I’m sure, if like me, that when you hear a mention of Tottenham Hotspur (Spurs) and tax in the same sentence, you’ll expect it to be a reference to one of my colleagues Tim Palmer and his infamous tax lectures!
If so, you will be surprised to learn that it isn’t Tim who has been referencing Spurs and tax in the same sentence, but the Upper Tribunal regarding their recent decision in a case involving the termination payments Spurs made to two of their former players (Peter Crouch and Wilson Palacios).
The argument put forward by Spurs was that the payments made to the players were not earnings but a payment in return for surrendering their employment rights. Specifically, the payments were made in return for the players forfeiting their right to be employed until the end of their contracts, and this was distinct from any provision within their employment contract.
The concept of placing a value on the surrendering of employment rights is, in itself, nothing new and indeed the short lived (and now abolished) tax-advantaged employee shareholder share scheme recognised the value that could be placed on employment rights.
Spurs argued that, as the payments didn’t relate to the employment contract, they were treated as termination payments and subject to tax under section 401, with the first £30,000 tax free and no national insurance due on the entire payment. Given the payments made were in excess of £1m to each player, the potential loss of 13.8% employers’ national insurance on the payment meant the stakes were high for HMRC.
HMRC’s argument was that the payments were made as a result of the provisions within the players’ employment contracts, specifically on the provision in the contracts for consensual early termination.
However, the findings of the tribunal were that whilst the contract provided for consensual early termination, the contract did not provide for an associated payment under this provision and therefore the payments in question were made without any pre-existing obligation on the employer to make the payment.
HMRC were dismissed, Spurs won the day, albeit not the season…sorry Tim!
For advisers, this decision demonstrates why advising on termination payments can be a minefield and specialist support is needed to consider the tax implications. PKF Francis Clark has a specialist employment tax team that are on hand to assist with any termination payment queries you may have.