€65,000 Termination Payment to Employee Not Exempt from Tax-Tax Appeals Commission Decides

Imagine this.

You receive €65,000 on the termination of your employment, and you believe it is tax free. Then, the Revenue Commissioners come calling and they claim the payment is taxable.

And they decide that, yes, it is taxable and raise an estimate for the taxation.

Lately, I have a lot of employees coming to me with settlement or termination of employment agreements. These agreements do a number of things, the most important of which is the termination of the employment.

The employee is looking to have the agreement “looked over” and to be advised that all is in order. From my perspective this is unproblematic.

However, one of the trickiest parts of these agreements, and a potential landmine for the employee, is the tax situation and the tax treatment of the settlement payment.

Invariably the employee will be getting holiday pay and notice pay, and by reason of the fact that this is pay it is fully taxable.

Any statutory redundancy payment is tax free but it gets more complicated when there is an ex gratia (discretionary) payment involved. This is taxable but there may be an exemption for the employee.

Please note I am a lawyer, not a tax expert. In fact, if truth be told, my knowledge of taxation is limited and basic.

But I know enough to warn the employee to get taxation advice if there is a significant payment involved. A recent Tax Appeals Commission decision in December 2019 proves the wisdom of this approach.


The employee received a termination payment of €65,000 and the severance agreement provided, under section 4 “Taxation Indemnity” for the employer as follows:

“The Company gives no warranty as to the amount of tax or pay related social insurance contributions that may be chargeable by reason of the Termination Payment and other arrangements set out in this Agreement.”

The agreement also provided for a contribution to the employee’s legal costs in the sum of €10,000.00.

The Revenue Commissioners claimed the termination payment was taxable and the dispute ended up with the Tax Appeals Commission.

The Law

Section 192A of the Taxes Consolidation Act, 1997 provides:

“192A Exemption in respect of certain payments under employment law (1) In this section “relevant Act” means an enactment which contains provisions for the protection of employees’ rights and entitlements or for the obligations of employers towards their employees;

“relevant authority” means any of the following –

(a) a rights commissioner,

(b) the Director of the Equality Tribunal,

(ba) an adjudication officer of the Workplace Relations Commission,

(bb) the Workplace Relations Commission,

(bc) the District Court,

(c) the Employment Appeals Tribunal,

(d) the Labour Court,

(e) the Circuit Court, or

(f) the High Court.

(2) Subject to subsections (3) and (5), this section applies to a payment under a relevant Act, to an employee or former employee by his or her employer or former employer, as the case may be, which is made, on or after 4 February 2004, in accordance with a recommendation, decision or a determination by a relevant authority in accordance with the provisions of that Act.

(3) A payment made in accordance with a settlement arrived at under a mediation process provided for in a relevant Act shall be treated as if it had been made in accordance with a recommendation, decision or determination under that Act of a relevant authority.

(4) (a) Subject to subsection (5) and without prejudice to any of the terms or conditions of an agreement referred to in this subsection, this section shall apply to a payment –

(i) made, on or after 4 February 2004, under an agreement evidenced in writing, being an agreement between persons who are not connected with each other (within the meaning of section 10), in settlement of a claim which–

(I) had it been made to a relevant authority, would have been a bona fide claim made under the provisions of a relevant Act,

(II) is evidenced in writing, and

(III) had the claim not been settled by agreement, is likely to have been the subject of a recommendation, decision or determination under that Act by a relevant authority that a payment be made to the person making the claim,

(ii) the amount of which does not exceed the maximum payment which, in accordance with a decision or determination by a relevant authority (other than the Circuit Court or the High Court) under the relevant Act, could have been made under that Act in relation to the claim, had the claim not been settled by agreement, and

(iii) where –

(I) copies of the agreement and the statement of claim are kept and retained by the employer, by or on behalf of whom the payment was made, for a period of six years from the day on which the payment was made, and

(II) the employer has made copies of the agreement and the statement of claim available to an officer of the Revenue Commissioners where the officer has requested the employer to make those copies available to him or her.

(b) (i) On being so requested by an officer of the Revenue Commissioners, an employer shall make available to the officer all copies of –

(I) such agreements as are referred to in paragraph (a) entered into by or on behalf of the employer, and

(II) the statements of claim related to those agreements kept and retained by the employer in accordance with subparagraph (iii) of that paragraph.

(ii) The officer may examine and take extracts from or copies of any documents made available to him or her under this subsection.

