COMPLIANCE
Lauren Handley LLB (Hons) MCIPPdip, CIPP course material author, covers some key considerations in relation to claw-back provisions for payroll professionals
C law-backs aren’t a new concept in the world of payroll, but they have become an increasing topic of discussion over the past few years. A claw-back provision is a term in a contract in which an employer provides a cash sum that's conditional on an employee remaining employed with the company for a certain amount of time. The most common examples of such provisions are signing bonuses or ‘golden handshakes’, where employees are given a sum of money contingent on them remaining in employment with the company for a certain amount of time.
Let’s look at HM Revenue and Customs (HMRC) v Julian Martin (https://ow.ly/ zUnK50QrllO), which is a prominent case on claw-backs. In this case, Mr. Martin received a signing bonus when he commenced his employment. The terms of the agreement were that his new employer would pay Mr. Martin a fee of £250,000 on the provision that he remained in employment for five years. The net payment Mr. Martin received was £147,500 after statutory deductions, such as tax and National Insurance contributions (NICs). Prior to the end of the five-year period, Mr. Martin left his employment with the company and the claw-back provision in his contract was triggered. Mr. Martin was asked to repay £162,500 to the company, which he did, and then sought to reclaim the difference in income tax from HMRC. Mr. Martin argued that this was an employment loss under Section 128 of the Income Tax Act 2007, but HMRC explained that there was nothing in tax legislation that permitted tax relief in these circumstances. The argument was also raised by Mr. Martin that his previous taxable earnings should have been amended, as by leaving his employment earlier than the five-year period, Mr. Martin hadn’t accrued his full signing bonus.
The case went to the First-Tier Tribunal and the Upper Tribunal (UT), which both held that the signing bonus was earned in its entirety and was at the full disposal of Mr. Martin at the time it was received. The contract didn’t have a provision where Mr. Martin accrued his signing bonus over the period of his employment. Pay as you earn (PAYE) tax had been operated correctly at the time it was paid by the employer. When the judge analysed the contractual terms surrounding the signing bonus in Mr. Martin’s circumstances, the signing bonus was held to be negative taxable earnings and therefore, no NICs were able to be reclaimed on the amount.
What happens when the claw- back provision is triggered? One would be forgiven for assuming that a simple recovery process would occur. But this is where claw-backs become interesting.
What are negative taxable earnings? HMRC guidance (https://ow.ly/ NhiA50QrlLO) explains that these are
| Professional in Payroll, Pensions and Reward | March 2024 | Issue 98 22
Made with FlippingBook - Online magazine maker