The policy intention is to support those who lose their job through no fault of their own (including voluntary redundancy) and that this support will be provided through tax and NICs relief on their termination payments. The government does not intend to provide tax and NICs relief for those who choose to resign and receive a payment from their employer for doing so. Neither, does it want to provide tax and NICs relief for those employees who have entered into arrangements with their employer to accept a reduced salary in return for a tax and NICs free termination payment. Additional anti-avoidance provisions In addition to the requirement that this cannot be provided through salary sacrifice or other similar arrangements the government is considering whether any further anti-avoidance provisions might be required. Such provisions may include not allowing the tax and NICs exemption for termination payments made to someone working on a fixed term contract or where the custom or agreement is that the employment will end after a fixed period of time This is because those who are aware that their contract will end are able to prepare and were aware of the terms they signed up to. There is also concern that there is a much larger scope for there to be contractual commitments for additional salary to be paid at the end of the contract where the contract is only for a set period of time. 14

15 4.26. The payments would also become taxable and liable to NICs if the employee is re-engaged to do a similar job for the same company or associated company (such as another company within the same group) within a 12 month period. Example 4 Pat has been working for a company for 10 years when made redundant. Pat gets a termination payment of 13,750. This is made up of: 4,750 statutory redundancy 5,000 ex-gratia payment for loss of employment 3,000 PILON 1,000 of holiday pay If the exemption was set at 6,000 after 2 years of service and then an additional 1,000 for each year of additional service then Pat would have a tax and NICs exemption of 14,000. This means that Pat would not need to pay any tax or NICs on the termination payment and neither would Pat s employer. Because Pat is a permanent employee he would not be affected by this anti-avoidance provision. Example 5 Ali signed up for a 3 year fixed term contract. When Ali joined the company Ali was told that at the end of the 3 year contract an additional payment of 5,000 would be made. As the contract was always intended to end and this was really part of Ali s remuneration, Ali would not receive any tax or NICs relief on the 5,000 payment. Q9 Are there any alternative approaches that you can think of that will prevent this payments of salary being disguised as a termination payment? Please provide details with your answer The government recognises that any anti-avoidance provisions may narrow the scope of who is able to receive tax and NICs relief on their termination payments. The government is keen to understand the effect of this and would like to know the types of people and case who would be affected. Q10 Please can you provide details of the types of payments and people who receive termination payment who would be affected by the anti-avoidance provisions? Please also state which anti-avoidance provision you are referring to. 15

16 Exemptions which remove the liability to income tax The existing exemptions are linked to those payments that are not earnings. Therefore, the government recognises that to simplify the existing treatment of termination payments these will need to be reviewed The simplest approach would be to remove all of the existing exemptions. However, the government recognises that this would cause some cases of hardship and would therefore not meet their objective of introducing a new fairer treatment Some suggestions about which existing exemptions may be retained are set out below. The government would welcome comments from stakeholders about whether these are the correct exemptions to retain. Exemption for injury or disability The government intends to retain this exemption, although recognises some of the existing problems with it. The differentiation between the various elements that make up the termination payment would be removed in line with all other termination payments. Therefore the government thinks that this will provide simplification but, will still provide support for employees who have been injured or become disabled and who are therefore less likely to be able to easily find other employment. Q11 Do you think that the exemption for injury or disability should be maintained? Please provide reasons for your answer. Q12 Do you agree that by removing the requirement to differentiate between the different elements of payments made in connection with injury or disability will provide simplification? Please provide reasons for your answer. Q13 Do you think that there should be a cap on the amount of tax and NICs relief that is provided where the payment is connected with injury or disability? If so please provide reasons and suggested amounts. HM Forces payments The government intends to keep this exemption for payments provided under a Royal Warrant, Queens Order in Council to a member of HM Forces by commutation of an annual or periodical payment under such a Warrant or Order to a lump sum or under certain schemes established under the Armed Forces (Pensions and Compensation) Act This exemption recognises the particular circumstances of the armed forces. 16

