SE12976 - Termination payments and benefits: payments in lieu of notice (PILONs): contractual payments
EMI Group Electronics v Caldicott ( 71TC455)
Where an employee receives a 'contractual' payment in lieu of
notice ('PILON'), it is chargeable under Section 19 ICTA 1988 as an
emolument from the employment.
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.
If it is asserted that such a document does not form part of
an employee's contractual terms, refer the question to Personal
Tax, (Technical), Solihull.
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 19
ICTA 1988. 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 148 ICTA 1988. It is
dealt with as a damages payment (see
SE12978 and Example 3 in
SE13924). 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 (decided in June 2001 but to be reported) 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 an expectation or custom of making PILONs: see SE12977
- whether the PILON is damages: see SE12978
