Exemption From Income Tax for Out of Court Settlements
Many disputes between employees and employers concerning the infringement of employees’ rights and entitlements or employers’ obligations to employees are settled by agreement without referral to a ‘relevant authority’. A payment made under such an agreement may qualify for exemption from income tax where all of the following conditions are met:
the agreement in settlement of a claim is evidenced in writing;
the original statement of claim by the employee is evidenced in writing;
the agreement is not between connected persons as defined in section 10 of the TCA 1997 (e.g. employer and relative, employer and director);
the claim would have been a bona fide claim under a ‘relevant Act’ had it been made to a ‘relevant authority’ (e.g. sufficient grounds for the claim; claim is within the scope of one of the relevant Acts; claim made within specified time limits, etc.);
the claim is likely to have been the subject of a recommendation; decision or determination by a relevant authority that a payment be made to the person making the claim;
the payment does not exceed the maximum amount which could have been awarded under relevant legislation by the Rights Commissioner, Director of the Equality Tribunal, Employment Appeals Tribunal, Workplace Relations Commission or Labour Court as appropriate (e.g. a claim made under the Employment Equality Act 1998 for acts of discrimination – maximum amount cannot exceed a sum calculated as being not greater than 104 weeks pay).
NOTE: The relevant employment legislation is available on the Irish Statute Book website.
Employers are obliged to retain copies of any such agreements together with the employees’ statements of claims for a period of six years from the date the payment was made, and to make these documents available to any officer of the Revenue Commissioners when requested to do so.
The format of the employees’ original statement of claim, which must be evidenced in writing, and the details to be included in same, will vary depending on the facts and circumstances of each individual case.
However, such written documentation may reasonably be expected to include information such as the nature of the claim, the nature of the relationship between the parties involved or a high-level summary of the allegations and the impact of same. The employee need not engage an external advisor to prepare such written documentation on their behalf and there is no requirement for the statement of claim to have been formally submitted to a relevant Authority, provided all other conditions set out above are met.
There is no obligation on employers to look for advance approval of exemption under section 192A TCA 1997 in respect of out of court settlements. However, where any employer does seek such an approval, a copy of the agreement and statement of the employee’s claim should be sought and examined before granting the exemption, if due. For further information, please contact the Tax Team at PKF today.