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I have a client who is about to take up a new employment and has been offered a substantial ‘golden hello’. There is no question that the sum will be taxable under Schedule E.
The problem is that the whole sum is being paid to my client but, if he does not remain in the employment for at least three years, a proportion would be repayable to the employer.
Given the situation whereby he is taxed at 40 per cent on the original sum and then stays in the employment for less than a year and has to repay two-thirds of the sum, he would be substantially out of pocket.
In the event that a part of the ‘golden hello’ has to be repaid, can a claim be made to have the original amount reduced to the amount finally retained?
Query T15,916 – MET
Reply from Leyborne
‘MET’ is looking for a Schedule E equivalent to section 49, Taxation of Chargeable Gains Act 1992, which allows contingent liabilities to be adjusted in a capital gains tax computation if the contingency crystallises.
There seems to be no specific similar provision relating to Schedule E – the payment would be taxable immediately if paid as an inducement, and the repayment does not fall under any of the deduction rules.
However, is it truly a payment subject to Schedule E, if there is a possibility that it will be repaid?
There is an argument – which could be made stronger if the documents are appropriately worded – that this is in fact an interest-free loan, which will be written off over three years.
The writing-off terms are simply the inverse of the repayment terms, and could provide for monthly amounts or different periods.
If the payment is structured in this way, the employee should never be taxed on money he does not get to keep.
There will also be a cash-flow benefit, in that the tax charge will not crystallise until the loans are written off; and the writing off of a loan is a P11D matter, whereas the payment of the inducement would be subject to pay-as-you-earn.
The only tax ‘downside’ is the payment of tax on the interest-free loan benefit.
However, at the current official rate, this is a relatively small ‘insurance premium’ against the possibility of an excessive tax charge, and is largely offset by the cash flow benefit in any case.
The other possible problem is any legal restriction on the employer making such loans, for example if the new employee is a director of the company. If so, Companies Act rules may make such an arrangement impossible.
In that case, it should still be possible to structure the inducement as a series of guaranteed bonuses payable monthly, quarterly or annually as desired.
This has the disadvantage that the new employee does not have the cash, and may be uncertain of the security of payment in later periods. But a strongly-worded contract should give enough assurance, provided that the employer does not become unable to pay.
Reply from Cagey
‘MET’ agrees that the receipt of a ‘golden hello’ will be taxable under Schedule E. This was confirmed in the decision Shilton v Wilmshurst [1991] STC 88.
However, the Shilton case can be slightly distinguished here. ‘MET’s’ client is not entitled to the full sum payable to him and, therefore, to the extent that the gross amount might be repayable, some of the payment will constitute a loan.
The rest, however, will be subject to tax on a receipts basis – and will initially be subject to pay-as-you-earn.
Since a loan will not constitute emoluments per se, it is not assessable under Schedule E (and will not initially be subject to tax – either under pay-as-you-earn or by assessment). As a result, any repayment can be easily funded out of the gross amount.
However, (assuming the loan element exceeds £5,000) a benefit-in-kind will arise under section 160, Taxes Act 1988 in respect of the notional interest forgone by the company – currently calculated at a rate of 6.25 per cent per annum.
If ‘MET’s’ client remains at the new employer for the full three-year term, then the loan will be released. This will give rise to a benefit-in-kind equal to the amount released under section 160(2) on the date the loan is released.
For National Insurance purposes, the position is the same as for income tax. The amount of the ‘golden hello’ that is immediately subject to tax (because it is not repayable) will be earnings and subject to Class 1 contributions.
(There is an argument that a golden hello does not constitute earnings, in the same way as it is possible to exempt some golden handshakes from National Insurance contributions. However, that does not seem to be applicable here and is not considered further.)
The benefit-in-kind and the release of the loan will give rise to Class 1A contributions.
Extract from reply by Hodgy
‘MET’ indicates that there is no question that the golden hello is taxable under Schedule E. This is likely to be the case but, if he has not already done so, I would refer ‘MET’ to the Inland Revenue’s Schedule E Manual at paragraph SE1041 for some thoughts on when a golden hello is not taxable under Schedule E.
The decided cases, such as Jarrold v Boustead 41 TC 701, usually turn on the fact that the payment is said to be received for giving up a right and is not paid by reason of the employment.
