Tottenham Hotspur 1, HMRC 0.

The First-Tier Tribunal allowed Tottenham's appeal and held payments made to two football players as part of their terms for leaving were not payments made "from" the players’ employment, therefore, they were not subject to income tax on the first £30,000 or national insurance contributions on the entire amount.

This article considers Tottenham Hotspur Ltd v HMRC [2016] UKFTT 0389 (TC), in which the First-Tier Tribunal ("the Tribunal") allowed the appeal of Tottenham Hotspur Ltd ("Tottenham"), the taxpayer, and held payments made to two football players (Peter Crouch and William Palacios ("the Players")) as part of their terms for leaving were not payments made "from" the Players’ employment. Under the Income Tax (Earnings and Pensions) Act 2003 ("ITEPA") and the Social Security Contributions and Benefits Act 1992 they were not subject to income tax on the first £30,000 or national insurance contributions ("NICs") on the entire amount.

Background - Tax position:

Income tax is payable on general earnings from employment. There is a specific exemption in section 403 ITEPA which provides that the first £30,000 of termination payments is exempt from income tax. Anything in excess of £30,000 is subject to income tax payable by the taxpayer. This decision was more significant for its NICs implications on the sums involved, which are payable by the employer and employee. If a payment is not classed as general earnings or from employment, there will generally be no NICs payable. Where as in this case, fairly significant termination payments are made, and the employer's rate of NICs is 13.8% of the payment made, whether a payment is "from" employment is an important determination.

Facts of the case:

In 2011, Tottenham was looking to reduce its wage bill. The Players were transferred from Tottenham to Stoke City Football Club ("Stoke"). Both were employed by Tottenham under fixed-term contracts, which contained provisions for early termination by mutual agreement between employer and employee.

To induce the Players to terminate their contracts early, and move to Stoke, Tottenham made payments as part of their settlement agreements. HMRC viewed these payments made to the Players as earnings, as their contracts expressly provided for termination by mutual consent. Tottenham argued that the payments were compensation for early termination of their contracts and the payments themselves were not pursuant to any provisions in the contract; the payments were made for the Players giving up their rights to be employed until the expiry of the fixed-term, so not "from" their respective employments.

The key question in this case was whether these payments made as part of the termination arrangements arose from the Players' employments (and hence were subject to full income tax and NICs). 

The two arguments advanced by HMRC were:

  1. As the contracts expressly provided for termination by mutual consent, any payment following such termination must flow "from" the contracts.
    The Tribunal did not follow HMRC's reasoning. A specific clause reflecting this actually changes nothing in effect. It is a fundamental principle of contract law: any contract can be terminated by mutual consent. Therefore, where an employee is employed by a contract with such a provision, it should, in effect, be in the same position as an employee who is under a fixed-term contract silent on early termination; and
  2. To not be "from" the employments, there must be a breach of contract by the employer.  So, a payment made on termination can only escape NICs (qualifying for the £30,000 Income Tax exemption) if there is a breach of contract by employer.
    The Tribunal rejected HMRC's reasoning on this point too. The Tribunal stated that employers and employees can take a pragmatic approach when entering a compromise agreement, to avoid wasting time and expense determining if there has been a breach of contract. In Richardson v Delaney, it was held that in such cases, even though parties have succeeded in avoiding unnecessary litigation, it would still be necessary to determine whether a breach has occurred to ascertain the correct tax position. The Tribunal did not consider that a desirable state of affairs, preferring the reasoning used in other established case law that there does not need to be a breach of contract for payments not to be “from” the Players’ employments. It, therefore, concluded no breach of contract is necessary.

The Tribunal found in favour of Tottenham by concluding overall that is that the payments did not derive "from” the Players’ employments.


Whilst a victory for the club, the case serves as a reminder to employers and taxpayers to be clear on the tax treatment of termination payments. The key question was whether the payments were “from” the Players’ employments, and the Tribunal undertook a fact finding analysis to ascertain the reason for the payment. Employers should be mindful of the tax implications when negotiating settlement agreements and be clear whether the payments are made pursuant to a contractual right or not.

This is positive news for football clubs that payments to footballers when leaving their club can, subject to the facts, be treated as termination payments under section 401 ITEPA.

 However, the actual benefit to other taxpayers is unlikely to be significantly longstanding, following the Government's announcement that all taxable termination payments will be subject to employer NICs from April 2018.

Authors: Nicola Kemp, Colleen Dooner

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

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