(5) This section shall not apply to so much of a payment under a relevant Act or an agreement referred to in subsection (4) as is–

(a) a payment, however described, in respect of remuneration including arrears of remuneration, or

(b) a payment referred to in section 123(1) or 480(2)(a).

(5A) This section shall not apply to payments made pursuant to an order under section 2B of the Employment Permits Act 2003.

(6) Payments to which this section applies shall be exempt from income tax and shall not be reckoned in computing total income from the purposes of the Income Tax Acts.”

Section 123 of the Taxes Consolidation Act, 1997 provides:

“123 General tax treatment of payments on retirements or removal from office or employment

(1) This section shall apply to any payment (not otherwise chargeable to income tax) which is made, whether in pursuance of any legal obligation or not, either directly or indirectly in consideration or in consequence of, or otherwise in connection with, the termination of the holding of an office or employment or any change in its functions or emoluments, including any payment in commutation of annual or periodic payments (whether chargeable to tax or not) which would otherwise have been so made.

(2) Subject to section 201, income tax shall be charged under Schedule E in respect of any payment to which this section applies made to the holder or past holder of any office or employment, or to his or her executors or administrators, whether made by the person under whom he or she holds or held the office or employment or by any other person.

(3) For the purposes of this section and section 201, any payment made to the spouse, civil partner, or any relative or dependant of a person who holds or has held an office or employment, or made on behalf of or to the order of that person, shall be treated as made to that person, and any valuable consideration other than money shall be treated as a payment of money equal to the value of that consideration at the date when it is given.

(4) Any payment chargeable to tax by virtue of this section shall be treated as income received on the following date –

(a) in the case of a payment in commutation of annual or other periodical payments, the date on which the commutation is effected,


(b) in the case of any other payment, the date of the termination or change in respect of which the payment is made, and shall be treated as emoluments of the holder or past holder of the office or employment assessable to income tax under Schedule E.

(5) In the case of the death of any person who if he or she had not died would have been chargeable to tax in respect of any such payment, the tax which would have been so chargeable shall be assessed and charged on his or her executors or administrators, and shall be a debt due from and payable out of his or her estate.

(6) Where any payment chargeable to tax under this section is made to any person in any year of assessment, it shall be the duty of the person by whom that payment is made to deliver particulars of the payment in writing to the inspector not later than 14 days after the end of that year.”

The Arguments

The employee claimed the termination payment was not taxable because he had made an allegation of bullying in the workplace, an investigation had been carried out by an external investigator who did not uphold the allegation, mediation was then availed of to resolve the dispute, but the employee saw during the mediation that there was no future for him in the workplace. In consequence of this his solicitor contacted the employer and the settlement agreement was agreed between the parties.

The Revenue Commissioners argued that this mediation was not sufficient to allow the tax exemption as such mediation did not meet the requirements of Section 192A of the Taxes Consolidation Act, 1997 as it was not a mediation process provided for in a relevant act.

Revenue also argued that it could not come within the “out of court” settlement because it was not presented to any court for a decision and therefore did not qualify.

Revenue also argued that the fact that the agreement was described as a “severance agreement” indicated it was not a payment which could avail of the tax exemption.

The Decision

The Tax Appeals Commissioner decided that the first place to look when determining a case like this was the agreement itself.

“The Severance Agreement expresses in clear terms that the Appellant was being given notice of the termination of his employment and that his employer agreed to make a termination payment to the Appellant. The payment of €65,000 is described as a termination payment. The Appellant agreed to accept the payment without any admission of a breach of statute or law by either party or a breach of any duty or obligation by the employer to the Appellant, and in full and final settlement of any claims arising out of the Appellant’s employment with the employer.”

The Commissioner went on to hold that the agreement confirmed there was no reference to the payment being made by the employer for a breach of the employment rights of the employee arising from the bullying compliant.

The employee accepted the payment without any admission of liability on behalf of the employer and this was expressly acknowledge in the agreement.

Moreover, of the payment was made in consequence of mediation pursuant to a “relevant act” it may be exempt. But that was not the case here as the mediation was voluntary and agreed between the parties.

Furthermore, an exemption would be possible if the payment was to settle a claim under a relevant act and the claim was likely to have been subject of a determination by a relevant authority. This means it must be advanced to a point where there is a “real prospect that the matter will be present to a court for decision”. This was not the case here.

For all these reasons the Appeal Commissioner, Fiona McLafferty, determined that the payment paid under the Severance Agreement was not exempt from tax.

Read the full decision here.