When an employee receives a signing bonus on joining a company, the employment contract may specify that part of that bonus must be repaid, if the individual resigns within a set period. If the bonus is repaid, how should that be treated for tax purposes?
This question was examined by the Upper Tribunal in the case of Julian Martin who received a signing bonus of £250,000 (£147,500 after PAYE deductions), for agreeing to work for five full years. He resigned his job after 13 months and had to repay £162,500 of the gross bonus to his former employer. Mr Martin had paid tax on the full £250,000, but had clearly only received the benefit of £87,500 gross income.
The Upper Tribunal agreed the repaid bonus should be treated as an employment loss, or negative earnings, and it should be relievable under ITA 2007, s 128. Mr Martin thus received tax relief on the £162,500 he was obliged to repay. HMRC also agreed to provide relief for the excess NIC paid.
In reaching his decision the Judge looked at the previous version of the law on losses in ICTA 1988, s 380, which had been rewritten into ITEPA 2003 and ITA 2007, but that rewrite was not intended to change the meaning of the legislation. He also considered the prevailing practice of HMRC, which until 2003, allowed the repayment of income tax suffered on earnings which, due to contractual terms, were subsequently repaid to the employer.
HMRC has now included guidance in its Employment Manual on negative earnings to follow the decision in the Julian Martin case. If a client has had to repay a bonus under the terms of his employment contract, we will check whether tax relief has been claimed. If you need any further advice please contact our office.
Written by the Tax Advice Network