BIM47200 - Specific deductions: staffing costs:
redundancy payments: general principles
On general principles redundancy payments will be allowable as
deductions provided that they:
- are paid wholly and exclusively for trade
purposes, and
- do not result in the trader acquiring
assets or rights of a capital nature.
Wholly and exclusively
Case law has identified a number of circumstances in which
redundancy payments may not be incurred wholly and exclusively for
the purposes of the employer’s trade. For example:
- Payments in excess of an employee's
pre-existing contractual or statutory entitlement made for the
purpose of closing down or selling off the trade (CIR v Anglo
Brewing Co Ltd [1925] 12TC803). However, this excludes payments
made to employees under a pre-existing contractual or statutory
obligation (for example, statutory redundancy payments made to
employees originally taken on in the course of the trade). Such
payments were considered in the Privy Council case of CIR v
Cosmotron Manufacturing Co Ltd [1997] 70TC292, to be normal
employment costs and not incurred for the purpose of going out of
business and so allowable deductions under general principles.
- If made as part of a bargain involving the
transfer of shares (James Snook and Co Ltd v Blasdale [1952]
33TC244 and, by way of contrast, CIR v Patrick Thomson Ltd [1956]
37TC145).
- When payments are influenced by family or
private interest (Samuel Dracup and Sons Ltd v Dakin [1957]
37TC377).
Capital expenditure
Payments made in conjunction with employees’ undertakings
as to their future conduct, for example restrictive covenants, may
be capital expenditure and disallowable on general principles - but
see
BIM47005.
Statutory reliefs that override general principles
In many instances, however, this case law has been overridden to
some extent by the statutory relieving provisions in:
- ICTA88/S579 and ICTA88/S580 (statutory
redundancy payments), see
BIM47205.
- ICTA88/S90 (additional payments to
redundant employees), see
BIM47210.
Guidance on the timing of deductions due under general
principles, or by virtue of these specific statutory reliefs, is at
BIM47215.
