A question about : Tax Status Of ATC Loss of Licence Payment
I would appreciate some advice. I am an air traffic controller and suffered a mini stroke with an emergency hospital admittance. As a result, I have lost my medical licence to practice. My company operates a contractual loss of air traffic controller’s licence benefit scheme. This states that two years salary will be paid on termination of employment due to medical loss of the licence. The scheme is run by an insurer to which the company pays a premium. I am about to be terminated by my employer.
I always believed that any payment made under the loss of licence scheme would be exempt of income tax and national insurance contributions, as determined in the High Court ruling below.
EIM13610 - Termination payments and benefits: Section 401 ITEPA 2003: exceptions: payments on account of injury or disability: general
Section 406(b) ITEPA 200
A termination (or change) payment or benefit is excepted from tax under Section 401 ITEPA 2003 (see EIM13000) if it is paid wholly on account of:
• an injury to an office-holder or employee, or
• the disability (see EIM13620) of such a person.
EIM13630 - Termination payments and benefits: Section 401 ITEPA 2003: exceptions: payments on account of injury or disability: meaning of disability: Hasted v Homer
Section 406(b) ITEPA 2003
The High Court decision in Hasted v Horner (67TC439) established two tests that must both be satisfied for the disability exception to apply:
• there must be an identified medical condition that disables or prevents the employee from carrying out the duties of the employment. Medical evidence confirming the precise nature of the disability must therefore be seen in all cases and it must be clear that the nature of the disability prevented the employee carrying out the specific duties of the employment
and
the payment must be made on account of that disability and on account of nothing else. This means that the facts demonstrate that was the sole motive of the payer.
I believe that I have fulfilled the above two conditions. I have sent all my medical and consultant’s reports to HMRC, and my company has sent all my employment records and contract to HMRC to obtain clearance from HMRC of a tax free payment.
HMRC initially confirmed the tax free status by letter, but now have reconsidered their position and state that tax and national insurance has to be paid as the loss of licence benefit was part of my contract.
I’d be grateful for any insight or viewpoints as to this decision, and whether I should consider an appeal.
Thanks so much.
Much appreciated.
jonbo300
Best answers:
- I would pose this question on PPrune ATC section or try contacting another large ATC unit where other controllers may have collected loss of licence insurance payouts. I knew several controllers who got this payout but I did not think they paid tax on it, not that I asked.
- Hi iltisman,
Thanks so much for your reply. What a brilliant suggestion. It never even crossed my mind!!
And, I've just been reading PPrune earlier!!
Best Wishes,
jonbo300 - The correct approach is to test first whether a payment is taxable (in full) as employment income under Section 62 ITEPA 2003.
If so that is the end of the matter. Tax and NI are payable.
Section 401 ITEPA 2003 is a catch up provision which taxes most termination payments (subject to exemption of the first Ј30,000) which escape Section 62.
I am afraid the word "contractual" is your downfall because it establishes the payment as taxable under Section 62.
https://www.hmrc.gov.uk/manuals/eimanual/EIM00610.htm
https://www.hmrc.gov.uk/manuals/eimanual/EIM00630.htm
Unless you can somehow establish that the payment is not contractual I am afraid you will be taxed.
https://www.hmrc.gov.uk/manuals/eimanual/EIM13920.htm - Hi Jimmo,
Thanks so much for your input and comments. Thanks for the explanation and the links.Much appreciated.
I understand the HMRC position now.
Could I ask that, even though the payment is taxable through contract, can the payment still not be excepted from tax under Section 401 ITEPA 2003 (see EIM13000) if it is paid wholly on account of:
• an injury to an office-holder or employee, or
• the disability (see EIM13620) of such a person
Would I be in a position to qualify for the first Ј30000 of the termination payment to be exempted from tax? I am not quite sure how that is applied by HMRC.
Thanks again - No to both I am afraid.
ITEPA2003 is constructed of various, self contained Parts and Chapters and each Chapter is then divided into Sections.
Part 3 deals with earnings.
Chapter 1 consists solely of section 62, the charge to tax on earnings. The following Chapters of Part 3 then contain various provisions which apply to earnings.
Part 4 then gives various exemptions from Part 3 but I will come back to that later.
Part 6 deals with employment income which is not earnings and Chapter 3 deals with termination payments.
As I said before Section 401 is a charging section, not a relieving section. It charges tax on termination payments which would have otherwise have not been taxed.
Section 401(3) confirms that a Section 401 charge does not apply if the payment is otherwise chargeable to tax.
https://www.legislation.gov.uk/ukpga/2003/1/section/401
In other words your termination payment is either chargeable under Section 62 or section 401, not both.
Section 403 then relieves the first Ј30,000 of any payments chargeable under Section 401 but it only applies within Part 6 so it applies to Section 401 but it has no relevance to a payment chargeable under Part 3 (Section 62).
https://www.legislation.gov.uk/ukpga/2003/1/section/403
Similarly Section 406 relieves disability payments such as yours from any charge under Section 401 and has no relevance to Section 62.
https://www.legislation.gov.uk/ukpga/2003/1/section/406
Coming back to Part 4: Chapter 10 provides exemption for termination payments which are within Part 3. This is where you probably need to concentrate any further effort.
https://www.legislation.gov.uk/ukpga/2003/1/part/4/chapter/10
That, however, is something I have never had to deal with so I am afraid I may not be able to help. - Hi jimmo,
Thanks again for your most comprehensive response, and all the relevant links. I appreciate your time and effort involved in helping me.
Thanks for explaining how IITEPA2003 is structured. I've been going through your links and I think I am beginning to understand some of the complexities involved.
As you suggest, I should concentrate on Part4 : Chapter 10 which provides exemption for termination payments.
I am trying to arrange a meeting with a tax specialist shortly. The loss of licence insurance scheme will provide two years of salary. Even though it will be taxed by HMRC, I really should be grateful to receive the payment as very few employers provide that type of benefit.
I respect your great depth of knowledge on tax matters and would like to thank you very much for your explanations and valuable information given to me.
Best Wishes
jonbo300 - Are you near to 55, or over? If so you could consider putting some of the payment into your pension (possibly using previous years unused allowances) - this will allow you to retrieve at least some of the tax & after April you can access the fund freely subject to your marginal tax rate.
- Hi enator,
Thanks for the reply.
I am shortly aged 58, so really nearing retirement age. I appreciate the suggestion of putting some of the lump sum into my pension fund.This is the course I am planning to follow now.
I am planning to use this year's unused tax allowance, and carry forward the unused allowance from the three previous tax years. I've worked out the figures and confirmed them with my pension provider.
This way, I feel I can reduce the tax implication considerably. I am going to wait until the 6th of April and then make use of phased flexi drawdown. I've emailed my pension provider to check whether the new provisions will be in place by April.
I will get 3 months pay, so I think it's a case of balancing how much I will need to live on until the income drawdown starts against how much to put into my pension. I wish to put as much of the lump sum as possible into the pension since I am a higher rate tax payer within this tax year, and not go short in the meantime.
Thanks again - Hi jimmo,
Could I possibly ask you a follow on question.
I will receive 3 months pay and some holiday pay when I receive my notice of termination. This is stated in my contract and has been agreed by my company.
Could I ask if this 3 months payment could be free of tax and NIC I I was trying to understand Section 403.
"Section 403 then relieves the first Ј30000 of any payments chargeable under Section 401 but it only applies within Part 6 so it applies to Section 401 but it has no relevance to a payment chargeable under Part 3 (Section 62)"
Thanks again, - If the 3 months salary is PILON (pay in lieu of notice) then it is 'earnings' and has to have NICs and PAYE against it.
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