As advisors to your clients, staying abreast of the latest tax rulings and their implications is essential to providing accurate advice and maintaining compliance. A recent determination by the Tax Appeals Commission (TAC) has provided some significant points to note in respect of making termination or redundancy payments to employees where a business is transferring.

Where businesses are sold by a company and as part of this employees transfer, deciding to pay a redundancy payment tax free has its risks as in this case, it highlights that a business has to cease in order for their to be a redundancy arrangement here. Having any arrangement whereby a person leaves just prior to a transfer of the business and an ex-gratia termination payment is made and this person then begins in the same trade operated by someone else poses real risks.

Case Overview: 60TACD2024

The case in question involves a company (the Appellant) and the Revenue Commissioners (the Respondent), focusing on a dispute over whether payments made to employees in August 2017 were subject to income tax, PRSI and USC. The Appellant claimed these payments were redundancy payments, thereby qualifying for tax relief under the TCA 1997 specifically due to the provisions of Section 123 TCA 1997, while the Respondent argued otherwise.

The key tax legislation referred to in this case included:

1. Section 12 TCA 1997: Establishes the broad categories of taxable income, including property, profits, and gains.
2. Section 19 TCA 1997: Specifies that income under Schedule E includes salaries, fees, and wages.
3. Section 112 TCA 1997: Clarifies that all employment-related profits are taxable under Schedule E.
4. Section 123 TCA 1997: Discusses the tax treatment of payments on retirement or removal from office or employment.

Key Points

The Appellant company was trading in food production and ceased in August 2017. A second company owned by one of the directors of the Appellant company in close proximity to this commenced to trade in food production – from the same premises and in a very similar manner. Former employees of the Appellant joined the second company. It was noted that the two directors in the Appellant company were father and daughter and the daughter took over the business operations seamlessly from the Appellant company.

The crux of the dispute was whether the payments were genuine redundancy payments. Redundancy payments are eligible for tax relief if they arise from a genuine termination of employment due to redundancy. However, in this case, the TAC found that the business was not terminated but rather transitioned to a new company formed by the second director of the Appellant company.

Employees continued their roles under the new entity, contradicting the redundancy claim and there was an understanding that this is what would happen. It was noted that evidence suggested a transfer of business operations, falling under the scope of TUPE principles, which protect employees’ rights and ensure continuity of their employment terms in the event of a business transfer.

The TAC's determination was heavily influenced by the evidence presented, which indicated a continuity of employment rather than termination. As a result, the payments were classified as profits or gains from employment, making them taxable under Schedule E. Consequently, the Notice of Estimation issued by the Revenue Commissioners, which assessed a tax liability of €140,545, was upheld.

Implications for you and your client

This ruling underscores the importance of understanding the conditions under which payments can be classified as redundancy payments eligible for tax relief. It highlights the necessity of thorough documentation and clear evidence when claiming tax relief for redundancy payments. As accountants, it is crucial to advise clients accurately on these matters to ensure compliance and avoid disputes with the Revenue Commissioners.

This recent TAC determination serves as a reminder of the complexities involved in tax compliance and the importance of accurate classification of payments. By staying informed on the latest TAC determinations and court decisions, you can better navigate these challenges and provide your clients with the best possible advice.

The contents of this article are meant as a guide only and are not a substitute for professional advice. The author/s accept no responsibility for any action taken, or refrained from, as a result of the material contained in this document. Specific advice should be obtained before acting or refraining from acting, in connection with the matters dealt with in this article.