Revenue Note for Guidance

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Revenue Note for Guidance

CHAPTER 5

Miscellaneous charging provisions

Overview

This Chapter provides for the imposition of a Schedule E charge to tax on the receipt of certain payments, sums, benefits, shares, securities and assets which, but for the provisions of this Chapter, would not be chargeable to tax. The Chapter also outlines the tax treatment of convertible securities, restricted shares and forfeitable shares acquired by directors and employees.

123 General tax treatment of payments on retirement or removal from office or employment

Summary

Subject to the exemptions provided for in section 201, section 123 imposes a charge to tax under Schedule E in respect of compensation payments for loss of office and certain other payments received on the termination of an office or employment or on a change in the functions or emoluments of an office or employment. Section 123 is confined to payments which escape tax under the general law. Section 201 may exempt from tax, depending on individual circumstances, all or part of such payments.

Details

Application

(1) The payments charged to tax under this section are described by reference to the events in connection with which the payments are made. The charge is limited to payments “not otherwise chargeable to income tax”. The payments covered include payments on a change of functions or emoluments and commutation payments. Examples of the type of payments caught by the section, which would otherwise be treated as non-taxable, are —

  • compensation for loss of office,
  • damages for breach of contract of service,
  • a payment to obtain release from a contingent liability under a contract of service,
  • a lump sum to commute a pension or pension rights,
  • a gratuity on or after retirement entirely at the discretion of the employer, and
  • redundancy, etc payments.

The charge to tax

(2) Subject to the exemptions provided for in section 201, a charge to tax under Schedule E arises in respect of any payments to which this section applies which are made to holders or former holders of offices or employments, whether made by the employer or by a third party. Also included are such payments made to the executors or administrators of a deceased person.

The charge to tax is extended to include payments made to the spouse, civil partner or any relative or dependant of the holders or former holders of offices or employments, or to any other persons on his/her behalf. It also provided that payments in kind are chargeable on their value at the time they are given.

When chargeable

(4) Sums received in commutation of annual or periodical payments are chargeable for the year in which the commutation takes place and not the year in which the service ends. All other payments within the charge are treated as arising on the date of the termination of service or change of functions or emoluments in respect of which the payment is made. All such payments are treated as emoluments assessable under Schedule E.

Deceased persons

(5) An assessment may be made on a taxpayer’s executors or administrators where the payment was made in the taxpayer’s lifetime but he/she has died before an assessment was made on him/her.

Information

(6) A person making any payment chargeable under this section is required to give particulars of the payment in writing to the inspector within 14 days of the end of the year of assessment in which the payment is made.

Relevant Date: Finance Act 2020