Redundancy Payments Income Tax

Redundancy Payments and Re-Engagement of Employees

Background

An article on Revenue’s view on the tax treatment of payments made under an arrangement whereby an employee is made “redundant” and is immediately re-engaged by the same employer appeared in Tax Briefing Issue 22 (June 1996). As a number of queries have again been received on this matter, this article is reproduced here, with the legislative references updated to show the relevant sections of the TCA 1997.

Redundancy

The question of whether or not there is a “redundancy” is a question of fact to be established by examining the facts and circumstances of each individual case.

Tax treatment of payments

The tax treatment of any payment depends on the nature and character of the payment being made and the real nature of the agreement between the parties involved (i.e., between the employer and employee).

The reliefs afforded in Section 201 and Schedule 3 TCA 1997 are conditional on the lump sum payment being chargeable to tax under the provisions of Section 123 TCA 1997.

Section 123 TCA 1997 (payments on retirement or removal from office or employment) imposes a charge to tax on certain payments which are “not otherwise chargeable to income tax” and which come within the meaning of Section 123(2) TCA 1997.

Any charge under Section 123 in respect of a payment made on retirement or removal from office or employment must be made on the basis that the payment is not an emolument arising from an office or employment and must be founded in general income tax law and case law.

Where a payment is from an office or employment and is in the nature of income, it is chargeable to tax under the ordinary rules of Schedule E, by virtue of Section 112 TCA 1997 [Section 112 applies to salaries, fees, wages, perquisites or profits whatsoever from an office or employment].

Also, a sum paid under a contract of employment at the termination of employment [i.e. where there is a prior title to the sum and it is in the nature of a supplement to remuneration] is chargeable to tax under the ordinary rules of Schedule E [i.e. under the provisions of Section 2 TCA 1997].