EIM12976 - Termination payments and benefits: payments in lieu of notice (PILONs): contractual payments

EMI Group Electronics v Caldicott (71TC455)

With effect from 6 April 2018, an element of all payments received in connection with the termination of a person’s employment are chargeable to income tax as general earnings (see EIM13874).

Where an employee receives a contractual payment in lieu of notice (PILON), it is chargeable under Section 62 ITEPA 2003 as earnings from the employment (see EIM00515).

A contractual PILON is one that has its source in the contractual arrangements between employer and employee. Such arrangements can take a variety of forms, including:

  • the main contract document
  • a side letter to the main contract document
  • a staff handbook
  • a letter of appointment
  • a redundancy agreement
  • an employer-union agreement

It is important to consider all possible contractual sources.

(This content has been withheld because of exemptions in the Freedom of Information Act 2000)

Sometimes these arrangements give the employer a choice or discretion of giving notice or making a PILON. That was the situation in the EMI case, where under the terms of the contract the employer had a reserved right to make a payment in lieu of notice. It was accepted that the right was exercised and the Court of Appeal held that such a payment is chargeable under section 62 ITEPA 2003.

An employer in this situation can choose not to give proper notice and also not to make a payment in lieu under the contract. If so, the terms of the contract are breached, and a payment for that breach falls within section 401 ITEPA 2003. It is dealt with as a damages payment (see EIM12978 and Example 3 in EIM13924). Such cases must be examined critically to ensure that there is evidence that the employer did in fact choose to breach the contract. The case of Richardson v Delaney (74TC167) is an example of a case where the High Court rejected the employer’s claim that such a breach had occurred.

If there is no contractual source for the PILON, consider:

  • whether there is a custom of making PILONs, see EIM12977
  • whether the PILON is damages, see EIM12978