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The recent case of Colquhoun v HM Revenue & Customs ("HMRC") suggests a payment to reduce an employee's future contractual redundancy rights can potentially be entirely tax-free and does not count towards the £30,000 exemption available on any future termination of employment.

The facts of the case

Mr Colquhoun was employed by his employer from 1973 until 2005, when he was made redundant. In 1997 he was offered a payment to reduce his rights to enhanced redundancy payments if he were to be made redundant in the future. He accepted the offer and received £33,000. Mr Colquhoun was subsequently made redundant 8 years later in 2005, when he received a smaller redundancy package than he would have done had he not accepted a variation in the terms of the scheme in 1997.

Mr Colquhoun sought to shelter this 2005 payment from tax by using the £30,000 tax exemption available for redundancy and certain other payments, claiming that the 1997 payment could not have been on account of redundancy as his employment had not then ended. HMRC argued the £30,000 tax exemption, which is only available once during the course of a particular employment, had already been used to shelter the 1997 payment and so the whole 2005 redundancy payment was taxable.


The Tax Tribunal agreed with Mr Colquhoun, holding that the 1997 payment was not a termination payment and did not, therefore, use up the tax-free exemption as it was not a termination payment in the first place. The exemption was therefore still fully available for the actual redundancy payment in 2005. In reaching its decision, the Tax Tribunal considered that what is popularly known as the termination payment legislation only covers three areas:

  • Termination of employment;
  • Change in the duties of employment; and
  • Change in the earnings of the employment.

The Tax Tribunal concluded that none of these factors were relevant to the 1997 payment for changing redundancy rights. Mr Colquhoun had in
1997 remained in employment with the same employer, had not changed his duties and had not suffered any change in his earnings. As the payment was not a termination payment , the £30,000 exemption had not needed to be used and so was still available to shelter the 2005 payment. Other than to say the £30,000 tax exemption had not been used, which was the only relevant point in the proceedings, the Tax Tribunal did not analyse in any great depth the issue of how the 1997 payment should have been taxed on the basis it was too late to consider any alternative tax treatment.

Planning points

Further guidance is now required from HMRC (who may still appeal this case) outlining how they will treat payments to buy-out enhanced redundancy rights.

In the interim period, employers will need to ensure they take appropriate advice before negotiating and making any such payments, but, for those employers considering reducing the value of their redundancy programmes and making a payment for doing so, there does at least seem the potential to make tax-free payments and to claw back tax where they treated these payments as taxable if the payments were more than £30,000. However, if there were a proposal to make employees redundant shortly after the payment or incentivise employees in this or some other way, great care would be needed as the payment could be taxable on other grounds and HMRC would be likely to raise these points.

For a link to the Tax Tribunal case report please click here.

This article originally appeared in Law-Now, CMS Cameron McKenna's Free Online Information Service. To register for Law-Now, simply visit and select the 'Register' link in the main navigation.

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