Although Spurs would probably have happily traded their recent win before the First-tier Tribunal (Tottenham Hotspur Ltd v HMRC [2016] UKFTT 389 (TC), reported in Tax Journal, 17 June 2016) for a win in the Premier League, we venture to suggest that the decision will prove of even greater and longer-lasting significance than three points at White Hart Lane.
The case concerned the transfer in 2011 of Peter Crouch and the much-travelled Wilson Palacios to Stoke City. Both players were employed by Spurs under fixed-term contracts. The contracts contained provision for early termination either if certain circumstances arose (which had not in the event arisen) or by mutual agreement between employer and employee.
Spurs had failed to qualify for the lucrative Champions League and wished to shed some players in order to reduce costs. So they negotiated terms on which the employments would end. The question was whether the amounts paid to the players as part of the termination arrangements arose ‘from’ the employments so as to be subject to NICs. In principle, of course, the availability of exemption from income tax for the first £30,000 was also in point, though the size of the payments rendered tax on £30,000 little more than small change.
HMRC put forward two arguments. The first was that because the contracts expressly envisaged and provided for termination by mutual consent, any payments made following termination by mutual consent must flow ‘from’ the contracts. That was a brave argument: as the tribunal observed, it is a basic principle of contract law that any contract can be terminated (or varied) by mutual consent. So a specific clause to that effect changes nothing: ‘an employee employed under such a contract should be in the same position as an employee employed under a fixed-term contract that is silent as to the circumstances in which it is terminated early.’ One-nil to Spurs.
The second HMRC contention was that in order not to be ‘from’ the employments, there would need to be a breach of contract by the employer. Or, to put it another way, a payment made on termination of an employment contract can escape NICs (and can qualify for the £30,000 income tax exemption) only if there has been a breach of contract by the employer. In rejecting this, the tribunal commented:
‘Employers and employees may take a pragmatic decision to enter into a compromise agreement in order to avoid the time and expense involved in determining whether there has been a breach of contract. The logic of Richardson v Delaney ([2001] STC 1328) is that, in such cases, even though the parties have succeeded in avoiding unnecessary civil litigation between themselves, it would still be necessary to determine whether a breach had taken place in order to ascertain the correct tax position. We do not consider that would be a desirable state of affairs and, for that reason, prefer the decision in Martin ([2015] STC 478) and have concluded that no breach of contract is necessary.’
The tribunal therefore accepted the contentions of the employer and held that whether there was or was not a breach of contract was irrelevant to the tax treatment.
In this case, a win for Spurs is good news all round.
Although Spurs would probably have happily traded their recent win before the First-tier Tribunal (Tottenham Hotspur Ltd v HMRC [2016] UKFTT 389 (TC), reported in Tax Journal, 17 June 2016) for a win in the Premier League, we venture to suggest that the decision will prove of even greater and longer-lasting significance than three points at White Hart Lane.
The case concerned the transfer in 2011 of Peter Crouch and the much-travelled Wilson Palacios to Stoke City. Both players were employed by Spurs under fixed-term contracts. The contracts contained provision for early termination either if certain circumstances arose (which had not in the event arisen) or by mutual agreement between employer and employee.
Spurs had failed to qualify for the lucrative Champions League and wished to shed some players in order to reduce costs. So they negotiated terms on which the employments would end. The question was whether the amounts paid to the players as part of the termination arrangements arose ‘from’ the employments so as to be subject to NICs. In principle, of course, the availability of exemption from income tax for the first £30,000 was also in point, though the size of the payments rendered tax on £30,000 little more than small change.
HMRC put forward two arguments. The first was that because the contracts expressly envisaged and provided for termination by mutual consent, any payments made following termination by mutual consent must flow ‘from’ the contracts. That was a brave argument: as the tribunal observed, it is a basic principle of contract law that any contract can be terminated (or varied) by mutual consent. So a specific clause to that effect changes nothing: ‘an employee employed under such a contract should be in the same position as an employee employed under a fixed-term contract that is silent as to the circumstances in which it is terminated early.’ One-nil to Spurs.
The second HMRC contention was that in order not to be ‘from’ the employments, there would need to be a breach of contract by the employer. Or, to put it another way, a payment made on termination of an employment contract can escape NICs (and can qualify for the £30,000 income tax exemption) only if there has been a breach of contract by the employer. In rejecting this, the tribunal commented:
‘Employers and employees may take a pragmatic decision to enter into a compromise agreement in order to avoid the time and expense involved in determining whether there has been a breach of contract. The logic of Richardson v Delaney ([2001] STC 1328) is that, in such cases, even though the parties have succeeded in avoiding unnecessary civil litigation between themselves, it would still be necessary to determine whether a breach had taken place in order to ascertain the correct tax position. We do not consider that would be a desirable state of affairs and, for that reason, prefer the decision in Martin ([2015] STC 478) and have concluded that no breach of contract is necessary.’
The tribunal therefore accepted the contentions of the employer and held that whether there was or was not a breach of contract was irrelevant to the tax treatment.
In this case, a win for Spurs is good news all round.
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