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HMRC v Tottenham Hotspur

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In HMRC v Tottenham Hotspur [2017] UKUT 453 (24 November 2017), the Upper Tribunal (UT) found that payments made on termination of employment were not earnings from employment.

The appeal concerned lump sum payments made by Tottenham Hotspur to two professional footballers, in connection with the early termination of their employment contracts. The question was whether these payments were general ‘earnings from an employment’ (ITEPA 2003 ss 9 and 62), 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’ (ITEPA 2003 s 401), so that the first £30,000 was exempt and no NICs were due.

The main issue 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 mean that the agreed termination payments were ‘from an employment’.

The UT observed that the ‘real question’ was whether it would be right to regard an express clause in an employment contract allowing consensual termination of a fixed term, but not providing expressly for any payment as part of such an arrangement, as being equivalent to a ‘payment in lieu of notice’ clause like that found in EMI [1999] STC 803. The UT considered that the answer was ‘no’. The true distinction was between cases where the entire contract of employment was abrogated in exchange for the termination payment (as in Henley [1950] 1 All ER 908), and cases where the payment was made in pursuance of a pre-existing obligation to make such a payment arising under a contract of employment.

The UT also noted that, under HMRC’s view, any contractual provision allowing early consensual agreement for a termination is sufficient to make the termination payment made under the resulting agreement ‘from an employment’. This would mean that almost every termination payment agreed in respect of a fixed term contract would be caught, as the contract would always contain an express or implied right to agree an early termination. Finally, the UT firmly rejected the contention that the position may be different if one of the parties is under pressure to agree the termination, adding that such pressure will always be present in such negotiations.

Read the decision.

Why it matters: Having exhaustively covered the relevant case law, the UT observed: ‘There are some loose dicta, but the principles are clear.’ The UT’s clarification of the relevant test when deciding what is a ‘payment in lieu of notice’ is likely to be welcome.

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