HMRC has published its guidance on the availability of relief for negative taxable earnings, in response to the Upper Tribunal decision in HMRC v J Martin [2014] UKUT 429 (TCC). The guidance confirms that, in certain circumstances, income tax relief may be available to employees who have bonuses clawed back from them.
If an amount qualifies as negative taxable earnings, any relief is normally given through the employee’s self-assessment tax return (i.e. not through PAYE).
The new guidance can be found in the HMRC’s Employment Income Manual, starting at EIM00805. The guidance specifically explains the case of HMRC v J Martin, where it was decided that the amount the employee had to repay his employer under a clawback arrangement was negative taxable earnings under ITEPA 2003 s 11. Useful examples that demonstrate the potential tax treatment of clawed back bonuses are available in the Employment Income Manual, starting at EIM00842.
There is no concept of ‘negative specific employment income’ which would include share awards and termination payments, and so it is unclear how the guidance would apply to any clawback in relation to share awards. We hope this will be addressed by HMRC in the near future.
Certain financial services firms are required to include clawback provisions in their remuneration arrangements and clawback provisions are generally now more commonly attached to awards made to directors and senior employees of companies listed on the London Stock Exchange and elsewhere. Companies should now check whether their clawback policies are applied on a gross basis or a net of tax basis. If the clawback provisions are applied on a net of tax basis, there is now a substantial chance that UK based employees will be able to obtain a tax relief in the UK, which may put them in a more advantageous position than originally intended. Accordingly, companies are now advised to review their clawback provisions to check if they are operating clawback on a net of tax basis. If they are, it is worth considering whether to move away from a net of tax basis or, at the very least, to include a condition that a net of tax basis is only to be applied if the employee enters into a deed of indemnity in case any tax is refunded or refundable.
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Tax relief on clawback of bonuses
HMRC has published its guidance on the availability of relief for negative taxable earnings, in response to the Upper Tribunal decision in HMRC v J Martin [2014] UKUT 429 (TCC). The guidance confirms that, in certain circumstances, income tax relief may be available to employees who have bonuses clawed back from them.
If an amount qualifies as negative taxable earnings, any relief is normally given through the employee’s self-assessment tax return (i.e. not through PAYE).
The new guidance can be found in the HMRC’s Employment Income Manual, starting at EIM00805. The guidance specifically explains the case of HMRC v J Martin, where it was decided that the amount the employee had to repay his employer under a clawback arrangement was negative taxable earnings under ITEPA 2003 s 11. Useful examples that demonstrate the potential tax treatment of clawed back bonuses are available in the Employment Income Manual, starting at EIM00842.
There is no concept of ‘negative specific employment income’ which would include share awards and termination payments, and so it is unclear how the guidance would apply to any clawback in relation to share awards. We hope this will be addressed by HMRC in the near future.
Certain financial services firms are required to include clawback provisions in their remuneration arrangements and clawback provisions are generally now more commonly attached to awards made to directors and senior employees of companies listed on the London Stock Exchange and elsewhere. Companies should now check whether their clawback policies are applied on a gross basis or a net of tax basis. If the clawback provisions are applied on a net of tax basis, there is now a substantial chance that UK based employees will be able to obtain a tax relief in the UK, which may put them in a more advantageous position than originally intended. Accordingly, companies are now advised to review their clawback provisions to check if they are operating clawback on a net of tax basis. If they are, it is worth considering whether to move away from a net of tax basis or, at the very least, to include a condition that a net of tax basis is only to be applied if the employee enters into a deed of indemnity in case any tax is refunded or refundable.
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