Spurs 2 : 0 HMRC – payment on early termination of fixed term contract not taxable as earnings

In Tottenham Hotspur Ltd v HMRC [2017] UKUT 453 (TCC), the Upper Tribunal (UT) has confirmed the decision of the First-tier Tribunal (FTT) that payments made by an employer in respect of two football players on early termination of their fixed term contracts were not earnings. They were termination payments and, therefore, were outside the scope of national insurance contributions (NICs).

Background

The case concerned the transfer of two football players, Peter Crouch and Wilson Palacios (the Players), from Tottenham Hotspur Football & Athletic Co Ltd (Tottenham) to Stoke City Football Club (Stoke). The Players were employed by Tottenham on fixed term employment contracts. The contracts contained a provision for early termination, either if certain circumstances arose (none of which were present in this case), or by mutual agreement between the Players and their employer. 

In 2011, Tottenham wished to transfer the Players to another club and had identified Stoke as a possible destination. However, the Players were reluctant to move and for that reason Tottenham made payments to them as part of the agreement to terminate their contracts early.

HMRC considered that the payments made to the Players were earnings because the terms of the Players' employment contracts expressly envisaged, and provided for, termination by mutual consent and any payment received in consequence of implementing those terms was therefore "from" their employment. As such, the payments were subject to income tax and NICs.

Tottenham argued that the payments were compensation for the early termination of the Players’ contracts and were not made pursuant to any provision in those contracts. Accordingly, the payments were made in return for the Players giving up their rights to be employed until the expiry of the fixed term set out in their employment contracts and, as such, were not “from” their respective employments. 

In December 2014, HMRC issued determinations under Regulation 80 of the Income Tax (PAYE) Regulations 2003 and decisions under section 8, Social Security Contributions (Transfer of Functions etc) Act 1999, for recovery of the tax and NICs allegedly due on the payments made to the Players. 

Tottenham appealed against the determinations and decisions to the FTT.    The FTT allowed Tottenham's appeal.  

HMRC appealed to the UT.   The main issue before the UT was whether the fact that the players’ employment contracts included clauses expressly allowing for the early termination of their fixed terms by mutual consent was sufficient to establish that the agreed termination payments were "from" an employment. 

UT decision

HMRC's appeal was dismissed. 

In the view of the UT, there is a distinction between the situation where the entire contract of employment is abrogated in exchange for the termination payment and cases where payment was made in pursuance of a pre-existing obligation to make such a payment arising under a contract of employment. In the latter case, such payment was  "from" an employment. 

The UT concluded that the payments made in relation to the Players fell squarely within the first category. The payments compensated for the surrender of rights as part of the abandonment of the Players' contracts, they were not from their employment (for example, a payment in lieu of notice under an express term of their employment contracts), but from their termination.  

The UT also noted that, under HMRC’s view, any contractual provision permitting early consensual termination would be sufficient to make the termination payment made "from" an employment. This would result in almost all termination payments agreed in respect of a fixed term contract being caught as the contract would always contain an express or implied right to agree an early termination.  

Comment  

The UT's decision carefully analyses the relevant case law and its confirmation of the relevant test will be welcomed by taxpayers.  However, the benefit will be short-lived as Finance (No 2) Act 2017 changes the law so that all taxable termination payments are to be subject to employer NICs.  This was to come into effect from 6 April 2018 but has been deferred until April 2019.  

A copy of the decision can be viewed here.