Tapestry Alert: UK - HMRC Guidance on Recovering Tax on Clawed Back Bonuses

January 2017

Dear Client,

On 22 December 2016, HMRC (the UK tax authority) published guidance in the Employment Income Manual (EIM00800 to 00845) clarifying the availability of tax relief for ‘negative taxable earnings’. The guidance will be most relevant for employee incentives on which income tax has been paid before later being clawed back.

Background

This guidance follows the case of HMRC v Julian Martin [2014] in which it was decided that the amount of a bonus that a taxpayer had to repay to his employer under a clawback provision was negative taxable earnings and therefore he was entitled to income tax relief for the repayment.

Guidance

The new guidance clarifies circumstances in which payments by an employee may be treated as negative taxable earnings, and so will be deductible from the employee’s taxable earnings.

• The payment must relate directly to employment (this does not mean it is required under an employment contract; it can be set out in a bonus letter).

• Relief is given for negative taxable earnings in the tax year they are “for”.  Negative taxable earnings will normally be “for” the year when they are paid, but if paid after employment has ceased they will be “for” the last year in which the relevant employment was held.

• Relief will normally be given through the employee’s self-assessment tax return.

• Relief will first be given by deducting negative earnings from positive earnings, reducing the year’s taxable earnings.  If negative earnings exceed positive earnings, the employee may make a claim for repayment.

• The relief will not apply in relation to shares and other securities and the employee may forfeit those shares under the relevant clawback provision, despite tax being paid, which is also forfeited.

• No relief is available for national Insurance contributions.

Tapestry Comment:
This is a complex area of tax law and the HMRC guidance will be welcomed as it reassures firms and individuals of the tax implications of clawback, removing the need for firms to state that clawback operates net of tax, and giving clarity that the full amount can be recovered.  Employers should review their bonus clawback provisions to ensure that they are not left out of pocket by recovering only net amounts.  However, it is hoped that the relief will be applied to national insurance contributions paid on the bonus amounts, and that the relief will also be extended to share awards.

If you have any questions in the meantime regarding this newsletter, or any other topics, please do contact us - we would be delighted to help!

Chris and Matthew

 
Chris Fallon           Matthew Hunter