17 Foreign Service Exemption The government understands that determining what constitutes foreign service can be difficult and that understanding the tax status of the person whilst they were abroad is also difficult. Therefore to create a simpler tax and NICs treatment of termination payment the exemption for foreign service may be removed However, if the exemption was removed then territorial limits for termination payments would be adopted. The territorial limits would be in line with all other payments of employment income. Q14 Do you think that the foreign service exemption should be removed? Please provide reasons for your answer. Other Exemptions The government would like stakeholders views on whether any of the other existing exemptions should be retained. However, the simplest approach would be to remove the exemptions and treat everything as part of the termination payment and allow these costs up to the threshold. There is some concern that the exemption in respect of legal cost is used to pay for legal advice with the sole purpose of reducing tax and NICs liability for employees and employers. Q15 Do you think any of the other exemptions should be maintained? If so which ones? Please provide reasons for your answer The government will not be seeking to apply tax or NICs to any part of a termination payment that would normally be exempt from tax and NICs if it was paid as part of salary. For example payments into a registered pension scheme would not be taxed if they were made from salary so there would be no tax and NICs liability (up to any limits in the legislation) where these payments are made from termination payments. Q16 Do you agree that any payments that would usually be exempt from income tax and NICs should remain exempt (subject to the usual rules) when made as termination payments? Please provide reasons for your answer. New Exemptions If the government proceeds with the approach, suggested at 4.19 above, of limiting the exemption to termination payments made in respect of redundancy (including voluntary) then two new exemptions would be introduced. These would be for payments made in connection with wrongful or unfair dismissal or those compensatory payments made in cases of discrimination. Compensatory amounts for unfair/wrongful dismissal The government thinks there is a strong case for exempting from tax and NICs those payments that are paid in connection with compensation for unfair or 17

18 wrongful dismissal. Although these payments are made in connection with the termination of the employment they are compensatory in nature The government understands that some of these payments are made by tribunals and others are arrangements between the employee and the employer. Q17 Do you think that there should be a financial cap, above which income tax (and possibly NICs) should be payable in cases of unfair or wrongful dismissal? Please provide reasons for your answer. Q18 Do you think that that should be any differentiation in terms of a financial cap where payments have been settled by a tribunal or an arrangement between an employee and employer? Please provide reasons for your answer. Compensatory amounts for loss of future earnings following discrimination Only those payments that are related to the termination of the employment are currently taxable. Those that are paid in relation to injury of feeling and where there was discrimination prior to the termination are not subject to tax or NICs under the existing legislation. For the reasons of simplification the government is considering not imposing a tax or NICs liability on any payment connected with discrimination that has been awarded by a tribunal. This would remove the requirement for the payment to be separated out into its constituent parts The government understands that some of these payments are made by tribunals and others are arrangements between the employee and the employer. Q19 Do you think that there should be a financial cap, above which income tax (and possibly NICs) should be payable in cases of discrimination? Please provide reasons for your answer. Q20 Do you think that that should be any differentiation in terms of a financial cap where payments have been settled by a tribunal or an arrangement between an employee and employer? Please provide reasons for your answer. 18

19 5. Summary of Consultation Questions Q1 Do you agree that the distinction between contractual and noncontractual termination payments should be removed? Please provide reasons for your answer. Q2 Do you agree that removing the different tax and NICs treatment of different types of PILONs will help remove complexity for termination payments? Please provide reasons. Q3 Do you think that the income tax and NICs treatment of termination payments should be aligned? Please provide reasons. Q4 Do you think that aligning the income tax and NICs treatment of termination payments will make termination payments easier to administer and easier to understand? Please provide reasons for your answer. Q5 The government would like to explore what level the threshold for the termination payment tax and NICs exemption should be set and would welcome views. Please provide reasons for your answer. Q6 Do you agree that a relief based on length of service and those who are being made redundant would be easier for employers to administer? Please provide your reasons. Q7 Do you think that structuring the relief based on length of service and redundancy will be easier for employees to understand? Please provide reasons. Q8 Are there any alternative ways that the income tax and NICs exemption could be structured that would better meet the government s stated aims as set out in at 3.5 of this document. Please provide details with your answer. Q9 Are there any alternative approaches that you can think of that will prevent this payments of salary being disguised as a termination payment? Please provide details with your answer. Q10 Please can you provide details of the types of payments and people who receive termination payment who would be affected by the anti-avoidance provisions? Please also state which anti-avoidance provision you are referring to. Q11 Do you think that the exemption for injury or disability should be maintained? Please provide reasons for your answer. 19

