Tax deductions for a claw back of shares or a bonus

Posted by RM2 at 15:51 on 18 Nov 2014


Imagine the situation where you get a bonus, it might be a decent bonus but there is a catch: the company paying the bonus can claw back all or part of it if another condition is not fulfilled.

This is increasingly a ‘good practice’ requirement of bonuses and share awards, in line with the Remuneration Code of the Financial Conduct Authority. This can make sense to prevent employees benefiting from a spike of profit in one year which is followed by a significant fall, or simply to encourage retention of key employees. 

However, it can be unfair from the tax perspective if the bonus is fully taxable but the refund, as has been the practice, is not tax deductible.

We now have a case providing some hope for employees here and the development of the concept of “negative taxable earnings”. Julian Martin successfully challenged HMRC’s refusal to grant him tax relief on a claw-back provision to his signing-on bonus (golden hello) in a new employment contract.

Mr Martin had entered into a new employment contract with a 5 year commitment and a £250,000 signing on bonus. When Mr Martin gave notice to leave the company after a year, a claw-back provision in his employment contract meant he had to pay back a proportion of the £250,000 signing bonus to his employer. Coincidentally, the amount of the bonus he had to pay back was more than what he earned that year (he earned £140,000 that year but was made to pay back £162,500 of his bonus!).

HMRC had rejected Mr Martin’s tax relief from the bonus so Mr Martin appealed and successfully argued through to the Upper Tribunal that the repayment of the bonus meant he had ‘’negative taxable earnings’’ for that year and was granted relief.