2000 employees were transferred from Scottish & Newcastle's to KNDL in 2006 and the TUPE regulations applied.
A serious concern to those employees being transferred was that the pension scheme for KNDL was not as good as that provided by Scottish and Newcastle's. After several meetings Scottish and Newcastle's agreed to pay each employee the sum of £5,000. This payment was made partly as compensation for the loss of pension rights and partly to ensure a smooth transfer avoiding industrial action.
The First-Tier Tribunal, a tax tribunal, found that this payment was taxable as employment income and on appeal, the Upper Tribunal agreed.
This decision confirms that payments related to employment and for contractual benefits will give rise to tax and should be treated as such at the outset to avoid penalties. The issue here was that the compensation payment (usually a non-taxable concession) was linked and paid at the same time as the inducement payment (not to undertake industrial action). Had the payment been kept separate, arguably the first would not have fallen to be taxed.
If such a payments are to be made to an employee then it may be worth considering whether the payment can be split to represent the various reasons for the payment. This could allow the employer to limit the income tax payable by the employee.
The IT sector is well known for undertakings to be transferred so employers ought to take note. Employees who are taxed on this type of payment aren't likely to be very happy.
This was first published in January 2011