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Payment of pay in lieu of notice is not a termination of employment payment and is taken fully into account as employed earnings for the calculation of UC.

31st March, 2022

RMcE v. Department for Communities (UC) [2021] NI Com 59

Background

The claimant was dismissed from his employment in January 2018. He claimed Universal Credit (UC) in February 2018. In March 2018, the claimant received £475.49 from his employer. This amount represented pay, payment in lieu of notice and holiday pay. The Department decided that the claimant was entitled to UC amounting to £0.00 for the assessment period February to March 2018, as his earnings, including the payment of £475.49, exceeded entitlement to UC. The claimant appealed the Department’s decision.

Before the tribunal, the claimant argued that the payment in March 2018 should be attributed to the January 2018 assessment period. However, the tribunal rejected this argument, deciding that the date of actual payment was relevant.

The claimant also argued that the payment was a payment for the termination of employment and should not be taken into account as employed earnings. The tribunal rejected this argument too, distinguishing between payments on dismissal and redundancy payments. The tribunal disallowed the claimant’s appeal and he appealed to the Social Security Commissioner.

Legal issue

UC was introduced in Northern Ireland under the Welfare Reform (NI) Order 2015 (‘the 2015 Order’). Entitlement to UC depends on the claimant meeting basic and financial conditions. One of the financial conditions is that in order to be entitled to UC, the claimant’s income during a monthly[1] assessment period must not reach a specific limit.[2]

The amount of UC awarded to a claimant is ‘the maximum amount’ less any deductions.[3] Deductions include (a) an amount in respect of earned income and (b) an amount in respect of unearned income.

The definition of ‘earned income’ is provided in regulation 51 UC (NI) Regulations 2016. Regulation 51 states:

‘Earned income’ means:(a) The remuneration or profits derived from-
(i) employment under a contract of service or in an office, including elective office,
(ii) a trade, profession or vocation, or
(iii) any other paid work, or
(b) any income treated as earned income in accordance with this Chapter’.

    Regulation 53 provides that the calculation of a person’s earned income is to be based on the actual amounts received in an assessment period.

    Regulation 55 outlines the mechanism for calculating earned income. It states:

    ’55 – (1) This regulation applies for the purposes of calculating earned income from employment under a contract of service or in an office including elective office (‘employed earnings’).

    (2) Employed earnings comprise any amounts that are general earnings as defined in section 7(3) of the ITEPA but excluding-

    (a) amounts that are treated as earnings under Chapters 2 to 11 of Part 3 of that Act (employment income: earnings and benefit etc treated as income), and

    (b) amounts that are exempt from income tax under Part 4 of that Act (employment income: exemptions).

    (3)…(not relevant).’

    Regulation 55 refers to section 7(3) Income Tax (Earnings and Pensions) Act 2003 (ITEPA). In section 7(3) ‘general earnings’ is defined as follows:

    ‘(a) earnings within Chapter 1 of Part 3, or

    (b) any amount treated as earnings (see subsection (5)),

    excluding in each case any exempt income’.

    Section 8 ITEPA defines ‘exempt income’ as:

    ‘For the purposes of the employment income Parts, an amount of employment income within paragraph (a), (b) or (c) of section 7(2) is ‘exempt income’ if, as a result of any exemption in Part 4 or elsewhere, no liability to income tax arises in respect of it as such an amount’.

    Chapter 1, Part 3 of ITEPA consists of section 62. Section 62 provides:

    ‘62(1) This section explains what is meant by ‘earnings’ in the employment income Parts.

    (2) In those Parts ‘earnings’, in relation to an employment, means-

    (a) any salary, wages or fee,

    (b) any gratuity or other profit or incidental benefit of any kind obtained by an employer if it is money or money’s worth, or

    (c) anything else that constitutes an emolument of the employment’.

    Decision

    The period to which the March 2018 payment applied

    The Commissioner rejected the claimant’s argument that the March 2018 payment should be attributed to a different assessment period. The Commissioner accepted that the English decision SSWP v. Johnson [2020] Civ 778 is applicable in Northern Ireland. On the basis of Johnson, the Commissioner decided that it cannot be argued that payment made in one assessment period actually relates to another. He rejected the claimant’s submissions, citing the reasons he gave in his previous decision: Department for Communities v. RM UC [2021] NI Com 36.

