What Has Fair Got to Do With It?

There is a common belief that fairness is a concept that pervades the law, including tax law. However, a recent tax case shows that HM Revenue and Customs (HMRC) do not necessarily agree.

The case involved a man who joined a new employer and received a ‘golden hello’ of £250,000 provided that he remained in the company’s employ for five years. If he gave notice to quit his job, he was required to repay the golden hello on a pro-rata basis to the time he had worked for the company. He paid Income Tax on the golden hello in the tax year in which it was received.

He did give notice within five years and was required under his agreement to repay some £162,500 of the golden hello, which he did. This was in a later tax year than the year of receipt.

The net effect was that after repaying the £162,500 and paying the tax on the original £250,000, he was worse off than if he had not received the golden hello in the first place.

He sought to amend his tax return for the year in which the golden hello had been paid. This claim was rejected by HMRC on a number of grounds. He then sought to claim that the repayment meant he had ‘negative taxable earnings’ in the tax year in which it was made. HMRC rejected this argument also.

The First-tier Tribunal considered the arguments and concluded that the payment was fully taxable in the year of receipt. The repayment, however, was a deduction from taxable earnings in the tax year in which it was made and his repayment claim was valid.

An appeal by HMRC is thought to be likely.