Recent FTT case should prompt care over the interpretation of the period over which earnings are taxable for performance based rewards

Tue 15 Oct 2019

The First Tier Tax Tribunal case of Murphy v HMRC has cast doubt on HMRC manual guidance concerning the taxation of retention payments made to employees subject to a takeover, to encourage them to stay in employment for a defined period (see EIM40013).

The HMRC guidance indicates the retention payment could be taxed over the full for the period of retention, rather than in full on the date payment is due. The FTT decision in Murphy, however, considered the tax point was when the payment was due (once the condition had been satisfied for payment). This could have tax implications in particular if an employee is non-UK resident for part of the period over which the award is due.

It is not yet known whether the taxpayer will appeal, or whether HMRC will issue clarification. The employer will be required to account for PAYE on the full amount when a retention award is paid according to the employee’s PAYE code. The individual employee should, however, consider the appropriateness of the approach set out in HMRCs guidance compared to the FTT’s (non-binding) decision in Murphy, when calculating their self-assessment tax liability and whether any tax repayment is due.  

Please get in touch with a member of the Mazars employment tax or global mobility teams to discuss the implications of the case for your situation.

Background and details of the Murphy case

The standard approach to the taxation of earnings (apart from those of directors) is that they are generally taxable on the earlier of:

• receipt; and
• entitlement to payment.

In the FTT case, the Tribunal had to consider when Mr Murphy became entitled to a retention payment. Following the announcement of a conditional merger (acquisition) between his employer (consulting firm B) and consulting firm A, the retention payment was due to be made after the date when was acquired by firm A, provided he remained in employment with firm B throughout the period to acquisition (around 15 months).

The FTT considered Mr Murphy only became entitled to the award at the time of receipt because the conditions for receiving the payment would not be met until that date. Therefore, it was held to be taxable in full in the tax year of receipt in contrast to the HMRC guidance at EIM40013. There would have been less tax due if the payment had been allocated on a pro-rata basis over the fifteen month period (because Mr Murphy was non-UK resident for part of that period).

HMRC’s guidance on ‘the period earnings are for’ is found at EIM40008 and EIM40009 onwards.