Compromise Agreement Tax Implications

[Jonathan_T]

Without wishing to go into details. I ended up having a discussion with my boss yesterday and suggested that it was time we agreed a compromise agreement so I could leave the company with a payout and would drop any potential legal proceedings against the company and he would be free to replace me without the complications caused by redundancy etc.

I know that for a redundancy payment the company can pay up to £30K tax free. Is the same true when it comes to a compromise agreement?

I'm obviously keen to maximise the potential payment and don't want to inadvertantly push my self into a tax situation which it may be possible to avoid.

Currently thinking of a lump sum payment + good reference + training courses paid for by the company.

If anyone on here is HR savy / tax savy I'd appreciate your thoughts.

 

[flango]

I think the £30k tax free still applies, this might help

HM Revenue & Customs: Redundancy - guidance for employers

 

[Mr E]

No - £30k tax-free applies only for the redundancy element of any payout.

It would seem that in the OP's case this will not be redundancy, so any payment received (in lieu of notice, loss of earnings, unused vacation, etc) would be liable to tax.

Also remember that a compromise agreement is not there to protect you but is there to protect the employer. You should get it checked out by a decent legal advisor who specialises in employment law.

 

[flango]

No - £30k tax-free applies only for the redundancy element of any payout.

It would seem that in the OP's case this will not be redundancy, so any payment received (in lieu of notice, loss of earnings, unused vacation, etc) would be liable to tax.

Also remember that a compromise agreement is not there to protect you but is there to protect the employer. You should get it checked out by a decent legal advisor who specialises in employment law.

I thought a compromise agreement was clsssed as redundancy? It definitely is if the compromise agreement is arrived at because the redundancy procedure has been carried out unfairly or even if there is doubt about the fairness and it has not been done with proper consultation and under a selection procedure as it happened to one of my former colleagues

 

[IanA2]

No - £30k tax-free applies only for the redundancy element of any payout.

It would seem that in the OP's case this will not be redundancy, so any payment received (in lieu of notice, loss of earnings, unused vacation, etc) would be liable to tax.

Also remember that a compromise agreement is not there to protect you but is there to protect the employer. You should get it checked out by a decent legal advisor who specialises in employment law.

Moreover, it is my understanding that the employer is obliged to pay reasonable legal fees to have a lawyer check the CA on your behalf. Might be wrong.

 

[stevieb15]

Talk to ACAS about a COT3 agreement.
I understood the £30k was tax free provided it is paid as compensation for lose of office...but as the last COT3 I was involved with was in 2008 things may well have changed since then, your ACAS conciliator as above will give you better advice than I but I would still get a solicitor to check everything on your behalf.
It is usual for the employer to bear all costs.

 

[IanA2]

Talk to ACAS about a COT3 agreement.
I understood the £30k was tax free provided it is paid as compensation for lose of office...but as the last COT3 I was involved with was in 2008 things may well have changed since then, your ACAS conciliator as above will give you better advice than I but I would still get a solicitor to check everything on your behalf.
It is usual for the employer to bear all costs.

Can you use a COT3 if there are no ET proceedings?

 

[Neil Mackay]

I've been on the receiving end of a compromise agreement. Yes the £30k relates simply to the redundancy element of the agreement, you will be "on gardening leave" for the remainder (normally your notice period) which will attract PAYE as normal income. You can either freeze any pension contributions made by the company or include it within the agreement. The company is also expected to pay reasonable legal costs, and also remember any outstanding holiday. Now if the company want to be awkward the redundancy will be statutory unless your contract says to the contrary! I got my company car thrown in, but for tax issues they paid me the value of the car (increased redundancy pay so avoided tax) and I then paid them and in effect bought the car ( at a reduced value to what it was really worth). It's well worth seeking legal advise as soon as you can.

 

[DITTRICH]

1 Redundancy payment up to £30k tax and nics free.
2 Accrued Holiday Entitlement less holiday taken taxable and nicsable.
3 Payment in lieu of notice - depends on whether your employment contract gives your employer the option of paying in lieu of notice in which case taxable and nicsable as it would be part of your contract. If not in your contract then the payment is deemed compensation and not taxable or nicsable.
4 Any compromise agreement would require you to take legal advice before signing it - reasonable costs to be paid by the company. The lawyer whom you consult with will explain the ins and outs to you.
5 Push them for as much as you can. Neil above has some good relevant points.

 

[st13phil]

[THREAD HIJACK]

No - £30k tax-free applies only for the redundancy element of any payout.

Hey - Good to see you back

[/THREAD HIJACK]

 

[stevieb15]

Can you use a COT3 if there are no ET proceedings?

Yes I believe so, however as I said earlier the OP needs professional advice

 

[Mr E]

I thought a compromise agreement was clsssed as redundancy? It definitely is if the compromise agreement is arrived at because the redundancy procedure has been carried out unfairly or even if there is doubt about the fairness and it has not been done with proper consultation and under a selection procedure as it happened to one of my former colleagues

No - a compromise agreement is put in place to prevent you taking further action against the employer, nothing more, nothing less.

Redundancy comes about if your role is being made redundant. Often, in cases of voluntary redundancy (as I went through last year) a compromise agreement is put in place to protect the employer against any comeback.

In your case, it doesn't appear to be redundancy (as you mentioned a potential replacement) but a way to manage (from the employer's perspective) a parting of the ways. I was involved, before I left, in "management-initiated separations" in other parts of the organisation as a independent manager. If they want rid of you, for whatever reason, then they will offer a (usually) attractive package but backed with a compromise agreement to prevent you taking any subsequent actions against them. In effect, anything over and above what you would receive if given formal notice can be considered compensation for giving up your rights in the agreement.

In my personal case, I was happy to sign as I walked away with more than 12 months salary, bonus, pension contributions and car allowance, and had no particular grievance (and who wouldn't in those circumstances). In your case, if you have grievances, you need to consider what compensation you get for giving up the right to pursue those. Absolutely essential to get good advice from a professional.

 

[IanA2]

Mr E is correct.

There is either a redundancy, for which the proper procedure should be followed, or there is MARS (mutually agreed resignation scheme). Redundancies do not normally require a CA, although a MARS might. Very much depends on the circumstances.

OP, see a good employment lawyer.

 

[Jonathan_T]

Thanks all fo the very useful advice

Expect to be on garden leave by the end of the day so will have time to get a legal professional involved and assessing what ever the company come up with.

 

[flango]

Mr E is correct.

There is either a redundancy, for which the proper procedure should be followed, or there is MARS (mutually agreed resignation scheme). Redundancies do not normally require a CA, although a MARS might. Very much depends on the circumstances.

OP, see a good employment lawyer.

No one mentioned a MARS procedure I read it as though it was a employer selected redundancy featuring a compromise agreement. If it is indeed a MARS procedure then Mr E is 100% correct