Termination payments not from employment

Termination payments not from employment

In this FTT decision, payments made to footballers on early termination of their contracts were held not to derive from their employment.

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In a recent case before the First-Tier Tribunal (FTT), Tottenham Hotspur FC (Tottenham) successfully argued that payments made to two former footballers on the early, mutual termination of their contracts did not derive from their employment. While the Income Tax implications were not significant, the National Insurance (NIC) savings were substantial.

In August 2011 Tottenham agreed terms with two of its players (the Players) which involved them leaving Tottenham to join Stoke City FC (Stoke) and Tottenham making payments to the Players. The appeal concerned the tax treatment of those payments. HMRC considered that the payments were earnings from the Players’ employment and, as such, subject to income tax and NIC.

Tottenham argued that the payments were compensation for the early termination of the Players’ contracts and, as such, were not from the Players’ employments. For Income Tax purposes the difference was not material. If HMRC were correct then the payments would be subject to Income Tax as general earnings. If Tottenham were correct the payments would still be subject to Income Tax but as termination payments with the first £30,000 tax free. For NIC purposes however, the point was material as NIC is charged only on ‘remuneration or profit derived from employment’. If Tottenham were correct then NIC would not be due.

The judgment relied heavily on a case from the 1950s called Henley v Murray [1950] 1 All ER 908 which distinguished between:

  • A payment due under (or flowing from) a contract of employment; and,
  • A payment made for the surrender of rights at the end of a contract (and so not from employment).

The FTT found that, in this case and on the facts, the payments made to the Players were made ‘for the consideration of the total abandonment of the contractual rights which the Player had (under their contracts)’. As such they were not from employment and so the taxpayer’s appeal was allowed.

Even if this decision is not appealed by HMRC, it has been announced that NIC will be due on all termination payments from April 2018.
 

For further information please contact :

Seamus Murphy

Mike Lavan

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