In conducting his own case before the First-tier Tribunal, Benjamin Murphy demonstrated that he knew the law better than HMRC. Sadly, the application of that law to the facts meant he lost the case ( UKFTT 409 (TC)): but he certainly scored a moral victory.
Mr Murphy was employed by Booz & Company LLP. In 2013 a merger with PwC was announced. Recognising the importance of keeping staff during and after the merger, Booz announced a “Staff Retention Programme” under which some $50m would be shared out amongst staff who were employed by Booz as at 31 December 2013 and who remained employed a year after the merger date.
Mr Murphy’s share was £30,000 and he got it on 28 April 2015. There was no dispute as to the fact that it was in principle taxable as employment income.
The complication was that although Mr Murphy was UK-resident for the tax year 2015/16, he had not been tax-resident in the UK for 2013/14 or for part of 2014/15. The Tribunal seems to have implicitly accepted that during his period of non-residence, all duties were performed outside the UK.
Mr Murphy asserted that he had earned his money by dint of being employed in the period 1 January 2014 to 28 April 2015: so the earnings must be allocated between the three tax years concerned on a “just and reasonable” basis (with the result that some of the earnings, being “for” a period of non-residence, would not be subject to UK tax).
HMRC would have none of it: the money was received in 2015/16 so was earnings of 2015/16 and taxable in full.
The Tribunal held (quite correctly) that HMRC were wrong in principle. Essentially, though the Tribunal did not put it quite like this, the first step is to identify the period “in, or otherwise in respect of [which]” the earnings are earned – it’s that step (in conjunction with the employee’s residence and domicile status and where the duties are performed) that determines whether the earnings are taxable. If they are, they are taxed in the year in which they are received (which may of course be different from the year in which they are earned).
It is this rule that means that bonuses paid to a returning expatriate in respect of service overseas remain free of UK tax, even if paid after return to the UK. It’s also the reason why you can’t escape UK tax on a bonus for work done in the UK or by a UK resident simply by deferring payment to a tax year in which the employee is non-resident.
So, in Mr Murphy’s case, it was certainly necessary to consider when the £30,000 was earned – that is, what year or years it was “for”. But the Tribunal observed that, until the payment was actually made, there was no entitlement to it: if Mr Murphy had left before the payment date, he would have received nothing. Therefore, on the facts of the case, the money was earned on 28 April 2015 and was taxable in full in 2015/16: just not for the reason that HMRC had put forward.
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You can also read more about this case in David Whiscombe’s later article for Taxation magazine: Receipts basis for employment income