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HMRC internal manual

Employment Income Manual

Employment income: negative taxable earnings

HMRC v Julian Martin


Mr Martin received a payment of money (“the Signing Bonus”) from his employer in consideration for Mr Martin agreeing a new contract of employment that reflected the employer’s wish to tie Mr Martin to that company for a further period of at least 5 years. The terms of the contract included provision (“the claw-back provision”) for the possibility that Mr Martin would have to pay an amount of money to the company in specified circumstances.  The amount that Mr Martin might have to pay would then be determined in accordance with a formula that, in effect, meant the amount would be equivalent to a proportion of the gross amount of the Signing Bonus. The most likely reason within the specified circumstances for Mr Martin to be required to make a payment to his employer was that he sought to terminate the employment early.

Under the terms of the contract, the company paid the Signing Bonus together with the first salary payment due under the new contract. The company deducted tax under PAYE and National Insurance contributions. The gross payment was £250,000 but Mr Martin received £147,500.

Subsequently, Mr Martin notified his employer that he wished to terminate the employment, triggering the claw-back provision. The amount that he had to and did pay to his employer was calculated to be £162,500. Consequently, Mr Martin sought to recover the income tax previously collected under PAYE in respect of that amount.


Mr Martin contended that the correct approach was to retrospectively amend the amount previously treated as his taxable earnings from the employment on the basis that, because the employment had ended early, he had not in fact earned the full amount of the Signing Bonus.

Alternatively, Mr Martin sought tax relief as an employment loss in relation to the amount that he paid to his employer with that loss to be allowed under the provisions of section 128 ITA 2007 (previously section 380 ICTA 1988).

HMRC contended that there was no provision within the tax legislation that enabled Mr Martin to obtain tax relief.

The arguments were considered at both the First-tier Tribunal (FTT) and the Upper Tribunal (UT). Both the FTT and UT rejected the proposition that the amount originally treated as taxable earnings could be retrospectively amended. The Signing Bonus was offered and paid to secure Mr Martin’s acceptance of the new contract of employment, which was intended to tie him to the company for the 5-year period. The contract was not structured to give Mr Martin an accruing right to payment.  Mr Martin’s right to receive the Signing Bonus was fully vested at the time he received it.  Once received, the money was at his full disposal. The employer had correctly operated PAYE and that income is taxable in full in the tax year in which it was received.

The FTT and UT also rejected the proposition that the amount paid by Mr Martin to his employer was available as an employment loss to be allowed under the provisions of section 128 ITA 2007.  However, both held that the amount should be construed as negative taxable earnings; a concept that was recognised as newly identified by section 11(3) ITEPA 2003 but not introduced by ITEPA.

In his decision, Mr Justice Warren, Chamber President of the UT, provided a detailed explanation of the basis for calculating the amount that is taxable earnings from an employment in a tax year and the recognition that the concept of negative taxable earnings may feature in that calculation in certain circumstances.

Judge Warren then applied that analysis to the particular circumstances of Mr Martin’s case and concluded, on his interpretation of the relevant clauses in the employment contract, that the amount paid by Mr Martin should be taken into account as negative taxable earnings.


In the final paragraph of his decision, Judge Warren stated:

“I should add that, although I have explained what I think is the correct approach to the interpretation of section 11 and of the meaning of TE in particular, my actual decision turns critically on an interpretation of the Contract.  It does not, and is not intended, to give any particular guidance about the application of that approach to different facts.”

In determining whether an amount that is paid by an employee to the employer constitutes negative earnings from the employment, careful consideration must be given to identifying all the relevant facts before seeking to apply the principles indicated in the UT decision.