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Markel Tax

07 Jul 2020

Voluntary liquidation: Is the director entitled to the £30,000 termination payment threshold?

My client is the managing director and sole shareholder of her own personal holiday bookings company. Unfortunately the demand for the company’s services has dried up in the recent economic climate and as a result the director is going to put the company into voluntary liquidation. Is the director entitled to the £30,000 termination payment threshold in respect of any payments she receives from the company?

In some circumstances it is possible for a director to receive termination payments that fall within s 401, ITEPA 2003 from their limited companies, however, the position should be reviewed on a case by case basis.
In the first instance it is important to identify whether the client is indeed employed by the company. Evidence that could prove the employment status might include the existence of an employment contract, ideally in writing although an oral contract may suffice, payment of salary via PAYE and being able to demonstrate that the client has a practical role beyond that of just an advisory position.

Assuming the client is clearly employed by her company, it is then necessary to determine to what extent the payments relate to the termination of the client’s employment rather than to her position as shareholder. If other employees have also been made redundant and paid termination payments, this strengthens the argument that the director is also entitled to a termination payment in light of the company’s trade drying up and also provides a benchmark for an appropriate level of termination payment.

Some termination payments may fall within the £30,000 exemption, provided they are not subject to tax under another part of the legislation such as earning or benefits. For example, accrued wages paid to a director on termination will fall to tax as earning rather than as termination payments within s 401. Additionally, for terminations on or after 6 April 2018, payments will need to take account of any payments in lieu of notice (PILONs) as though a notice period was worked, whether or not it is contractual. These amounts are referred to as Post Employment Notice Pay (PENP) and do not fall within the £30,000 exemption.

As can be seen, this is a fairly complex area and the facts of any case will need to be reviewed to determine whether any termination payments for the director would fall within the £30,000 exemption but with the right set of circumstance the relief can be available.

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Tagged Tax for entrepreneurs and corporates Tax for entrepreneurs and corporates