PAYE & Damages - Tax Free Payment

[northernladuk]

Thanks having read the link - its a bit grey! but I can put in the accounts as revenue receipt & then I will make a damages payment to the consultant for their services - it is this part that I believe can be tax free - not through PAYE - as the consultant was not on a payroll at the time & payment is over a year later & it is damages.

Get an accountant for gods sake.

[Clare@InTouch]

Thanks having read the link - its a bit grey! but I can put in the accounts as revenue receipt & then I will make a damages payment to the consultant for their services - it is this part that I believe can be tax free - not through PAYE - as the consultant was not on a payroll at the time & payment is over a year later & it is damages.

Where do you get the bit about it being OK to make a damages payment to the Consultant from?

[ASB]

Thanks having read the link - its a bit grey! but I can put in the accounts as revenue receipt & then I will make a damages payment to the consultant for their services - it is this part that I believe can be tax free - not through PAYE - as the consultant was not on a payroll at the time & payment is over a year later & it is damages.

Umm, no I don't think so. The consultant was not your employee, so you will simply be paying their invoice.

If you were paying the consultant PAYE then you might just be able to make them a payment without deducting paye. But only if you did in fact fire them, triggering the notice period etc and not pay.

Though the years delay might make that a bit tricky.

Simple question is: was the consultant ever an employee (irrespective of whether you had a contract of employment with them there could be an implied one). Did you fire them? Either explicitly or constructively.

If you can't get over both these hurdles then there is no way you can make a tax free compensation payment.

As has been said, find an employment law specialist. And remember your company is going to be paying CT on the funds received (almost certainly).

[tractor]

...

Thanks having read the link - its a bit grey! but I can put in the accounts as revenue receipt & then I will make a damages payment to the consultant for their services - it is this part that I believe can be tax free - not through PAYE - as the consultant was not on a payroll at the time & payment is over a year later & it is damages.

It is only damages if a court actually awards it as such. Otherwise it can only be 'payment in lieu of somethingorother'. I suspect the consultant is actually you aka the director and no doubt shareholder. You can deem it a sandwich allowance but it wouldn't make it so. HMRC will deem it payment unless you can satisfactorily show otherwise. I hate that word 'deemed' but that is what it is!

Seems to me even after all the good advice here which amounts to get an accountant, you are still going to pay it as 'damages'. At the end of the year, if your accountant is any good, they will question that fact and disallow it. You will then end up with an unpleasant bill. You really should listen to what is being said here.

Another thing, it appears that this event has transcended an end of tax period (corporate year). If so, and the revenue was at risk, you are likely to have made provision for it as a bad debt for which you will have already claimed some tax relief (if your acct is switched on). Now you have recieved the payment, it should be taken from provisions back to revenue and will again be subject to CT as others have already pointed out.

[Contreras]

Thanks having read the link - its a bit grey! but I can put in the accounts as revenue receipt & then I will make a damages payment to the consultant for their services - it is this part that I believe can be tax free - not through PAYE - as the consultant was not on a payroll at the time & payment is over a year later & it is damages.

It's not a grey area at all.

Agent Co. has settled a bad debt with Ltd Co., this contributes to Ltd Co.'s profit and therefore is subject to corporation tax.

Ltd Co. incurred legal fees which are deductible against corporation tax, as is any salary paid by Ltd Co. to Consultant.

Ltd Co. was previously unable to pay Consultant's remuneration. Now that Ltd Co. is in a position to pay, if paid as salary this will be treated as PAYE regardless of the circumstances. The only question is in which tax year it became due.

To avoid the PAYE, Ltd Co. could instead issue a dividend as distribution of profits. This is not deductible against corporation tax but still may be the preferred option.

At best, Consultant could have taken action against Ltd Co. for "unlawful deduction of wages". Whether awarded by a tribunal, or settled out of court, and even though a year late, any resulting payment would still be subject to PAYE - because it is remuneration for employment, i.e. it must be treated as wages.

