Spurs beat compensation tax offside trap

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In a judgement of two halves Tottenham Hotspur won their court case against HMRC after a tax tribunal ruled that tax and NI was not due on the compensation paid to two former players upon the termination of their contracts.

The case ([2016] UKFTT 0389) tackled termination payments paid to former England striker Peter Crouch and Wilson Palacios. On transfer deadline day, August 2011, the pair were deemed surplus to requirements by Tottenham as the club sought to reduce its wage bill.

The tribunal heard that Matthew Collecott, group operations and finance director of Tottenham, sent a text message to Melvyn Gandz, Crouch’s accountant, stating that the forward would not form part of the 25-player squad eligible to play in Premier League matches.

As not playing for the remaining two years of his contract would have had an adverse effect on Crouch’s career, he reluctantly agreed to a transfer to Stoke City. After negotiations involving Gandz and Crouch’s father Bruce, Tottenham agreed to compensate the player for ending his contract early.

Midfielder Palacios, who had a further three years left to run on his contract, also joined Stoke on transfer deadline day, and was given a contract termination payment of £1.5m, the judge heard.

Relatively mundane technical point

HMRC argued that the payments should be classed as earnings and therefore subject to income tax and NI, but Tottenham claimed the money was compensation for ending the contracts by mutual consent.

At the heart of the case was a relatively mundane technical point – because the payments were in effect for the footballers not doing their jobs, rather than for doing them, Tottenham argued that they were not from employment.

The FTT agreed with Tottenham’s case, concluding that the payments did not derive “from” the players’ employments, and allowed their appeal.

Relatively uncommon

Arrangements where footballers are paid to leave their club are relatively uncommon – they often receive a signing-on fee but not a ‘signing-off’ fee, and AccountingWEB is not aware of any other ongoing cases of this nature.

HMRC has not commented on whether it will appeal the decision, and while it is somewhat unusual for them not to appeal when they have lost, as the point on which the case was won is relatively straightforward the Revenue may decide to call full-time on it.

In terms of the case’s applicability to other arrangements, although the principle doesn’t just apply to footballers (it applies to everybody who is paid to leave employment), the particular clause that caused the Revenue to argue the point here –  a clause that said that the contract had to be terminated by mutual agreement – is most commonly found among footballers’ contracts. It is not a clause typically seen in employment contracts.

As the case mainly has application to footballers being paid by their clubs to depart this reduces the scope for it having a broad application, which means that HMRC are unlikely to be caught out by this particular offside trap on a regular basis.

About Tom Herbert

Tom is editor at AccountingWEB, responsible for all editorial content on the site. If you have any comments or suggestions for us get in touch.

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