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December 13, 2017

HMRC rematch with Tottenham Hotspur on Termination Payments

In an appeal to the Upper Tribunal (the “UT”), HM Revenue & Customs challenged the decision that payments made by Tottenham Hotspur FC (the “Taxpayer”) to two of their former players upon the termination of their contracts should not be subject to income tax and NICs on the same basis as their salaries.

HMRC’s basis for the appeal was that the First-Tier Tribunal (the “FTT”) incorrectly applied previous case law, and sought to revisit a number points in the FTT analysis that they felt were important. The case illustrates the difficulties that arise in handling the taxation of termination packages, which can often comprise a number of different payments and/or benefits, each with their own respective tax treatments.

The UTT rejected HMRC’s appeal and found in the favour of the taxpayer, meaning that the termination payments retained the initial tax/NIC treatment.

The Case
A review of the initial case can be found here.
In summary, the FTT found in favour of the taxpayer and ruled that the payments formed a part of a mutual agreement to terminate the players’ contracts.

HMRC challenged the decision on a number of grounds concerning the FTT’s examination and application of the relevant authorities. However, HMRC’s first and primary grounds for appeal regarded one of the player’s contracts which HMRC argued contained clauses akin to an agreed payment upon termination, and therefore payments made under this clause should be subject to income tax and NICs accordingly.

The UT reviewed a number of relevant previous cases, the results of which have ultimately led to the current practice in deciding upon the taxation of termination payments, detailed below:

The primary distinction made in all the cases, is that where a termination payment is provided on the repeal of a contract of employment, the first £30,000 will not be subject to tax or NICs. Where a payment is made on termination in pursuance of a pre-existing obligation to make such a payment arising under a contract of employment, the payment will be taxable as earnings in line with the employee’s salary.

The Decision
The UT noted that whilst it was difficult to see the logical difference in tax treatment between the clause included in the player’s employment contract, and a payment of any remaining wages under a fixed term contract, the “distinction is, as it seems to us, too clearly established by the authorities for us to depart from it”.

The express clause therefore did not constitute a pre-existing obligation under the contract of employment (as noted in the distinction above), and so it was not subject to tax and NICs in line with earnings.

Regarding the other grounds for appeal, the UT again agreed with the FTT’s initial analysis in all cases.

It should be noted in considering the scope of this decision that the Autumn Budget announced that employers will be liable to pay employer’s NICs on termination payments in excess of the £30,000 threshold from April 2018. This brings the treatment of termination payments for employer’s NICs in line with income tax, and reduces the effect of the above decision for termination payments from 2018/19.

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