For it not to be treated as wages then it can't be recompense for work done, e.g. the Consultant would need to sue Ltd Co. for sex discrimination or such like, or possibly a redundancy payment in lieu of notice period, and only then could it be classed as damages.

[Podgy]

Where do you get the bit about it being OK to make a damages payment to the Consultant from?

http://www.hmrc.gov.uk/guidance/2011/cwg2.pdf - page 102 no.7

have to admit tho may be a bit dodgy in the particular circumstances.

[Clare@InTouch]

http://www.hmrc.gov.uk/guidance/2011/cwg2.pdf - page 102 no.7

have to admit tho may be a bit dodgy in the particular circumstances.

So which one of those did your employer do to you?

7 Payments made as damages

if the termination was a breach of contract. For example:
• you did not give the employee proper notice, and there
was no entitlement or option to make payment in lieu
of notice. A payment in lieu then made is damages for
the breach
• you agree, or the Courts or an Employment Tribunal rule,
that the employee was unfairly or wrongly dismissed.
If you pay something which is due under the terms or
conditions of employment, it will not be damages. For
example, you may be ordered, or agree as part of a
settlement of damages, to pay wages due under such
terms. In these circumstances that element of the payment
must be included in gross pay for NICs and PAYE purposes.

[Podgy]

It's not a grey area at all.

Agent Co. has settled a bad debt with Ltd Co., this contributes to Ltd Co.'s profit and therefore is subject to corporation tax.

Ltd Co. incurred legal fees which are deductible against corporation tax, as is any salary paid by Ltd Co. to Consultant.

Ltd Co. was previously unable to pay Consultant's remuneration. Now that Ltd Co. is in a position to pay, if paid as salary this will be treated as PAYE regardless of the circumstances. The only question is in which tax year it became due.

To avoid the PAYE, Ltd Co. could instead issue a dividend as distribution of profits. This is not deductible against corporation tax but still may be the preferred option.

At best, Consultant could have taken action against Ltd Co. for "unlawful deduction of wages". Whether awarded by a tribunal, or settled out of court, and even though a year late, any resulting payment would still be subject to PAYE - because it is remuneration for employment, i.e. it must be treated as wages.

For it not to be treated as wages then it can't be recompense for work done, e.g. the Consultant would need to sue Ltd Co. for sex discrimination or such like, or possibly a redundancy payment in lieu of notice period, and only then could it be classed as damages.

mmm - was worth a try tho - only question is whether I should adjust the accounts for year ending 2010 with the payment & salary - as this is the period to which it relates? I received payment & paid salary in 2011/12 tax year tho?

[Podgy]

So which one of those did your employer do to you?

7 Payments made as damages

if the termination was a breach of contract. For example:
• you did not give the employee proper notice, and there
was no entitlement or option to make payment in lieu
of notice. A payment in lieu then made is damages for
the breach
• you agree, or the Courts or an Employment Tribunal rule,
that the employee was unfairly or wrongly dismissed.
If you pay something which is due under the terms or
conditions of employment, it will not be damages. For
example, you may be ordered, or agree as part of a
settlement of damages, to pay wages due under such
terms. In these circumstances that element of the payment
must be included in gross pay for NICs and PAYE purposes.

The first one.

[Contreras]

So which one of those did your employer do to you?

7 Payments made as damages

if the termination was a breach of contract. For example:
• you did not give the employee proper notice, and there was no entitlement or option to make payment in lieu of notice. A payment in lieu then made is damages for the breach
• you agree, or the Courts or an Employment Tribunal rule, that the employee was unfairly or wrongly dismissed.

If you pay something which is due under the terms or conditions of employment, it will not be damages. For example, you may be ordered, or agree as part of a settlement of damages, to pay wages due under such terms. In these circumstances that element of the payment must be included in gross pay for NICs and PAYE purposes.

The first one.

Try again.