October 29th, 2012 / Insight posted in

Tax relief on redundancy

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.