A First Tier Tribunal (FTT) has ruled that payments made to two Spurs football players, Peter Crouch and Wilson Palacios, on termination of their employment contracts with the club were not subject to national insurance contributions (NICs) as they did not derive ‘from’ that employment
The case concerned the Premier League club’s financial arrangements in August 2011 when it agreed terms with Crouch and Palacios to leave the London club to join Stoke City football club. [Tottenham Hotspur Ltd and Her Majesty’s Commissioners for Revenue and Customs, [2016] UKFTT 0389, TC05143].
Both of the players were employed on fixed-term contracts of employment, with Crouch’s contract due to end in June 2013 and Palacios’s in June 2014. At the time, Tottenham wished to reduce its wage bill as its commercial income had declined given that the club had not been involved in the Champions League. It wanted to transfer both footballers to another club but they were reluctant to move.
Despite this, the tribunal heard evidence Tottenham did not take express action to terminate their contracts by, for example, sending an express notice of termination or requiring them to stay away from Tottenham’s ground or other players.
However, the FTT was told that Crouch’s accountant, Melvyn Gandz, a partner at BSG Valentine, was sent a text message by the club’s management which read: ‘Bottom line is player won’t be part of 25 man squad and will sit out 2 years – Stoke won’t take as asking too much.’
Crouch was said to take this as evidence of a ‘threat’ that management would not support his continuing role at the club, leaving him without the necessary match fitness and exposure to other clubs, but said he would require financial recompense from Tottenham in return for ending his contract early. Eventually he signed a compromise agreement and joined Stoke, while Spurs also agreed to make a payment to Palacios and he also joined Stoke.
HMRC argued at the FTT that the payments were earnings from the players’ employment and therefore subject to income tax under s. 9, ITEPA 2003 and NICs under s. 6, Social Security Contributions and Benefits Act 1992. Although the appeal did not involve significant amounts of income tax relative to the amount of payments made, it involved material amounts of NICs.
For its part, Tottenham argued that the payments were made in return for the players giving up their rights to be employed until the expiry of the fixed term set out in their contracts. The payments were not made under any provision of their contracts. Accordingly, the payments were in return for the total abandonment of rights under the players’ contracts and not ‘from’ their respective employments.
HMRC stated that the players’ contracts expressly envisaged and provided for termination by mutual consent. The payments were made following a termination by mutual consent and therefore flowed ‘from’ their contracts of employment.
The FTT did not accept that the degree of the employee’s involvement in the termination of the employment was relevant, citing the Court of Appeal decision in Henley v Murray. In that case, as in the Spurs appeal, the relevant payment was made following a compromise of a potential dispute that the parties agreed between themselves.
There were provisions in the contracts that would have entitled Tottenham to terminate the players' contracts early if particular circumstances arose, but they were not activated.
The FTT found that if Crouch had stayed at Tottenham and the club had followed through with a threat of not selecting him (as set out in the text message to his accountant), he may have been entitled to request that his contract be terminated under the FIFA Rules and FA Rules.
However, in August 2011, this was a threat only and therefore Crouch’s right to terminate (or to request termination) had not been triggered. It followed that, with the exception of the right to terminate early by mutual agreement, neither the players nor Tottenham had any operative right of termination conferred under the players’ employment contracts.
The payments that Tottenham made, as part of arrangements to terminate the players’ contracts, were accordingly made in return for the surrender of the players’ rights under the contract and within the scope of Henley v Murray, the FTT found.
The FTT, allowing the appeal, concluded that the payments under the mutual agreement did not therefore derive ‘from’ the players’ employments and were not therefore subject to NICs, and were only subject to income tax above the £30,000 threshold.
Julie Clift, CCH tax writer said: ‘The FTT held that as the contracts in this case were not terminated following a breach of contract, the termination was by mutual agreement. However, the payments made following such a mutual agreement were not within the scope of the principle in EMI Group Electronics, as the contracts had not specifically provided for the payments. It followed that applying the principle in Henley v Murray the payments did not derive “from” the players’ employments.’
