SE12977 - Termination payments and benefits: payments in lieu of notice: automatic or customary payments

As SE00640 explains, a payment made without legal obligation can be chargeable under Section 19 ICTA 1988 if it is customary to make it. This is to be considered when there is no written reference in employment terms to PILONs (see SE12976).

For example, an employer may always make a payment for any notice period that is not worked, even though nothing is written down. This may be described as a "custom" or as an "expectation", but the terminology used is less important than identifying the character of the payment. Provided that the payment is made as an automatic response, it is arguable that it is an "emolument therefrom" within Section 19 ICTA 1988. That may be so even if an individual employee does not know about it - what is important is whether it is part of the employment relationship where the individual works.

The important point is less how long the expectation or custom has been in place than whether it is an automatic part of the employment. So where it is clear that an employer intends to follow a particular path in the future, a custom can come into being very quickly.

An expectation or custom should not be argued to exist where there is a procedure for making a genuine critical assessment in the making of payments, so that they are not made automatically. For example, an employer makes PILONs instead of giving notice, but each payment is looked at under an internal written procedure that assesses what payment is to be made. The result is that some employees may be forced to sue for compensation, or some may receive less than the equivalent of gross salary (because, for example, they already have another job to go to). Such PILONs are likely to represent damages because an individual employee cannot be certain that a payment equal to salary due in the notice period will automatically be made: see SE12978.

An custom may be industry-wide or confined to a small group of employees within a business or even a single employee. What is important is whether the payment is part of the employment relationship.

Do not suggest that such a payment is contractual. Since you will be dealing with unwritten provisions, such a payment will in general only be contractual if it can be "implied" into the contract. This is a complex non-tax law concept, but broadly a PILON cannot usually be "implied" because it would conflict with the contractual right to receive a period of notice. However, such payments can still fall within Section 19 ICTA 1988 even if they are not contractual, as explained above. Cases such as Corbett v Duff (23TC763) and Laidler v Perry (42TC351) demonstrate that such payments may be within Section 19 ICTA 1988 even if non-contractual (see SE01040 and SE00645). Good evidence must be established from documents and interviews before asserting that Section 19 ICTA 1988 applies in such a situation.