Gabelle Tax Analysis: Three interesting employment tax decisions
Three interesting employment tax decisions were published on 25 January. These relate to:
- Car benefits
- Conditional bonuses, and
- Termination payments.
The first decision illustrates how a car benefit tax charge may be avoided after the end of the relevant tax year.
In Peter Marshall  UKFTT046 (TC), Mr Marshall was assessed on a taxable benefit on his company car. Mr Marshall made payments to ‘make good’ the taxable benefit but these payments were made outside the relevant tax year.
HMRC denied an offset of amounts paid – because they were paid outside the tax year; however, the First-tier Tribunal, perhaps surprisingly, held that an employee’s offsetting payment does not need to be made in the tax year in question.
The second decision provides guidance on how relief should apply when employee bonuses are clawed back.
In Julian Martin  UKFTT 040 (TC), Mr Martin signed an employment agreement which included a signing on bonus of £250,000; however, the bonus would be clawed back if he left his employer within five years. Mr Martin resigned within the five year period and had to repay £162,500 to his employer.
HMRC asserted that relief was not available for the repayment made to the employer. If they had been correct this would have meant that Mr Martin would have suffered tax on monies he was not able to keep. Mr Martin appealed to the First-tier Tribunal
The First-tier Tribunal sensibly decided that the repayment of £162,500 must be ‘negative taxable income’ for 2006/07.
This is an important case because before the publication of this decision it was not clear how to treat the claw back of conditional bonuses. This decision is good news for taxpayers because it means that relief is still available even where the taxpayer is out of time to make an error or mistake claim in relation to the original receipt.
The final case, reminds us of the importance of clearly defining the purpose of making a termination payment, (as well as some essential life lessons!)
In D V Thomas  UKFTT 043, Mr Thomas had been employed by Garrard & Co as Crown jeweller since 1986. Following his 65th birthday Mr Thomas took a two to three month break. In his absence, a new CEO was appointed, who brought with him a new management style. When Mr Thomas returned after his break he found that his office had been moved to the basement. Shortly afterwards, Mr Thomas received a letter to tell him that his employer wanted him to retire on 1 February 2009. If he took no further action he would be treated as agreeing to their proposal and receive a payment equivalent to six months of his base salary.
Realising he was not wanted, Mr Thomas did not challenge the letter. He believed that the payment was compensation for giving up his employment rights and as such that the payment was only taxable to the extent it exceeded £30,000. The First-tier Tribunal held that the payment was fully taxable as employment income. The letter simply said that the payment would be made on his retirement. There was not mention of compensation for giving up his employment rights and therefore the £30,000 exemption did not apply.