    Relevance of employer’s deductions

    The Commissioner also rejected the claimant’s argument that his employer’s deductions of tax and National Insurance from the March 2018 payment was definitive. It is for the tribunal to decide if payments fall within statutory definitions in Universal Credit and ITEPA: not simply how a third party has interpreted them.

    Definition of termination of employment payments

    The Commissioner decided that termination of employment payments, such as that received by the claimant, are defined in legislation. He referred to Regulation 55(2) and the definition of employed earnings as the starting point. He noted that under regulation 55(2):

    ‘employed earnings’ comprise earnings as defined in section 7(3) of ITEPA but excluding-

    (a) amounts that are treated as earnings under Chapters 2-11 Part 3 of that Act (employment income: earnings and benefit etc. treated as income), and

    (b) amounts that are exempt from income tax under Part 4 of that Act (employment income: exemptions).’

    Chapter 10, Part 4 ITEPA provides that certain payments upon termination of employment are exempted from income tax liability and therefore are not considered ‘employed earnings’ under regulation 55. These payments include, under section 309, redundancy payments[4] and approved contractual payments.[5] The Commissioner decided that the payment to the claimant was neither a redundancy payment nor an approved contractual payment. The tribunal was right, therefore, to distinguish between redundancy payments and payments upon dismissal.

    At paragraph 35, the Commissioner states:

    ‘…the definition in section 7(3) of ITEPA is subject to exclusion of exempt income from general earnings. Section 8 provides that an amount of employment income is ‘exempt income’ if, as a result of any exemption in Part 4 or elsewhere [Commissioner emphasis], no liability to income tax arises in respect of it. The focus in the present case is in relation to payments upon termination of employment. It can be seen that by s401 of the ITEPA, Chapter 3 of Part 6 also applies to payments and other benefits which are received directly or indirectly in consideration or in consequence of, or otherwise in connection with the termination of a person’s employment.’

    At paragraph 36, the Commissioner states:

    ‘I consider it arguable that the expression ‘as defined in section 7(3) of the ITEPA’ appearing in regulation 55 of the UC Regulations has to be read in the light of section 8 ITEPA. It is similarly arguable that any exemptions provided for at Chapter 3 of Part 6 of the ITEPA would therefore fall within the scope of the general expression ‘or elsewhere’ appearing in section 8. For that reason, I have also given some consideration to Chapter 3. Within that Chapter, it appears to me that specific attention is given to post-employment notice pay by section 402D of the ITEPA. It further appears to me, without having heard argument on the point, that pay in lieu of notice falls within the scope of post-employment notice pay as addressed by section 402D and is taxable. It is clear, in any event, that it does not fall within any of the exclusions set out in section 405-416 in Chapter 3.’

    The Commissioner concludes:

    ‘I cannot accept the submissions of [the claimant] that the tribunal erred by adopting an unduly narrow interpretation of payments made upon termination of employment. It appears to me that the scope of such payments is defined within the ITEPA and that pay in lieu of notice is not an excluded payment made upon termination of employment. I consider that the tribunal was entitled to make the findings it did within the legislative framework’.

    The Commissioner noted that the Department did not assist the tribunal by providing a copy or summary of relevant income tax legislation. He comments at paragraph 34:

    ‘In this context, I judge that more needs to be provided by the Department, including explanatory materials, legislation and jurisprudence relating to income tax, to enable tribunals fully to perform their role in cases such as the present one and to enable appellants and advisors to understand the decisions in a case.’

    The Commissioner dismissed the appeal.

    For a full copy of the Judgment, click here

    [1] Regulation 22(1) UC (NI) Regulations 2016.

    [2] Article 10(b) 2015 Order.

    [3] Article 13(1) 2015 Order.

    [4] ‘Redundancy payment’ is defined in Part 12, Employment Rights (NI) Order 1996.

    [5] ‘Approved contractual payments’ are a payment to a person on the termination of the person’s employment under an agreement in respect of which an order is in force under Article 192 of the Employment Rights (NI) Order 1996.