When two become one

Mergers, acquisitions and other reorganisations of businesses can result in employees being moved, either from one physical location to another and/or from one payroll to another. This can have a range of implications for paying employees, and, typically, organisations look for answers to the following questions.

• We’re merging two payrolls. Do I really have to issue P45s if no-one is losing their job?
No, is the simple answer, but unfortunately, HM Revenue & Customs (HMRC) staff often appear unaware that it’s possible for the identity of an employer to change whilst the employees remain the same. As long as the ‘old’ employer gives the ‘new’ employer all the payroll records, the new employer can simply pick up the operation of the payroll where the old employer left off – mergers and sales of organisations are unsettling enough for employees without unnecessary P45s appearing as well. The old employer is responsible for dealing with tax payments up to the date of the change of employer and from that date the new employer takes over liability (though life is a little more complex where the two payrolls come from different legal entities and the employees transfer en bloc).
• We are relocating across town and some employees will have a longer journey to work. Can we pay them a disturbance allowance?
Subject to national minimum wage and employment law issues, employers can pay their employees what they choose. That said, they must also deal with the tax and NICs consequences correctly. A disturbance allowance can certainly be paid, but it will be regarded as part of pay for tax purposes and so needs to be paid through the payroll with PAYE and Class 1 NICs accounted for. Even if the employees incur extra travelling costs in getting to and from work, if the job is still within a reasonable daily commute, the sums will be taxable and NIC-able.
• We are moving out of the area and need employees to move home. How much can we offer toward their removal costs?
The statutory maximum that can be paid free of tax and NICs is £8,000, but it needs to be matched with actual expenditure of specified types, such as legal fees, estate agents’ costs and the charges of a removals firm. The costs need to have been incurred before the end of the tax year following the relocation.
HMRC provides guidance at www.hmrc.gov.uk/ employers/ebik/ebik3/relocation.htm. An employer can, of course, pay or provide benefits worth more than £8,000, but in such cases a P11D entry is needed with the associated NICs and income tax consequences. The same rules apply if a new employee is relocating in order to take up a post, so a contribution to removal costs could form part of a ‘golden hello’.
• We are going to have to make some employees redundant, but isn’t there a £30,000 tax-free allowance that will cover any termination payments? [[There are very few payments that employers can make to current, past or future employees without a tax or national insurance liability arising...]]
There are very few payments that employers can make to current, past or future employees without a tax or national insurance liability arising, so it should not be surprising that HMRC takes a very narrow view of what the £30,000 exemption can cover. Broadly, all redundancy payments, whether at the statutory minimum or at a higher level, can be free of tax up to £30,000. In fact there is no cap at all on NIC-free redundancy payments. But when it comes to holiday pay or gardening leave, these definitely need to go through the payroll.
Pay in lieu of notice (PILON, in Revenue-speak) is a tricky area. If the employee’s contract provides the employer with the option or right to pay the employee, instead of allowing him or her to work out the contractual notice period, that payment is almost certainly taxable and NIC-able. HMRC officers often look at the employer’s custom and practice in order to allege that there is an expectation of such a payment, which therefore forms an unwritten term of the employee’s contract of employment and is taxable. This allegation is of questionable validity.
There is basic guidance, in what can be a tricky area, in the Revenue’s booklet CWG2 (‘Employer’s Further Guide to PAYE and NICs’) available on the HMRC Employer’s CD-ROM or at www.hmrc.gov.uk/guidance/cwg2.pdf. Since redundancy selection and payment also bring employment law pitfalls, this is an area in which it may be cost-effective to take professional advice on the particular circumstances.
• One of the employees that came with the organisation we acquired is simply not up to the job. Can we make him redundant and pay him off?
Redundancy has a precise legal definition and, broadly, there needs to be a requirement for fewer employees if it is to apply. Where it is simply a case of an employee’s face not fitting, or work not being up to standard, it is almost certain that redundancy is not going to be the answer. This is especially true if the employer goes out at once and recruits a replacement.
Getting rid of an employee for performance issues is a complex, and potentially costly area, where legal advice should be taken. If an agreement is reached with employees that they will leave without recourse to a full disciplinary process, it is usual for employer and employee to enter into a compromise agreement. This involves the employer paying the employee’s legal costs in taking advice on the agreement. If such a payment is made to a solicitor, then the employer can make it tax-free.
The terms of the compromise agreement are usually negotiated and so the precise tax and NICs consequences will vary. Generally, compensation for the termination of the employment contract will be free of tax and NICs but payments for restrictive undertakings (non-compete or non-solicit clauses) and accrued holiday pay will not be. When it comes to pay in lieu of notice, the tax and NICs treatment all depends on the actual terms of the employee’s contract of employment.