PAYE & Damages - Tax Free Payment

[Podgy]

Hi,

I received a payment from an agency who owed payment in lieu - it was settled out of court - so I beleive it is now classified as damages. It is under the 30k limit for tax & I believe does not need to be included in PAYE / NI.

Does that mean I can make a one-off payment to the 'consultant' for the full amount called damages & completely bypass all the paye? (obviously the payment will still go through the accounts to reduce the corp tax). I've got all documentation to back-up.

[NickNick]

I'm going to suggest the same as many people did in the P11D thread. An accountant will sort this out for you in very short shrift, as opposed to those of us on here who can only offer advice based on experience.

[malvolio]

Hi,

I received a payment from an agency who owed payment in lieu - it was settled out of court - so I beleive it is now classified as damages. It is under the 30k limit for tax & I believe does not need to be included in PAYE / NI.

Does that mean I can make a one-off payment to the 'consultant' for the full amount called damages & completely bypass all the paye? (obviously the payment will still go through the accounts to reduce the corp tax). I've got all documentation to back-up.

I think you need to ask an accountant, but the money belongs to your company, not to you. It may well skip CT, but I rather doubt it's tax free to you

[Clare@InTouch]

Assuming the damages were paid to your company, not you, then no. You're not the one who was 'damaged' therefore it wouldn't be tax free in your hands!

[Nixon Williams]

Hi,

I received a payment from an agency who owed payment in lieu - it was settled out of court - so I beleive it is now classified as damages. It is under the 30k limit for tax & I believe does not need to be included in PAYE / NI.

Does that mean I can make a one-off payment to the 'consultant' for the full amount called damages & completely bypass all the paye? (obviously the payment will still go through the accounts to reduce the corp tax). I've got all documentation to back-up.

As has been said, the payment was paid to the company and as a separate legal entity the tax treatment is different to your own personal affairs.

I think you might be getting confused with the sometimes tax free status of redundancy payments, which are often free of tax & NIC upto £30,000.

Legal damages paid to you personally would be free of tax.

Alan

[Podgy]

The payment was made to the company & has been banked accordingly - but the payment was in relation to the notice for the specified consultant - so now I believe (from the hmrc documentation I was reading last night) I can make a payment to the consultant for the damages received (as my ltd was not able to give notice/payment in leiu at the time - but now can).

I would put through the accounts as damages received / paid (leaving solicitors cost/payment to balance).

I cant see why not? if it all stays in the Ltd that would be grossly unfair - what about the poor contractor who slogged their guts out for the ruthless client (they could put a claim to the ltd for non-payment!)

Not quite finalised the accounts tho should I enter payment in the accounts to which it relates (Oct 2010) or when it was received (2012).

[malvolio]

The payment was made to the company & has been banked accordingly - but the payment was in relation to the notice for the specified consultant - so now I believe (from the hmrc documentation I was reading last night) I can make a payment to the consultant for the damages received (as my ltd was not able to give notice/payment in leiu at the time - but now can).

I would put through the accounts as damages received / paid (leaving solicitors cost/payment to balance).

I cant see why not? if it all stays in the Ltd that would be grossly unfair - what about the poor contractor who slogged their guts out for the ruthless client (they could put a claim to the ltd for non-payment!)

Not quite finalised the accounts tho should I enter payment in the accounts to which it relates (Oct 2010) or when it was received (2012).

You're in danger of confusing your money with the company's; never a good idea. It's tax free income for the company, and therefore adds to the company's profits. What you do with it is up to you the director (and you're not actually an employee, in the legal sense of the term, btw), but a divi might be a nice reward...

[Clare@InTouch]

The payment was made to the company & has been banked accordingly - but the payment was in relation to the notice for the specified consultant - so now I believe (from the hmrc documentation I was reading last night) I can make a payment to the consultant for the damages received (as my ltd was not able to give notice/payment in leiu at the time - but now can).

I would put through the accounts as damages received / paid (leaving solicitors cost/payment to balance).

I cant see why not? if it all stays in the Ltd that would be grossly unfair - what about the poor contractor who slogged their guts out for the ruthless client (they could put a claim to the ltd for non-payment!)

Not quite finalised the accounts tho should I enter payment in the accounts to which it relates (Oct 2010) or when it was received (2012).

The company sued the agency, it's nothing to do with you. Unless you, as the employee, now sue the company.

If the employee that had been inconvenienced wasn't you, would you still be happy to pass on the damages tax free?

[ASB]

I received a payment from an agency who owed payment in lieu

I think you need to tread very carefully. I am assuming that PodgyCo brought action against NaffAgent for non payment of an invoice and that this invoice happened - purely coincidentally - to relate to an ungiven notice period.

Another alternative is that PodgyCo brought action against NaffAgent for breach.

What you have here is simply a standard commercial dispute. It seems to me they payment is as a result of the trade. As such it is trading income and would be taxable on the business. **

If you were to argue that it was a compensation payment for early termination (which would probably be successful) then this would still be trading income in my view.

If it were non payment then this is probably still subject to VAT (at least as much on the amount not subject to bad debt relief). In the latter case of compensation then it is probably not.

Wrapping it all up into the compensation regimes of when an employee sues an employer and the taxability of that (which is a minefield in itself) is confusing the issue.

Profits from trade are taxable, damages for damage aren't. The simple fact that court action has been involved (whether settled by the court or by agreement) does not magically turn something that is trade income into damages (and in the corporate case even if they are damages they could potentially be a capital receipt which is another minefield).

Reading this may help (or obfuscate the matter further).

Business Compensation Receipts

** Think about this. The obvious point is I engage you. Don't pay your bill, settle on the court steps (or in court for that matter) and bingo, all of a sudden your corporate income is all tax free. Hardly likely is it?

[Podgy]

I think you need to tread very carefully. I am assuming that PodgyCo brought action against NaffAgent for non payment of an invoice and that this invoice happened - purely coincidentally - to relate to an ungiven notice period.

Another alternative is that PodgyCo brought action against NaffAgent for breach.

What you have here is simply a standard commercial dispute. It seems to me they payment is as a result of the trade. As such it is trading income and would be taxable on the business. **

If you were to argue that it was a compensation payment for early termination (which would probably be successful) then this would still be trading income in my view.

If it were non payment then this is probably still subject to VAT (at least as much on the amount not subject to bad debt relief). In the latter case of compensation then it is probably not.

Wrapping it all up into the compensation regimes of when an employee sues an employer and the taxability of that (which is a minefield in itself) is confusing the issue.

Profits from trade are taxable, damages for damage aren't. The simple fact that court action has been involved (whether settled by the court or by agreement) does not magically turn something that is trade income into damages (and in the corporate case even if they are damages they could potentially be a capital receipt which is another minefield).

Reading this may help (or obfuscate the matter further).

Business Compensation Receipts

** Think about this. The obvious point is I engage you. Don't pay your bill, settle on the court steps (or in court for that matter) and bingo, all of a sudden your corporate income is all tax free. Hardly likely is it?

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.