Redundancy payment

Q. Redundancy payment – My wife’s company contracts me out in the oil business and I am the only employee. We want to make me redundant but my accountant says ‘they will treat it as retirement’. Is this correct? I am 67, salary £50k last year and paid my wife £20k Directors fees.

A. Presumably the writer is referring to HMRC when he states “they” & the question is whether or not he can receive statutory redundancy pay & be exempt from tax on payments up to £30K? Whilst I can fully understand the rationale for the accountant’s advice I would add that statutory redundancy can be paid to any employee who has been in two or more years’ continuous employment with an employer. The calculation is made according to a formula, based on age, length of service and weekly pay which is capped at £475 p.w.

In deciding whether or not any payment qualifies as a genuine redundancy payment HMRC apply the definition of redundancy given by Section 139 Employment Rights Act 1996:

“….an employee who is dismissed shall be taken to be dismissed by reason of redundancy if the dismissal is attributable wholly or mainly to:

the fact that his employer has ceased, or intends to cease, to carry on the business for the purposes of which the employee was employed by him, or has ceased, or intends to cease, to carry on that business in the place where the employee was employed or
the fact that the requirements of that business for employees to carry out work of a particular kind or for employees to carry out work of a particular kind in the place where he was so employed, have ceased or diminished or are expected to cease or diminish.”

HMRC will try & argue that payments to older employees are made on retirement & taxable. Evidence needs to be gathered to show that the redundancy is genuine & not for retirement purposes. The accountant is therefore absolutely correct in their words of caution because if the employer gets this wrong then they are likely to be liable for penalties as well as the tax, NIC & interest.