In Lawrence Rawlinson v HMRC [2026] TC09746, the First Tier Tribunal (FTT) was obliged to strike out an appeal in relation to termination payments, due to the absence of a formal Schedule 1AB claim. The FTT found that the 'motive' for the payment was to discharge a contractual notice entitlement, not due to the appellant's disability, so the appeal would have been dismissed if the FTT had jurisdiction.
Mr Lawrence Rawlinson, a retired solicitor, had been in practice for 37 years. Despite his extensive legal background, Mr Rawlinson failed to adhere to the mandatory statutory requirements for bringing a formal tax appeal.
- In early 2021, Mr Rawlinson was diagnosed with a rare form of cancer necessitating extensive surgery, including the removal of his right eye socket, right parotid gland and neck lymph nodes.
- These impairments resulted in a total incapacity to perform his duties at T Ltd, which required him to work at pace, reviewing, drafting and amending contracts across multiple simultaneous projects and working on three computer screens.
- Following 13 months of sick leave supported by income protection insurance, T Ltd initiated termination proceedings in July 2022.
- T Ltd offered Mr Rawlinson two options:
- A settlement agreement: a Payment In Lieu Of Notice (PILON), an ex gratia payment, accrued holiday and for the income protection insurance payments to continue until the policy entitlement was exhausted.
- The commencement of the company's absence process, which was likely leading to his termination without the ex gratia and insurance payments.
- Mr Rawlinson opted for the settlement agreement. A formal settlement agreement was executed on 2 September 2022. Mr Rawlinson's employment ended on 9 September 2022.
- The settlement comprised two payments.
- A PILON of £15,000, subjected to PAYE deductions.
- A Termination payment of £15,000, paid free of tax.
- Mr Rawlinson sought a refund of £4,112.82 by way of a letter dated 20 June 2023, representing the Income Tax and National Insurance Contributions (NICs) deducted from the PILON. He supported his claim with his final payslip, insurance tax certificate and an ESA 500 statement.
- HMRC refused on the basis that the PILON was subject to tax under s.62 Income Tax (Earnings and Pensions) Act 2023 (ITEPA).
- Mr Rawlinson argued that s.406(1) ITEPA provides an exemption from tax where a payment is made on account of an employee's disability.
- While T Ltd's offer clearly linked the disability to the termination of the employment relationship, it simultaneously framed the PILON as a contractual discharge.
- In this case, Mr Rawlinson's solicitor had requested the inclusion of the word 'disability' in the agreement, but T Ltd refused, fearing the legal implications of admitting a disability-related dismissal.
- By providing a separate £15,000 ex gratia payment untaxed, the employer had effectively apportioned the disability-related element of the package, leaving the PILON to be characterised purely as a discharge of notice obligations.
- These facts necessitated a rigorous application of the Haster v Horner test to determine if the disability was the proximate motive for the specific payment in question.
The First Tier Tribunal (FTT) found that:
- Mr Rawlinson's request for a refund was an 'informal letter' rather than a formal Schedule 1AB claim.
- Mr Rawlinson had received informal advice from an HMRC officer to 'simply write a letter', and HMRC itself had failed to publish a formal claim form for such rebates.
- The PILON was not 'earnings' under s.62 ITEPA because there was no pre-determination contractual right to such a payment in Mr Rawlinson's contract or via custom. The right to the PILON was created solely by the settlement agreement.
- Applying the case of Hasted v Horner test, Mr Rawlinson suffered from a 'relevant disability' that incapacitated him from performing his role.
- The PILON failed the s.406(1)(b) test. The 'motive' for the payment was to discharge a contractual notice entitlement.
- The disability was the cause of the termination, but the proximate cause of the payment was the legal obligation to provide notice.
- The FTT was legally bound to strike out the appeal due to the lack of a formal Schedule 1AB claim.
If the FTT had jurisdiction, it would have dismissed the appeal for the reasons set out above.
Useful guides on this topic
Termination, redundancy and leaving payments
How are redundancy and termination payments taxed? What amounts can be paid tax-free? What amounts are taxable as earnings?
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