A taxpayer wins his claim for tax relief in relation to the repayment to his employer of part of his sign-on bonus.
The taxpayer entered into a new employment contract with his existing employer whereby he received a sign on bonus of £250,000 in return for his agreement to remain with the employer for at least 5 years. Under the contract, he was liable to repay part of that sign on bonus if he gave early notice to terminate the employment in breach of the 5-year commitment.
At the time of payment, the full amount was subject to PAYE tax and National Insurance Contributions. Additionally, the taxpayer reported the full amount as taxable income on his self assessment tax return for the tax year in which the payment was made.
The taxpayer subsequently gave notice early and became liable to repay £162,500 to his employer. However, HMRC denied any tax relief in relation to the repaid amount on the grounds that the full amount of £250,000 was earnings for the year in which it was received and that the fact that a portion of the bonus was repaid did not change that. It also contended that the repayment could not be regarded as “negative earnings” (a concept which is provided for under UK tax law) or that a claim could be made for employment loss relief under another part of the legislation.
The Tribunal acknowledged that, were the HMRC view to prevail, the taxpayer would be considerably worse off than if he had not received the sign on bonus in the first place. However, it stated that it would be “quite wrong for us to arrive at a rogue decision simply because we might consider that the Appellant would be unfairly prejudiced by a correct decision that dismissed his Appeal”. HMRC also acknowledged that the result was “hard” but that its job was to apply the legislation as enacted.
The Tribunal agreed with HMRC that the sign on bonus was earnings and properly treated as such for the tax year in which it was received. However, it did accept the alternative contention by the taxpayer (that the repayment was a payment of “negative earnings”) and concluded that the negative earnings should be aggregated with the “positive earnings” (£140,000) received by the taxpayer in that same tax year. This resulted in nil earnings for the year in question. The Tribunal also determined that the remaining amount of the repayment (£22,500) could be claimed under a different part of the legislation as “employment loss relief”.
Although an appeal may be made, the decision is still a timely one as more and more UK companies, under pressure from shareholders, are inserting claw back provisions into their bonus and share plans.
Julian Martin v HMRC  UKFTT 040 (TC)
For further information or to discuss the issues raised, please contact John Mooney or Bina Gayadien on +44 (0)20 3051 5711.
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