This week, one of our partners’ football clubs has been in the news in the case of Tottenham Hotspur Limited – v – The Commissioners for Her Majesty’s Revenue & Customs (2016).
You can read the full case details by clicking here.
This case concerned payments made by Tottenham to former players Peter Crouch and Wilson Palacios in August/September 2011 when Tottenham agreed terms for their transfer to Stoke City Football Club. A couple of seasons out of the lucrative Champions League meant Spurs were keen to reduce their wage bill, while Stoke were looking at enhancing their status in the Premiership by signing expensive new players.
The terms included payments to the players and this case concerns the tax treatment of those payments.
Read the full stories as reported in the media at the time: Stoke City sign Tottenham Hotspur’s Peter Crouch in £12m deal and Tottenham Hotspur’s Wilson Palacios seals move to Stoke City.
When are earnings not earnings?
The First-Tier Tribunal (Tax) determined that the payments made by Tottenham to the players were not earnings but termination payments and therefore outside the scope of National Insurance Contributions (NICs). The payments compensated the players for the surrender of rights as part of the abandonment of their contracts and therefore they were not payments arising from the players’ employment, but rather its termination.
Current legislation which deals with payments and benefits provided on termination of employment provides that payments which constitute compensation for the early termination of employment (which are not taxable as employment income) are not subject to NICs. This is subject however, to the well-known exemption that the first £30,000.00 of such a payment is not chargeable to tax or NICs at all.
Understanding your employment contract
HMRC argued that the payments were earnings because the terms of the players’ employment contracts provided for early termination by mutual consent and therefore a payment received in consequence of the implementation of this clause of the employment contract would therefore be a payment “arising from” the players’ employment, thus similar to a salary payment.
Tottenham, however, applied the judgment of a conflicting case and claimed that the payments were for the surrender of rights on the abandonment of the contracts. This argument was preferred by the tribunal.
Does this mean all employers benefit from this legal precedent?
The tribunal noted that all contracts can be terminated by mutual agreement and, therefore, such a right arises from general contract law rather than the employment contract. While the decision is good news for employers, the benefit will be relatively short-lived because the government has announced that from April 2018 all taxable termination payments will be subject to employer NICs.
At Cunningtons Solicitors, our Employment Law Department has employment solicitors who can provide specialist employment advice for both employers and employees. Please call us on 01376 326868 to see how we can help.
Even if you’re not working in the Premier League.