Tottenham Hotspur Limited v HMRC [2016] UKFTT 389 (TC)

Football fans will remember the August 2011 transfer window in which Tottenham Hotspur transferred Peter Crouch and Wilson Palacios to Stoke City for a reported transfer fee of £15m.  At the time Tottenham were desperate to lower their wage bill and thus paid a 'sweetening' termination payment to each player as an encouragement for them to accept any offer made by Stoke for their services.

Payments stemming from the cessation of employment are made taxable by s.9 of the Income Tax (Earnings and Pensions) Act 2003.  There are two categories of payments relevant to the present case being:

• Income in relation to 'employment' (s.62).  For example an employer exercising a pre-existing contract clause to terminate the agreement.  This is made in accordance with an employment agreement and thus is income in relation to 'employment'.
• Income in relation to 'termination of employment' (s.401).  Such as what occurs when an employer breaches a contract and the employment is terminated by way of a final payout for damages to the employee.  In this case the employment contact is deemed to be terminated by 'mutual agreement' between the parties.

As both types of payments are taxable, whether or not tax is chargeable under s.63 or s.401 makes negligible difference to the total tax outcome for each player in the present case (and thus how much Tottenham would be required to withhold as PAYE tax to the HMRC).  However, when withholding tax for the National Insurance (NI) scheme (13.8% of income) there is a material difference between the two categories of payments which is apparent when considering the definition of 'earnings' in s.3(1)(a) of the Social Security Contributions and Benefits Act 1992:

""[E]arnings" includes any remuneration or profit derived from an employment"."

Thus while each payment is taxable at the players' marginal rates of income tax, the extra NI contribution to be withheld by Tottenham is a significant cost to bear - being an extra 13.8% of tax.  The Social Security Contributions and Benefits Act 1992 provides that only remuneration in respect of employment is taxable under the NI scheme thus if the payment is taxed under s.403 then no NI contribution is required.  Whether or not a termination payment is made in relation to employment was discussed by the Tribunal:

"Where a payment is made in pursuance of a contractual provision, agreed at the outset of the employment, which enables the employer to terminate the employment on making that payment, the sum received is remuneration in respect of the employment even though it is made in conjunction with the termination of the employment. Such a payment is not paid in consideration of the recipient’s “surrender of rights” under the contract because the recipient is receiving what was bargained for under that contract (EMI Group Electronics Ltd v Coldicott)."¹

The HMRC argued that Premier League playing contracts envisage 'from the outset' early mutual termination of employment and thus contract abrogation was a normal part of the employment arrangement. In its view the payment was in respect of employment. 

Unsurprisingly, Tottenham argued that the payment was made in relation to a mutual termination of the agreement whereby both parties 'surrendered their rights' under the contract.  The consequence being that it would be excepted from 'employment remuneration' as per above.

The Tribunal found:

"There were provisions that would have entitled Tottenham to terminate the Players’ contracts early if particular circumstances arose. However, none of these early termination provisions were engaged in relation to either Player. If Mr Crouch had stayed at Tottenham and Tottenham had followed through on the threat of not selecting him to play, he may have been entitled to require his contract to be terminated under the provisions of the FIFA Rules set out at [32(2)]. He may also have been entitled to request that his contract be terminated under the provisions of the FA Rules referred to at [41]. However, in August 2011, this was a threat only and therefore Mr Crouch’s right to terminate (or to request termination) had not been triggered. It follows that, with the exception of the right to terminate early by mutual agreement, in August 2011, neither the Players nor Tottenham had any operative right of termination conferred under the Players’ employment contracts. The payments that Tottenham made, as part of arrangements to terminate the Players’ contracts, were accordingly made in return for the surrender of the Players’ rights under the contract and fall within the scope of the principle in Henley v. Murray."²

"Our overall conclusion, therefore, is that the payments did not derive “from” the Players’ employments applying the principle in Henley v Murray. The appeal is accordingly allowed."³

Notes

Case (UKFTT [2016] 389):  http://www.bailii.org/uk/cases/UKFTT/TC/2016/TC05143.html

1.  p95

2.  p103

3.  p106

Legislation

http://www.bailii.org/uk/legis/num_act/1992/ukpga_19920004_en_1.html
http://www.bailii.org/uk/legis/num_act/2003/ukpga_20030001_en_1.html