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  • Ex-Gratia Payment

    We are in the process of working out a compromise agreement with a employee. Our solicitors of called the payment 'ex-gratia' and the other side are arguing that it should be tax & NI free.

    I don't agree as the payment is made up of compensation for loss of earnings whilst the employee was off sick together with the standard one months notice (although they are not expected to work it) plus a further two months salary. This payment is clearly link to their employment and there earnings and I therefore feel it should be treated in the normal way.

    Any advice?

  • #2
    My understanding is that it is taxable, unless it is a "golden bracelet" sort of payment requiring a contract being signed, not to approach the companies clients for 6 months or more... or because sensitive company information is involved and, again, a gagging contract is in place.Then the equivilant to 2 months salary could be treated as tax free.
    It may be worth posting this onto accounting web and seeking the advice of all the professionals who contribute to the site.
    It's not what you are that holds you back, it's what you think you are not!!!


    • #3
      To my knowledge if it is contractual then it's taxable - if not then it isn't.


      • #4
        Originally posted by Bluewednesday View Post
        To my knowledge if it is contractual then it's taxable - if not then it isn't.

        This is something that came up at a previous practice I worked at and my boss researched the revenue site and found something about a "gagging contract" that could result in a tax free payment
        It's not what you are that holds you back, it's what you think you are not!!!


        • #5
          Hi Gill,

          I agree with you that there is a worryingly bland approach taken to ex gratia payments as if calling something ex gratia miraculously makes it tax free when in most cases the opposite applies.

          As an example, if an employee is not entitled to, say, a bonus payment becuase they have failed to meet all the criteria for it but the employer opts to pay it anyway, out of kindness, then the payment is ex gratia. This is because the employee has no legal right to enforce it but it is paid any, ex gratia meaning roughly that.

          however, just because the bonus payment is ex gratia doesn't make it tax free because at heart it is still a bonus and bonus payments are remuneration for tax purposes.

          My point is that in most cases an ex gratia payment is still something at heart or compensation for something else and it is the true reason for the payment which determines its tax treatment. One interesting dodge I have seen is for a termination to include compensation for loss of holidays but paid as ex gratia and hence tax free.

          The revenue immediately declared it taxable because they were able to reconcile the amount with the outstanding holidays.

          I would check the agreement thoroughly and identify any contractual payment which reconciles with the amount paid and establish exactly what the payment is for. If, as is sometimes the case, it is the employer being kind and adding a surprise extra to the package then it might be tax free but dont bank on it.



          • #6
            In my understanding, ex-gratia is Tax/NI free. If the payment is contractual, normal tax applies.

            As payroll pro says, it needs looking at carefully.

            My understanding is that they were off sick, and therefore not earning, but you're going to pay them some money anyway. My gut feeling is that this is taxable even though its not a contractual payment.

            Do you have FSB membership or tax investigation insurance? These should come with free legal helpline that might advise you further - the onus is on the employer to get it right.
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            • #7
              Hi again,

              Thanks for the back up faerie9 but I have to pick up on one comment and that is the asumption that ex gratia is tax and NIC free because that is where the problem occurs, in that belief.

              The correct situation is that ex gratia might be tax and NIC free depending on the purpose of the payment. It is always an ex gratia "something" and the tax and NIC treatment will follow the rules which apply to the "something" so my mission (should I choose to accept it) is to get people to turn their attention away from the expressioin "ex gratia" and to focus on what it actually is.

              An old client of mine had two "ex gratia" elements on their payroll of about 10,000 employees, one was tax and NIC free the other was full tax and NIC charge. They really needed four elements to cover the full range, free, tax only, NIC only and both. The problem was that whoever set up the parameters made both elements tax and NIC free and over 90% of the payments were taxable! A revenue compliance team would have had a field day if they had gone in.

              Trouble is, most payroll staff are not allowed to ask the right questions and those who do often dont get a reply!