Carousel_Arrow Chat icon_cookie IHT_trust_wills IR35 Combined Shape 2 Group 10 Login Mobile Menu Share Share Email SubMenuMobile Group 9 VAT View_Gallery View_List capital_allow Triangle 2 Copy Close construction cyberpro employment_tax_shares emplyer_solutions entrepreneurs_corps fee_protect Group 7 grant_fund Group i_Clock i_Consult i_Done i_Eligibility_Tick i_Enter i_Filter i_HMRC i_Negative i_Play i_Plus i_Reset i_Support_Legal i_Support_TaxDesk i_Support_VAT i_Tick noun_marketing_1872083 noun_online_2126759 i_download i_meet Group Copy 24 Group 18 noun_electrical_1240755 copy noun_Technology_2125422 noun_Science_2031115 i_tick_bullet_block international_tax patent_box private_client property_sdlt r_and_d reliefs_incentives Search specialist_tax status tax_indemnity valuation YouTube
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.

Our COVID-19 Hub contains a range of information and resources to best support our clients during this difficult time. To receive the latest news and insights by email sign-up here.

Tagged Tax for entrepreneurs and corporates