The distinction between taxable remuneration arising from employment and tax-free compensation for the surrender of employment rights is a crucial one but has proved perennially tricky. In a test case of critical importance to professional sports clubs and their players, a tribunal ruled that termination payments made to two Premier League footballers fell on the tax-exempt side of the line.
A club had agreed to make payments totalling over £4 million to the players on their transfer to another club. They were expressed to be non-contractual compensation for the early termination of their contracts. That was not accepted by HM Revenue and Customs (HMRC), however, and demands were raised against the club in respect of Income Tax and National Insurance Contributions.
In upholding the club’s challenge to those demands, the First-tier Tribunal (FTT) found that the payments were consideration for the players’ early surrender of their rights as office holders. Although their contracts permitted early termination by mutual consent, the payments could not be viewed as having been made in lieu of notice.
In rejecting HMRC’s appeal against that ruling, the Upper Tribunal could find no fault in the FTT’s approach to the case. The players’ contracts did not provide expressly for payments to be made to them on termination of their contracts and the money they received was thus not profit or remuneration arising from employment.