Tax relief awarded in bonus repayment case

The First-Tier Tribunal has found that an employee repaying a signing bonus should receive tax relief because the repayment amounted to ‘negative pay’ for the employee.

Julian Martin was awarded a signing bonus of £250,000 in 2005/06 by his employer JLT Risk Solutions with the provision that he would stay with the organisation for five years. The bonus was subject to tax and national insurance contributions, so the net amount he received was £147,500.

In the tax year 2006/07, Martin gave notice that he would be leaving the firm to take up a new job so was liable to repay a portion (£162,500) of the bonus to his employer. Martin put in an error-and-mistake claim to HM Revenue and Customs (HMRC) on his 2005/06 tax return on the basis that, although the full signing bonus had been taxed in that year, given that he was leaving the organisation and repaying most of the bonus, the full amount of the bonus had not been earned in 2005/06 so the £162,500 should not be taxable.

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HMRC rejected this claim for tax relief, which led to Martin being in a negative taxable earnings situation, where he was worse off due to the amount of repayment and tax he had to pay than had he not received the signing bonus at all.

The tribunal found that Martin should receive tax relief on the repayment.

David Stebbings, tax manager at tax advisory firm Eaves and Co, said: “The legislation does provide for the concept of negative taxable earnings. However, neither the legislation nor HMRC previously gave any substantive guidance as to what this could entail.

“HMRC’s previous practice had been to refuse claims for relief in cases such as this, where earnings had clearly been paid and then clawed-back.

“This case has therefore given some valuable insight into the interpretation of this largely untested subject and is clearly good news for those who have entered into such arrangements.”

Stebbings added that the issue could potentially have been avoided had suitable drafting of the original bonus payment taken place.

“The tribunal confirmed that the ‘economic effect of the provisions in this case might well have been achieved by adopting some sort of loan approach’.” he said. “The main lesson to take from this case may well be that it is important to structure such deals correctly, having taken suitable professional advice from the start.”