Tim Bridgett, employment taxes senior manager at PSTAX provides an overview of the guidance available regarding special severance payments

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On 12 May 2022, the government issued statutory guidance on the making and disclosure of ‘special severance payments’ (SSPs) by local authorities and other public bodies in England. This came after a 2021 consultation by the Department for Levelling Up, Housing and Communities (DLUHC) after guidance was issued by HM Treasury back in May 2021. Of course, this all follows the exit payment cap that eventually came into force on 4 November 2020, only to be revoked after much criticism, most notably from the Local Government Pension Scheme Advisory Board, with effect from 19 March 2021.

In this article, we provide a brief overview of the guidance as well as other considerations. It should be noted, however, that it’s likely specialist advice will be needed.

 

Background

The DLUHC considers the statutory and contractual terms covering redundancy and termination payments for public sector workers are significantly more generous than for private sector workers. The new guidance explains that the payments don’t generally provide good value for money to taxpayers. They should be considered only in exceptional circumstances where there’s clear and evidenced justification that this is a proper use of public money.

Therefore, the detailed guidance has been issued to local authorities and other public bodies in England – including fire authorities and National Park authorities – to explain what they must do when considering a payment and the relevant steps to follow.

 

What constitutes an SSP?

The guidance provides illustrative examples of what could constitute an SSP, although it’s stressed that this will vary according to an employee’s particular circumstances. Some of the examples that are more likely to be SSPs include:

• payments made under a settlement agreement between the employer and employee to discontinue legal proceedings without admission of fault

• the value of benefits in kind or allowances which are allowed to continue beyond the employee’s agreed exit date

• payments to employees for retraining related to their termination of employment.

Additional payments could be caught as SSPs under certain circumstances:

• pay or compensation in lieu of notice where the amount of the payment isn’t greater than the salary due in the period of notice set out in the employee’s contract

• some pension strain payments.

Whereas the following are examples of what aren’t considered to be SSPs:

• statutory or contractual redundancy payments

• payment for untaken annual leave

• injury or death in service compensation.

 

Considerations

Local authorities have to demonstrate their reasoning for why an SSP is being proposed, for example, whether there’s any feasible possibility of exiting the individual at a lower cost, or how the exit payment will be perceived by the public. Local authorities must also consider the full impact of SSPs on both efficiency and effectiveness.

The section on exceptional circumstances confirms that authorities may consider an SSP to settle disputes, where it can be properly demonstrated that other routes have been thoroughly explored and excluded: “After receiving appropriate professional advice, it may then possibly be concluded that a special severance payment is the most suitable option and prudent use of public money.”

 

Summary of the key points:

• in accordance with established case law, payments should only be made where there’s a convincing case that they’re in the interest of taxpayers

• certain types of payment are clearly inside and outside the definition of an SSP, but for some payments the position is more ambiguous and needs to be closely considered

• the authorisation requirements for SSPs, e.g., whether the whole council, head of paid service or a delegated person must authorise, are defined by reference to monetary value

• there are key roles for an authority’s Section 151 officer and monitoring officer in the overall process

• authorities must adhere to both existing and new reporting requirements when disclosing SSPs

• crucially, authorities must have the relevant policies in place to ensure they’re adhering to the multiple requirements.

There’s much to consider and potentially more questions to ask. Notwithstanding the various factors that must be thought about when a SSP is being proposed, it’s essential to remember that there’ll also be significant taxation implications that mustn’t be ignored, particularly in relation to post employment notice pay.

Clearly this is a complicated area, and it’s essential that specialist advice is sought, considering all the factors, including tax, when proposing a severance package. 

 

The statutory guidance on the making and disclosure of special severance payments by local authorities in England can be found here: http://ow.ly/faKy30sm5Cb.

• Policy article
• Professional magazine