Termination Payments – Even high paid footballers deserve a tax break, says the First Tier Tribunal (Tax)
Premier League Football Club Tottenham Hotspur successfully challenged HMRC’s tax treatment of the termination payments made to two of the club’s former players. The First Tier Tribunal (Tax) (‘FTT’) determined that the first £30,000 of the termination payments made to each player should not be subject to income tax and the full payments free from National Insurance contributions (NICs).
As with termination payments made under the terms of a settlement agreement, the question of what is the correct tax treatment is dependent on whether the payment is “from” employment or compensation for loss of employment.
Peter Crouch and Wilson Palacios were employed by the North London club on fixed term contracts that provided for early termination by mutual agreement. Spurs offered to make payments to the players in return for them agreeing to leave the club.
Although the players were being actively encouraged to terminate their employment there was no breach of contract and the termination was by mutual agreement.
HMRC subsequently issued determinations for recovery of income tax and NICs on the payments, which Tottenham appealed and brought to the FTT.
HMRC’s position was that the payments should be classed as earnings “from” the players’ employment on the basis that the contract expressly provided for termination by mutual consent. Whereas, the Premier League outfit asserted the payments were compensation for the early termination of employment; and, that they were not provided for in the employment contracts and they were not obliged to make the payments.
The FTT based its decision on the following: parties are free to agree to terminate employment and stating this in the employment contract is irrelevant; the agreement did not specify any payments in the event of termination by mutual agreement, therefore it could not be said the payments induced the players to enter employment with the club; and, there does not need to be a breach of contract for payments to be treated as compensation for loss of employment.
The FTT concluded that the payments were in return for the players giving up their rights under the employment contracts. Consequently, the payments were not ‘from’ the players’ employment meaning they are (i) free from NICs and (ii) only subject to income tax above £30,000.
The case highlights that HMRC actively reviews the tax treatment of termination payments. When negotiating the terms of a settlement agreement careful consideration should always be given to the tax treatment of payments and other benefits. The position is often fact-sensitive, a prime example is the tax treatment of a payment in lieu of notice: is it contractual, established through custom and practice, or paid as damages for loss of notice?
The FTT’s decision itself will be welcomed by both employees and, in particular, employers. However, the benefit for employers will be limited as the government recently announced that with effect from April 2018 all taxable termination payments will be subject to employer NICs.