The employer chose to describe the payment as ex gratia and not subject to PAYE (as it was below the £30,000 limit in ITEPA s.403). The termination letter gave no indication the employee had waived any right to receive a PILON by accepting the 'ex-gratia' payment. The employer argued that the payment should be regarded as being an amount in lieu of the notice due but not provided. The tribunal, however, found that the payment was ex-gratia as described in the termination letter, leading to the conclusion that it was still open to the employee to make a claim according to the terms of her employment contract (in respect of the required notice period).

This may be an important decision both in terms of the way in which employers record what is being paid in circumstances where an employee's employment is being terminated, and as regards the scope for HMRC to argue that such payments are something other than the 'label' applied.

HMRC sets out its view on the tax treatment of PILONs in its Employment Income manual. Great care should be taken to ensure that the nature of the payment is correctly categorised to ensure correct tax treatment and not leave either the employer or employee exposed to unexpected liability.

The lesson for employers from this case is that care should be taken in the drafting of letters giving notification of termination of employment, with both the tax and commercial implications needing attention.

If you have any queries concerning such issues please contact Inez Anderson, or a member of the employment taxes and incentives team.