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ITR: The Taxation of Certain Compensatory Payments to Employees

AUTHORs: Aidan Fahy co-author(s): Audrey Kean, Siun Clinch Services: Tax DATE: 28/07/2023

ITR - Taxation of Certain Compensatory Payments to Employees PDF | 0.25 MB

In this article, Aidan Fahy (Partner) and Audrey Kean and Siún Clinch (Senior Associates) discuss the taxation of certain compensatory payments, which can be provided to an employee on the termination of an employment. The key point of discussion in the article is the interaction between section 123 TCA (a broad charging provision which can apply to ex-gratia payments made on the termination of an employment) and certain other provisions of the tax legislation (eg, section 192A TCA and section 613 TCA) that can fully relieve “compensatory payments” made by an employer to an employee.

Compensatory payments may, depending on the facts, be subject to full relief (without any upper limit) under either section 192A TCA (income tax relief for compensation payments under the employment legislation) or section 613 TCA (capital gains tax relief for compensation for "any wrong or injury suffered by an individual").  However, where a payment is found to be a payment that is made in connection with the termination of an employment (and chargeable to income tax under section 123 TCA), these full reliefs cannot apply. The payment instead can be relieved under section 201 and Schedule 3 TCA, but this may only be a partial relief and is subject to a lifetime limit of €200,000.

Thus, where, for example, an alleged breach of employment law arises during an employment but ultimately the employment is terminated and the claim relating to the alleged breach of employment law is settled around the time that the employment is terminated, it is necessary to carefully consider the interaction between the above sections to determine the appropriate tax treatment for the payment. The question that arises is whether the mere fact of the payment being made pursuant to a compromise agreement entered into contemporaneously with the termination of the employment (albeit stemming from an alleged breach of employment law that arose before the termination of employment) could mean that relief under either section 192A TCA or section 613 TCA does not apply. This is discussed in more detail in the article.

The article also comments on some practical difficulties arising in relation to the availability of such reliefs following recent determinations of the Tax Appeals Commission, which have been somewhat unhelpful and in some cases contradictory.

© Copyright of Irish Tax Institute. This article first appeared in Irish Tax Review, Vol. 2023 No. 2