Be careful with redundancy payments. Why? Read on and you’ll find out. Let’s look at some of the issues involved that include
- Background
- Taxes at play
- Tax-free redundancy payments
- Case for the taxpayer
- Revenue Query
- Appeal Commissioner
- Summary
Background
To provide some background I’ll introduce you to the main characters. There’s dapper Dan O’Neil and his daughter Ciara. Dan set up Tastebud Heaven Ltd [TBL] in 1999. He was a director and 100% shareholder. As you need two directors he appointed Ciara, then 19, as the second director. The main activity of the company was food production. The company had one major customer, involved in the food distribution business. That customer then sold its products to supermarkets in Ireland.
TBL didn’t sell directly to these supermarkets because it didn’t have “BRC” food safety certification. This was due in part to the layout, size and refrigeration capacity of the factory premises.
In the early years, Ciara had little involvement in the business besides some admin tasks. As time passed she became more involved in the management of the company. Over the years TBL developed into a profitable and successful business. Dan was always of the view that when he came to retire Ciara would take over the family business. He said he couldn’t see the business
“going to any other person in the world”
In 2015 Dan was diagnosed with a life-threatening illness. That illness required him to have an operation in late 2016. After receiving the diagnosis Dan’s involvement in running the business reduced significantly. As a result, Ciara stepped into her father’s role and ran the company with a key employee. In 2017 Ciara set up Food Orgasmic Ltd [FOL]
Taxes at Play
The taxes at play are Income Tax, USC, and PRSI on payments made by TBL to its former employees in August 2017. The redundancy and termination payments in dispute were in the amount of €226,149. Revenue raised a Notice of Estimation and was looking for tax of €140,545 on those payments.
The main issue is whether the payments made by TBL to its former employees were redundancy payments. If the payments were, then the employees would benefit from the tax exemptions available. Revenue’s view was that the payments weren’t genuine redundancy payments. As a result, the payments would be liable to Income Tax, PRSI, and USC.
Revenue viewed that the business of TBL was transferred to another company, FOL. And that the employees retained their original positions of employment with their new employer.
Tax-free redundancy payments
I always say those two words tax-free have a nice ring to them. There are a few different options when it comes to tax-fee redundancy payments. Firstly, statutory redundancy is tax-free.
Any amounts paid greater than statutory redundancy can also be tax-free. There are certain exemptions available Let’s look at an example to give you an idea about how this works.
Lily Fong is the food production manager at TBL, and she started working there in January 2002. Her salary is €52,000 a year. She had 15 years full service in January 2017 and ceased employment on the 4th of August 2017. Assuming she’s eligible for redundancy she’s entitled to
- Two weeks’ pay for every year of service and
- One extra week’s pay
The maximum weekly amount to calculate redundancy pay is €600 a week.
| Start date | 1 Jan 2002 |
| End date | 4 Aug 2017 |
| Years | 15.6 |
| Years X 2 | 31.2 |
| Bonus week | 1 |
| Total weeks | 32.2 |
| Statutory Redundancy 32.2 x €600 | €19,320 |
But say TBL pays her €40,000. We know the first €19,320 is taken care of. But what about the balance of €20,680? Tax exemptions can apply to the balance.
Basic exemption
The basic exemption is €10,160 plus €765 for each full year you are working for your employer. So, in Lily’s case, her figure is
| Basic exemption | €10,160 |
| €765 x 15 | €11,475 |
| Total | €21,635 |
As a result, her balance of €20,680 is less than her basic exemption and she doesn’t pay any tax on the full €40,000.
Increased exemption
The increased exemption is the basic plus an extra €10,000. This is subject to some terms and conditions that Revenue just love to apply. There is also an SCSB amount that can be valuable for those with higher salaries and longer service.
But Revenue’s view is that there should be no statutory redundancy nor any other tax-free exemptions like the basic one. So, the full payments to the employees would be liable to all the taxes.
Case for the Taxpayer
In early 2017 Dan confirmed his intention to retire in the coming months. The company was less profitable plus there were “huge structural issues” per Ciara. These were the cramped space for food production and storage and from ageing machinery. They carried out a structural review of the business.
It became clear that they couldn’t outsource the food production. Nor could they find more suitable premises. As a result of this and Dan’s ill health, they decided that TBL should cease trading which it did on the 4th of August 2017. Around that time TBL ended its lease of the factory premises.
