The Upper Tribunal has rejected an appeal from HMRC in a case relating to the taxation of termination payments made to football player employees of Tottenham Hotspur Limited.
In HMRC v Tottenham Hotspur [2017] UKUT 453, the players’ employment contracts included clauses expressly allowing for the early termination of their fixed terms by mutual consent but remained silent on the issue of payment.
The question was whether the termination payments made under this clause were general 'earnings from an employment' (under sections 9 and 62 of the Income Tax (Employment and Pensions) Act ("ITEPA") 2003), so that they were entirely taxable and subject to NICs, or payments ‘received directly or indirectly in consideration or in consequence of, or otherwise in connection with the termination of a person’s employment’ (under section 401 of ITEPA 2003), so that the first £30,000 was exempt and no NICs were due. HMRC had taken the former view.
On appeal, the question that the Upper Tribunal had to consider was whether it was right to regard an express early termination clause in an employment contract which does not expressly provide for payment as being the same as a 'payment in lieu of notice' ("PILON") clause which, if payment was expressly contemplated by the contract, is taxable as salary in the usual way.
The Upper Tribunal appeared to have no difficulty in finding against HMRC. It was held that there is a proper distinction between cases where a contract is abrogated in exchange for a termination payment and cases where a payment is made pursuant to a pre-existing obligation under the employment contract to make such a payment, such as a PILON.
It was also noted by the Upper Tribunal that, on HMRC's analysis of the law, almost every payment made in respect of termination of a fixed term contract would be taxable; as the contract would always contain an express or implied right to agree early termination.
Although the law in this area is not entirely straightforward, this case provides some welcome clarification as to the factors to be taken into account when considering whether a not a payment is made within the contemplation of the parties under the employment contract.
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