In the recent case of Julian Martin v HMRC (TC 02460), the appellant agreed to enter into an employment contract under which he received a signing bonus of £250,000 in 2005/06 the terms of which required him to work for the company for a period of 5 years.
The signing bonus was subject to income tax and NIC’s through PAYE and the net amount received was £147,500.
Mr Martin gave early notice and therefore became liable to repay £162,500 to his former employer.
The appellant made an error and mistake claim for 2005/06 on the basis that whilst the full bonus had been taxed in that year, in retrospect the full amount had not been earned in that year and as such the repaid amount of £162,500 should not be taxable.
HM Revenue and Customs rejected Mr Martin’s claim for relief and argued that the full amount remained taxable despite the fact that most of it was later repaid.
This gave rise to an anomalous position whereby Mr Martin was worse off than if he had never accepted the signing bonus because the tax and NICs were in excess of the amount of the bonus that he actually retained.
The first tier tribunal found that relief should be available on the basis that the repayment of the bonus amounted to negative taxable earnings in Mr Martin’s hands.