Firstly, the quote from us regarding notice periods is out of date; I need to locate it and update.
Lisa is quite right to cite the judges comments in the 1997 case of McManus v Griffiths.
The vast majority of contracts that I see all have notice periods contained within them because they serve a commercial purpose, e.g. they allow time for the work to be brought to a satisfactory conclusion and any hand over to be made smoothly. Where there is early termination of the contract, a notice period could act as a form of compensation to the contractor for cancellation of a trading contract. Such receipts are recognised as trading income and can even be considered to be capital receipts if one contract is so dominant that it accounts for substantially the whole of a company's income.
In the main, however, most contractors who have had notice served upon them will be receiving money in return for services during that period of notice.
Where notice is served and the contractor simply paid for doing no work at all then there is a danger that this could be seen to be payment in lieu of notice (PILON). PILONs are associated with employment and the proper tax treatment is to tax such as employment income. Clearly that would not be helpful.
Although notice periods should be considered as a neutral factor because of the the judges comments in the above case they do have an impact on MOO especially if a notice period is a lengthy one. Where there is a long notice period then it would be difficult to argue against obligations existing between the two parties. Even with a 30 day notice period HMRC may seek to argue that this indicates MOO is present within the contract.
Lisa is quite right to cite the judges comments in the 1997 case of McManus v Griffiths.
The vast majority of contracts that I see all have notice periods contained within them because they serve a commercial purpose, e.g. they allow time for the work to be brought to a satisfactory conclusion and any hand over to be made smoothly. Where there is early termination of the contract, a notice period could act as a form of compensation to the contractor for cancellation of a trading contract. Such receipts are recognised as trading income and can even be considered to be capital receipts if one contract is so dominant that it accounts for substantially the whole of a company's income.
In the main, however, most contractors who have had notice served upon them will be receiving money in return for services during that period of notice.
Where notice is served and the contractor simply paid for doing no work at all then there is a danger that this could be seen to be payment in lieu of notice (PILON). PILONs are associated with employment and the proper tax treatment is to tax such as employment income. Clearly that would not be helpful.
Although notice periods should be considered as a neutral factor because of the the judges comments in the above case they do have an impact on MOO especially if a notice period is a lengthy one. Where there is a long notice period then it would be difficult to argue against obligations existing between the two parties. Even with a 30 day notice period HMRC may seek to argue that this indicates MOO is present within the contract.
Comment