It is not unusual for an employee to receive a valuable signing on bonus, often referred to as a ‘golden handshake’ in exchange for accepting a role and committing to a minimum period of service. These are normally provided on the basis that the bonus is repaid to the employer if the agreed minimum period of service is not met.
This creates a potential problem for the taxpayer, they have received the bonus net of income tax and NIC however they might be required to repay the full amount to their employer. Meaning the returnable bonus has resulted in negative earnings and a loss for the taxpayer!
The sensible solution to this would be to claim an employment loss and Julian Martin a UK taxpayer did just that. However, HMRC were unhappy about this and challenged the position. Justice prevailed at a First-tier tribunal, where it was decided the amount repaid did give rise to an employment loss. This was appealed by HMRC and heard at an Upper Tribunal. The upper tribunal focused on whether the payment made by John Martin was compensation for breaching his contract or a direct repayment of his employment income. Again the courts decided in favour of the taxpayer with the repayment being treated as negative earnings from the employment which could be relieved accordingly under the provisions of ITA2007, s128.
The detail in a case like this revealing and can provide useful insight for taxpayers and employers who enter into these arrangements. It was conceded by HMRC that it would have accepted the repayment of the income to have been relievable negative earnings, if the terms of the contract had not been such that Mr Martin could not resign within a five year period. They believed the resignation clause meant that the repayment to his employer was in fact a payment for breaching his contract. It is possible HMRC will appeal the outcome of the case, however the judge in this case made it clear that in his opinion there should have been no uncertainty over the validity of the claim.
If you have been required to repay a signing on bonus, please contact us to discuss how this case might be applied to your circumstances.
