Termination Tax Tool

What is the tool?

The Termination Tax Tool is a web based tool to assist HR, Payroll, Legal and Tax professionals in determining the correct income tax and National Insurance Contribution (“NIC”) treatment of termination payments. It has been designed to enable non-tax specialists to access self-service tax advice in real-time and at a low cost. The tool will form part of an organisation’s governance and controls around termination payments, in particular triaging complex cases to the tax department or usual tax advisors (without them needing to be directly involved other than in the most complex cases).

How might the tool benefit your organisation?

Many businesses are currently having to make difficult decisions about their headcount. Where businesses decide to terminate employments, it is important to accurately determine the income tax and NIC treatment to apply on any termination payments being made so that the individual receives the right net payment and tax risk is effectively managed.

One of the key benefits of the tool is that it has been designed to be easily used by non-tax specialists within your organisation, in particular HR professionals or the Payroll department. The questions are simple and so users do not need a detailed knowledge of employment taxes or the termination payments legislation, whilst also providing tax governance of termination payments on a case by case basis.

The other benefits of the tool are:

• Improved accuracy of income tax and NIC treatment of termination payments; 
• Improved controls around termination payments;
• Supporting the consistent application of income tax/NIC positions;
• Reducing the time commitment of the tax and HR departments within the business, particularly if multiple cases to consider with different fact patterns;
• Enabling HR professionals to understand the tax impact of different exemptions available, and highlighting the benefit of these to employees in the communication process;
• Tax legislation changes will be updated in the tool without the business spending time considering them and updating processes as required. Recently, there have been changes to introduce Class 1A NIC (following a deferment) on certain termination payments and changes to the value to use for monthly pay periods for PENP calculations; and
  
• Triaging complex cases to the tax department; this allows governance of the termination payment process without tax teams directly being involved in simple cases. This is of particular importance for organisations within the Senior Accounting Officer regime.
  

What output will the user get from the tool?

The tool provides the user with a bespoke report that:

• provides a clear and simple summary of the termination payments and the relevant tax and NIC treatment which can be used to instruct payroll correctly;
• includes detailed explanations of the tax technical positions applied; and
• includes a full record of information that the user has entered, so the report can be used as a standalone audit trail of the tax treatment of the payments.

How does the tool work?

The tool utilises artificial intelligence and captures the collective experience and knowledge of the Deloitte employment tax practice through coding hundreds of rules. The user responds to a series of simple questions about the different payments being made to the employee and particular facts regarding the termination. The tax logic works in the background, and the artificial intelligence tailors the questions asked to the particular scenario, until enough information is collected to determine the income tax and NIC treatment of each payment. The user is provided with a bespoke Deloitte report that summarises the results.

Why did we develop the tool?

Determining the tax treatment of termination payments has always been an area that employers have found challenging. In April 2018, the government introduced new legislation with the intention of simplifying the treatment of payments, particularly around payments in lieu of notice. However, our experience has been that employers have found the rules difficult to apply in practice. Minor differences in fact patterns mean the rules apply differently and can change the tax answer. Our tool is designed to be easily utilised by organisations and non-tax professionals to arrive at accurate tax treatments.

How do users access the tool?

The tool is a web-based tool. Users access the tool via Deloitte’s “myInsight” web pages.

Please contact your usual Deloitte contact, or one of the team below, if you would like more information or to see a more detailed demonstration of the tool.