BIM47205 - Specific deductions: staffing costs: statutory redundancy payments

If deductions for redundancy-related payments are not allowable under general principles relief may still be available under:

• ICTA88/S579 and ICTA88/S580 (statutory redundancy payments) or
• ICTA88/S90 (certain payments made in addition to statutory redundancy payments), see BIM47210.

‘Corresponding amounts’

Both ICTA88/S579 and ICTA88/S90 reliefs refer to “... redundancy payments or the corresponding amount of any other employer's payments...”

This is a reference to payments made, on similar terms, under an approved redundancy scheme set up by an employer with the agreement of the trade unions as an alternative to the statutory scheme. Such approved schemes are rare.

ICTA88/S579 provides relief for redundancy payments made under the legislation specified in ICTA88/S580. Such payments are commonly referred to as ‘statutory redundancy payments'.

Redundancy payments and employer’s corresponding payments are defined in ICTA88/S580 to have the same meaning as in Part XI Employment Rights Act 1996 and the Northern Ireland equivalent legislation. Part XI does not actually give a single meaning for redundancy payment but sets out (at length) when such a payment must be made and explains how to calculate the amount of the payment.

Title to statutory redundancy payments

The Employment Rights Act 1996 sets out the conditions that must be satisfied before statutory redundancy payments are made. In particular, the employee must have been:

• continuously employed for a period of two years, excluding any period before the employee attained the age of 18,
• made redundant, broadly speaking, because the business is ceasing or the requirements of the business have altered in such a way that kind of work carried out by the employee is no longer needed; (a change of ownership does not give rise to statutory payments, unless of course this leads to cessation or alteration as a result of which the employee is dismissed).

Employees may also be disqualified from claiming redundancy payments if they have attained the normal retiring age for a person in the employee’s position or, if there is no normal retiring age, the age of 65. Although directors are not specifically excluded, it is arguable whether they are in fact covered by the Employment Rights Act. That said, where a company ceases to trade, statutory payments are in practice made to directors in relation to services performed as employees under contracts of service (whether written or not). It can be accepted that ICTA88/S579 applies to such payments in the usual way.

On the winding up of a company, a director may be retained on an unpaid basis to realise assets, collect debts etc. Relief should not be denied merely on the grounds that the director still works for the company in this way.

No double allowance

ICTA88/S579 (5) provides that relief is not due if an employee wholly serves, or to the extent that he or she partly serves, the employer in his private capacity. Nor is relief given more than once in respect of any employers’ payment.

Payments direct to employees by a government department

ICTA88/S579 (6) provides that, where a Minister (that is a government department) makes a redundancy payment direct to an employee and then recovers all or part of the payment from the employer, the employer is entitled to relief for the amount paid to the government department.

Payments after trade ceases

Where a statutory redundancy payment is made after the trade etc ceases, it should be treated as though it was made on the last day on which the trade or business was carried on. Further guidance on the timing of deductions is at BIM47215.