20 Q12 Do you agree that by removing the requirement to differentiate between the different elements of payments made in connection with injury or disability will provide simplification? Please provide reasons for your answer. Q13 Do you think that there should be a cap on the amount of tax and NICs relief that is provided where the payment is connected with injury or disability? If so please provide reasons and suggested amounts. Q14 Do you think that the foreign service exemption should be removed? Please provide reasons for your answer. Q15 Do you think any of the other exemptions should be maintained? If so which ones? Please provide reasons for your answer. Q16 Do you agree that any payments that would usually be exempt from income tax and NICs should remain exempt (subject to the usual rules) when made as termination payments? Please provide reasons for your answer. Q17 Do you think that there should be a financial cap, above which income tax (and possibly NICs) should be payable in cases of unfair or wrongful dismissal? Please provide reasons for your answer. Q18 Do you think that that should be any differentiation in terms of a financial cap where payments have been settled by a tribunal or an arrangement between an employee and employer? Please provide reasons for your answer. Q19 Do you think that there should be a financial cap, above which income tax (and possibly NICs) should be payable in cases of discrimination? Please provide reasons for your answer. Q20 Do you think that that should be any differentiation in terms of a financial cap where payments have been settled by a tribunal or an arrangement between an employee and employer? Please provide reasons for your answer. 20

21 6. The Consultation Process This consultation is being conducted in line with the Tax Consultation Framework. There are 5 stages to tax policy development: Stage 1 Setting out objectives and identifying options. Stage 2 Determining the best option and developing a framework for Stage 3 Stage 4 Stage 5 implementation including detailed policy design. Drafting legislation to effect the proposed change. Implementing and monitoring the change. Reviewing and evaluating the change. This consultation is taking place during stage 1 of the process. The purpose of the consultation is to seek views on the policy design and any suitable possible alternatives. How to respond If you would like to respond to any of the issues raised in the consultation, please send your response by 16 October 2015, by if possible, to or by post to: Sarah Radford Employment Income Policy Team Her Majesty s Revenue and Customs Room 1E/ Parliament Street London SW1A 2BQ If you have any queries on the consultation, please contact Sarah Radford on tel: ; or The consultation will run for 12 weeks from 24 July This document can also be accessed from the government website at: https://www.gov.uk/government/publications?departments%5b%5d=hm-revenuecustoms&publication_filter_option=consultations. All responses will be acknowledged but it will not be possible to give substantive replies to individual representations. 21

22 Paper copies of this document or copies in Welsh and alternative formats (large print, audio and Braille) may be obtained free of charge from the above address. This document can also be accessed from the HMRC inside Government pages on the government website: https://www.gov.uk/government/organisations/hm-revenuecustoms. When responding, please say if you are a business, individual or representative body. In the case of representative bodies please provide information on the number and nature of people you represent. A summary of the questions in this consultation is included at chapter 5. Confidentiality Information provided in response to this consultation, including personal information, may be published or disclosed in accordance with the access to information regimes. These are primarily the Freedom of Information Act 2000 (FOIA), the Data Protection Act 1998 (DPA) and the Environmental Information Regulations If you want the information that you provide to be treated as confidential, please be aware that, under the FOIA, there is a statutory Code of Practice with which public authorities must comply and which deals with, amongst other things, obligations of confidence. In view of this it would be helpful if you could explain to us why you regard the information you have provided as confidential. If we receive a request for disclosure of the information we will take full account of your explanation, but we cannot give an assurance that confidentially can be maintained in all circumstances. An automatic confidentiality disclaimer generated by your IT system will not, of itself, be regarded as binding on HM Revenue and Customs (HMRC). HMRC will process your personal data in accordance with the DPA and in the majority of circumstances this will mean that your personal data will not be disclosed to third parties. Consultation Principles This consultation is being run in accordance with the Government s Consultation Principles. The Consultation Principles are available on the Cabinet Office website: If you have any comments or complaints about the consultation process please contact: Oliver Toop, Consultation Coordinator, Budget Team, HM Revenue & Customs, 100 Parliament Street, London, SW1A 2BQ. 22

23 Please do not send responses to the consultation to this address. 23

24 Annex A: Relevant (current) Government Legislation Section Income Tax (Earnings and Pensions) Act Section 3 Social Security Contributions and Benefits Act Paragraph 6 of Part 10 of Schedule 3 to The Social Security (Contributions) Regulations 2001 (SI 2001/1004) The list of legislation quoted above is not exhaustive. 24

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