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Tax Update: Tax Relief for Clawback of Bonuses

Malus and clawback are becoming increasingly prevalent facets of executive remuneration plans; affording essential protection to public companies and financial institutions (for more information about the operation of malus and clawback, please click here).

In the case of HMRC v Julian Martin, a bonus that was paid to an employee under an executive remuneration plan and subsequently “clawed back” by the employer, was held to constitute negative taxable earnings.

HMRC has since clarified the availability of tax relief for the clawback of bonuses which seek to prevent executives, who initially paid tax on the award of a bonus, from incurring a loss in the event of that bonus being “clawed back” by their employer.

This guidance will be relevant for advisers and companies who operate, or are considering the operation of, clawback on the award of a bonus.

HMRC Guidance Updates

1.  Relief for negative taxable earnings will not be available in relation to National Insurance contributions.

2.  The bonus payment must have been made as a result of the employment relationship in a manner equivalent to that of general earnings.

3.  For internationally mobile employees, negative earnings will be “for” the tax year in which they are paid. However, where negative taxable earnings are paid after an executive has ceased employment with the employer (a likely scenario where the employer is operating clawback) they will be “for” the final year that employment was held.

4.  The relief is provided through the executive’s self-assessment tax return by deduction of negative earnings from positive earnings. Where negative earnings exceed positive earnings, the executive may claim for employment loss – offsetting the loss against their net income for that tax year, the previous tax year or both tax years.

5.  Relief for negative taxable earnings applies only to negative general earnings rather than negative specific earnings. In practice, this means that where an individual is required to forfeit shares – acquired, for example, under a nil cost option – this would not attract tax relief. The clawback of a cash bonus, on the other hand, may indeed attract relief.

To view the relevant guidance in HMRC’s Employment Income Manuals, please click here.

Malus & Clawback

As noted, malus and clawback afford vital protection for employers who may be paying substantial bonuses to their employees. However, the operation of these provisions – clawback, in particular – require careful consideration and diligent drafting.

Pett, Franklin & Co. LLP are experts in employee share schemesshare valuations and executive incentives. To find out how we can help you or your client, please call 0121 281 5798 or email