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December 5, 2016
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Tottenham Hotspur v HMRC – Termination Payments

The recent case of Tottenham Hotspur FC v HMRC highlights the complex tax treatment of termination payments made by employers.

The case was in respect of payments made by Tottenham Hotspur FC (the "appellant") to two players on the termination of their contracts.

The First-Tier Tribunal considered whether the payments were earnings from the players' employment and as such were subject to income tax and national insurance contributions (NICs) on the same basis as their salaries, or whether the payments were compensation for the early termination of their contracts.

The tribunal found in favour of the appellant and held that the payments were indeed compensatory, and therefore eligible for the £30,000 exemption.

The Facts

  • The appellant wished to reduce their wage bills as its commercial income had declined. They identified Stoke as a possible destination to transfer two of their players.
  • The players’ contracts were not due to expire for a further 2-3 seasons and so they were under no obligation to leave the club. Both were reluctant to move, however following negotiations they ultimately agreed to the transfer.
  • The appellant agreed to provide financial recompense to both players following the request from one of the player’s advisors.

The Case

The appellant contended that the payments made to the players were in return for the players giving up their rights to be employed to the end of their contracts and were not pursuant to any provision within their contracts. As such, the payments were not ‘from’ their respective employments.

HMRC argued that the players’ contracts provided for termination by mutual consent. As the payments were made following a termination by mutual consent, they therefore flowed ‘from’ the players’ contracts of employment.

The Decision

Despite provisions that would have allowed the taxpayer to terminate the players’ contracts early, none of these early termination provisions were used.

Both players’ contracts did contain provisions for termination by mutual agreement however the Tribunal found that this merely reflected a fundamental principal of contract law, i.e that a contract may be terminated or amended by mutual consent, regardless of whether there is a provision within the contract permitting such actions.

Any payments under such a provision arise as a result of general contract law. Moreover, the players had no greater security or continuity of salary as they would have had if the contacts did not contain such a provision.

The Tribunal therefore decided that the payments were in return for the surrender of employment rights and did not arise ‘from’ the players’ contracts.

This resulted in the entirety of the payments being exempt from NICs and the first £30,000 of each player’s payment being exempt from income tax.

Further Reading

The tax treatment of termination payments is complex and how a payment is taxed will depend upon the characteristics of the payment/employment itself. It is not uncommon to receive a number of payments upon termination of employment and for each of these to be taxed in varying ways.

Further information on the changes to termination payments can be found here.

Contact us today to discuss your tax requirements.
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