Footballers’ Pay Offs Taxable as Termination Payments

Payments made to footballers on the early termination of their fixed term contracts were taxable as termination payments, not earnings. 

Speedread

Payments made to footballers on the early termination of their fixed term contracts were taxable as termination payments. There was no contractual term which provided for the payments to be made. They were made in return for the players abandoning their right to be employed until the expiry of the fixed term and the fact that there had been no breach of contract made no difference. 

Facts

In Tottenham Hotspur Limited v HMRC, Tottenham employed Peter Crouch and Wilson Palacios on fixed term contracts. Their contracts provided that their employment could be terminated early by mutual consent. Tottenham wished to reduce its wage bill and sought to transfer the players to Stoke. Eventually it agreed terms on which the players would transfer to Stoke and Tottenham would pay them termination payments. The payments were less than they would have received had they continued to work. 

HMRC argued that the payments were earnings and subject to income tax and NICs. The players’ contracts expressly provided for termination by mutual consent and any payment received as a result of implementing those terms was “from” the employment and therefore earnings. In order for such payments to be treated as termination payments, there would need to be a breach of contract by Tottenham and there had not been. 

Tottenham argued that that the payments were compensation for the early termination of the players’ contracts. They were made in return for them giving up the right to be employed until the expiry of the fixed term. They were not made pursuant to a term of the contract and the tax and NIC treatment of the payments did not depend on whether there had been a breach of contract. 

Decision

The first tier tax tribunal ruled that the payments were taxable as termination payments. There was no contractual term which provided for the payments to be made. They were made in return for the players abandoning their right to be employed until the expiry of the fixed term and the fact that there had been no breach of contract made no difference. 

Implications

Payments made to an employee in return for them giving up their contractual rights on termination will not be taxable, provided that the contract does not provide for the payment to be made. Where a contract is terminated by mutual consent, a payment made by the employer may still be treated as a termination payment for tax and NICs purposes. It is not necessary to demonstrate that the contract has been terminated in breach.