When an employee who left his employer prematurely was forced to repay part of a bonus he had been awarded, the refusal of HM Revenue and Customs (HMRC) to regard the repayment as a reduction in income for the year in which the bonus had originally been paid came as an unpleasant surprise.
The £250,000 bonus was taxed as usual in the year of receipt. However, when the employee left the following year, his employer demanded a repayment of a proportion of the bonus. The deduction of tax etc. from the original bonus payment was not relevant for this: the repayment was of a gross sum.
The employee expected to be given tax relief for his repayment, but HMRC refused, claiming that it was a form of liquidated damages for his breaching the original contract.
The case has now been heard by the Upper Tax Tribunal, which has ruled that the repayment does qualify for tax relief as 'negative taxable earnings'.
HMRC Forced to Match Repayment With Earnings
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