Changes will make termination payments more complicated: ICAEW comments on draft legislation

Withdrawing foreign service relief (FSR) on employees’ termination payments will make the regime more complex. This seems contrary to the government’s objective of simplification.


ICAEW Tax Faculty expressed this view in our submission (ICAEW REP 119/17) on the draft Finance Bill legislation to withdraw FSR on termination payments


This draft clause will remove foreign service relief on termination payments for UK residents, so that all employees who are UK-resident in the tax year their employment is terminated will be liable to income tax on their termination payment in the same way, regardless of whether they have worked abroad. Foreign service relief is retained for seafarers. The change will apply from April 2018.


The original consultation cited several objectives including that “the rules should provide certainty for employees and employers; the rules should be simple”. Regrettably, the new rules will be more complicated than those they replace, which is contrary to the second, third and fourth of our Ten Tenets for Better Tax System (summarised in ICAEW REP 119/17), namely that the rules should be ‘Certain’, ‘Simple’ and ‘Easy to collect and to calculate’.


Complications will be caused when calculating foreign tax credits where the employee is overseas and globally mobile employees may not know whether or not they are UK resident at the time of payment.


We suggest that a simpler way to tax termination payments through payroll would be to time-apportion the compensation between UK and non-UK periods spent working for the same employer (and any associated companies) and charge tax and NIC on the UK-source element, possibly with a parallel time-apportioned £30,000 rule.


ICAEW Tax Faculty also questions calling the employer-only NIC on termination payments “Class 1A”. Using the same nomenclature as for NIC on employer-provided benefits-in-kind (BiK) – which has different reporting processes – is likely to cause confusion. We recommend calling it “Class 1C”.


We also seek clarification as to:


  • the due date for paying the NIC (which the provisional nomenclature suggests will be 19/22 July following the tax year end), and
  • whether termination payments on which employer-only NIC will be payable will be included in the “pay bill” for apprentice levy purposes.


We understand that HMRC has still not given software developers full IT specifications for calculating the NIC charge. We therefore recommend that the commencement date be deferred until April 2019. Failing that, HMRC should produce complete and detailed IT specifications without delay.


We should also welcome clarification of how termination payments will be displayed when businesses access their business tax accounts and how agents will access these details.