On 24 June 2019, the First-tier Tribunal held4 that a retention payment was earned, and therefore taxed, in full in the tax year in which the payment was made. The taxpayer had argued that as the payment was made in return for continued active employment during a stated period (spanning, at least in part, three tax years) the payment should be apportioned between them on a “just and reasonable” basis.
The Tribunal agreed with HMRC that section 18 of ITEPA 2003 sets out the rules as to when earnings are treated as received for tax purposes. The result was that the payment was treated as received upon the earlier of (i) payment and (ii) Mr Murphy becoming entitled to it. Although the Tribunal accepted that the conditions that attached to the payment required continued employment throughout the (15 month) retention period, it did not agree with Mr Murphy that the payment was earned in or in respect of that period. The entitlement to the payment did not accrue during the retention period. If Mr Murphy had left his employment at any point during the period, he would have been entitled to nothing. The payment was made on a certain date (clearly within one tax year) and Mr Murphy only became entitled to it on the same date. Applying section 18, the Tribunal therefore agreed with HMRC that the payment was taxable, in full, in the one tax year.