November 22, 2024
Volume XIV, Number 327
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Tottenham Hotspur FC 2 : 0 HM Revenue & Customs
Friday, December 1, 2017

Football, football teams, footballers, footballer’s pay… a comprehensive review of the case law on the taxation of termination payments… this one has got it all!

The match… the case (HM Revenue & Customs v Tottenham Hotspur Limited) concerns termination payments made to Peter Crouch and Wilson Palacios. The facts are relatively straightforward. Both player’s contracts with Tottenham Hotspur were for a fixed term and could only be terminated by mutual consent. Both contracts were terminated early (by mutual consent) when both players moved to Stoke City during the 2011 summer transfer window.  Both players received lump sum termination payments from Tottenham as part of overall transfer arrangements.

HMRC, arguing that the lump sums paid to Crouch and Palacios were “from an employment”, determined that both income tax and national insurance contributions (NICs) were due. Tottenham disagreed and appealed against the determinations.

The First-tier Tribunal (FTT) decided, back in 2016, that the the payments were not taxable as earnings from employment, and were not subject to NICs. Crucially, the FTT drew a distinction between payments “received in connection with the termination of employment” (such as those received by Mr Crouch and Mr Palacios) and payments that were “earnings from employment”. One-nil, Tottenham. Perhaps realising that football is a game of (at least) two halves, HMRC appealed against that decision.

The Upper Tribunal undertook a detailed summary of the voluminous case law in this area, but ultimately upheld the FTT’s decision. It found that the termination payments “fell squarely” into the category of payments made where the entire contract of employment is abrogated and distinguished such payments from those “made in pursuance of a pre-existing obligation … under a contract of employment”. Two-nil, Tottenham.

While this is good news for Spurs, and the individual players involved, it is worth noting that the law in this area will be changing with effect from April 2018.

Currently, termination payments made in line with a contractual provision (such as a payment in lieu of notice (PILON) clause) are taxable in full, whereas payments which are not contractual are not subject to NICs at all and the first £30,000 of the payment is free of income tax.

From April 2018, that distinction between “contractual” and “non-contractual” PILONs, so critical in this case, will fall away. Under the new rules any “post-employment notice pay” (broadly, the basic pay the employee would have been paid up to the termination date if they had worked their notice period) will be subject to income tax and NICs. The £30,000 exemption and full exemption from NICs will only apply to termination payments that exceed the “post-employment notice pay”. The goalposts are moving.

HMRC v Tottenham Hotspur Limited [2017] UKUT 0453 (TCC)

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