Tribunal confirms termination payments to Spurs not subject to NICs

11 December 2017

With thanks to Pinsent Masons for the following summary:

Payments to two footballers for early termination of fixed term contracts were taxable as termination payments and not as general earnings, even though the contracts envisaged early termination by mutual consent, the UK's Upper Tribunal has decided, upholding an early First-Tier tribunal decision.

The decision related to payments made in 2011 to professional footballers Wilson Palacios and Peter Crouch by Tottenham Hotspur Football Club. The footballers had contracts with the club which expired on a fixed date unless terminated earlier by mutual consent. In 2011 the club wished to reduce its wage bill and so agreed to pay the footballers a lump sum for agreeing to the early termination of their contracts to join Stoke City Football Club.

HM Revenue & Customs (HMRC) argued that the payments were general ‘earnings from an employment’, subject to income tax and national insurance contributions (NICs), rather than payments in consequence of the termination of employment which would not have been subject to NICs and of which the first £30,000 would be tax free.

HMRC argued that the fact that the employment contracts included clauses expressly allowing for early termination of their fixed terms only by mutual consent was sufficient to mean that the agreed termination payments were 'from an employment'.

The Upper Tribunal upheld the earlier decision of the First-tier Tribunal that the payments were not general earnings.

"This is a helpful clarification that just allowing for the possibility of early termination is not enough to make a subsequent termination payment taxable as earnings," said Chris Thomas, an employment tax expert at Pinsent Masons, the law firm behind "However, it is important to note that the outcome would have been different if the contract had actually included provision for a payment to be made, as that would effectively have been a contractual PILON, and taxable accordingly. Nor does this case change the general principle that payments envisaged in the employment contract will be earnings – it is specific to this particular situation."

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