On 1 August 2017, FOL registered as an employer for PAYE/PRSI. On the 5th of August 2017, 12 of the former employees of TBL signed written contracts of employment with FOL. These contracts were very like the old contracts they had with TBL save for a reduction of 1 day’s holiday. The activity of FOL, which started on the 5th of August 2017, was the production of the same food products that TBL produced. It was from the same premises too as FOL managed to negotiate a rolling month-to-month lease.
All the existing plant and equipment already in place in the factory premises was used by FOL in its own production activities. Ciara gave evidence that it was vital there was no break in food production. Otherwise, the contract held with the distribution company could be in danger.
Reasons why
Ciara gave evidence about the reasons why it was essential to form a new company and, in her view, start a new business.
Firstly, she said her father was difficult to deal with when he stepped back in his role of managing TBL. She viewed this as a lack of respect for her authority. Plus, she didn’t own shares in TBL so had no control and owned 100% of FOL.
Secondly, the lease agreement on the property, with 17 years left to run in August 2017, was onerous. She didn’t want to be saddled with it.
Finally, she worried about the staff and redundancy costs and didn’t want to take that burden on. She would have employees starting afresh with FOL so redundancy wouldn’t be an issue.
TBL Submission
The agent acting for TBL submitted that there was a genuine redundancy of its employees. The assertion that they were “fired and re-hired” was, he said, misconceived. TBL and FOL were entirely separate entities. Dan controlled the first company while it was Ciara who controlled the second company. Firing and rehiring was in the context of the same company. If there were separate companies then it was a genuine redundancy.
Plus, there was no evidence of any assurance given by TBL that the employees would be hired by FOL. That was a decision that FOL took and had nothing to do with TBL.
Revenue Query
On the 2nd of September 2020, Revenue commenced an aspect query into the affairs of TBL. This later became an audit. During its review Revenue queried payments of €276,758 recorded in the 2017 accounts. These were under the heading “Directors’ remuneration and transactions”
The company accountant for TBL informed Revenue that this sum represented redundancy payments. The payments were to its staff on the cessation of trading and the termination of their employment. The €276,758 comprised
- statutory payments paid to TBL’s non-management staff and
- increased amounts up to the maximum non-taxable sum allowed for Dan, Ciara, and a senior employee
In December 2021 Revenue informed TBL that
- It was treating all the payments made to staff as salary liable to Income Tax, USC, and PRSI except
- The payment to Dan of €50,609 as he hadn’t taken up fresh employment with FOL. That was ok.
Revenue raised its Notice of Estimation on the 16th of December 2021. It held that TBL owed €140,545 in Income Tax, PRSI and USC arising from payments to employees of €226,149.
Appeal Commissioner
Conor O’Higgins was the Appeal Commissioner in this case. His big question. Were the payments to the employees as a result of the termination of their employment on the grounds of redundancy?
“This can only be so if the positions they held ceased to exist upon the termination of employment”
Revenue held that FOL took over a “going concern” that would carry on the same activities at TBL. If this is the case then the reliefs and exemptions under tax law wouldn’t be available
Mr O’Higgins mentioned a European Court of Justice case called Spijkers. To establish if a transaction resulted in an undertaking or business being transferred from one owner to another was
“whether the business in question retained its identity”
On considering the facts of the case he was in no doubt that the food production business of TBL didn’t end. It was taken over and continued by FOL.
Reasons for his conclusion
The main reasons for his conclusion were
- FOL took over the lease of the factory premises that TBL had for the previous 18 years
- All the plant and machinery used for food production and storage was taken and used by FOL
- All the staff of TBL, except Dan, made a seamless transition from being its employees to being employees of FOL. They didn’t miss a day at work and performed the exact same roles as before. The terms of employment, including salaries, remained the same
- FOL inherited the same major customer from TBL. And FOL wanted to ensure it maintained that goodwill by continuing to supply it with the same products as before. There was a fear that if production didn’t continue that customer would source products elsewhere
- The name and logo of the new company FOL had a striking similarity to TBL. (I made up these names as didn’t know this piece was coming)
Mr O’Higgins viewed it as not being credible that there was no agreement between the companies that the staff would move from one to the other.
He also noted that it was Dan’s evidence that Ciara would always inherit the family business.
“The Commissioner determines that the Notice of Estimation of Revenue, with a balance of €140,545 in taxes is correct and stands affirmed
Summary
So, game, set, and match to Revenue. From reading the facts there’s no doubt that this wasn’t a genuine case of redundancy. It was the same business with the same employees carried on in the same premises with the same equipment. The only difference was the company that took over the existing business.
It shows how important it is to be careful with redundancy payments. Getting the right advice and having quality accountants who will look after you is vital. This helps limit Revenue interactions. That’s time, cost, and stress you can do without.
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