DW writes: My trading company has been in operation for many years, but I
recently needed to respond to a drop in business and make four employees
redundant. I agreed to pay three of them the statutory redundancy package,
while the fourth will receive more than statutory redundancy. Does the
company get a corporation-tax deduction for all the redundancy costs or just
the statutory part? Also, at which point does the company get the tax
allowances for these costs - is it when the money is paid to the employee or
when the decision is made to make redundancies?
In general, redundancy payments will be considered deductible for calculating
tax on trading profits, writes Jon Sutcliffe, partner at Kingston Smith LLP.
For costs to be deductible against trading profits, the general rule is that
the costs should be wholly and exclusively for the benefit of the trade.
Assuming that the employees were working wholly within the trade, then a tax
deduction should be allowed.
Payouts that may be considered to be a capital payment related to shares will
not attract tax relief in this way. Similarly, payments to a family member
or private interest will attract scrutiny from the taxman but not
necessarily tax relief.
The point at which payments will attract tax relief against trading profits
will be the earlier of the payment date or the point at which the company
has a legal or constructive obligation to make the payments. This obligation
will arise when employees are told that they will be made redundant.
Do the right thing over a dismissal
DG writes: Our business is looking at ways to save on costs. We have
conducted a full evaluation of job roles within the company and have decided
to make an employee redundant who has been with us for just over 11 months.
Do I still need to follow the same procedures as with those with more than a
year’s service?
There are several things you need to do to carry out a fair redundancy
selection and dismissal,writes Peter Done, managing director of Peninsula.
First consult your employees as to whether, in light of the job evaluation,
you should lose this post, and then if you should lose the post holder. This
process helps to ensure that you are making the right decision and are
losing the right person. Bear in mind that in a redundancy situation it is
not the person who is made redundant, it is the post.
If you bypass this process, you will lose the opportunity of discovering if
there are better options and risk keeping a less suitable staff member.
The length of service does not make a different process fair; it just means
that an employee with less than a year’s service cannot challenge you
directly for general unfair dismissal.
You need to be careful with length of service. You have to look at how long
your employee would have been with you, taking into account his one-week
statutory notice period to determine if he has less than a year’s service.
If you do not give notice, this can be added to the date of termination to
determine the length of service, so you need to consider just how far past
11 months’ service this person has gone.
Although your employee cannot bring a general claim for unfair dismissal if he
has less than a year’s service, he can pursue a claim if he argues that the
dismissal was not due to a general decision that the role was no longer
needed, but instead that he was targeted for an unfair reason.
If your employee challenges your decision on the basis of issues like
discrimination, then by not following a procedure you will have hampered
your ability to defend your actions.
Consider how close to a year’s service this employee is and if he could raise
any issues of discrimination or breach of statutory rights. Then decide if
you still want to make him redundant.
Kingston Smith LLP, the chartered accountant, and Peninsula, the
employment-law firm, can advise owner-managers on their problems. Send
questions to The Business Doctor, The Sunday Times, 1 Pennington Street,
London E98 1ST, or fax to 020 7782 5765. Advice is given without legal
responsibility.
bizdoc@kingstonsmith.co.uk
