Murphy v HMRC - The period a bonus is 'for'

This case addressed the taxation of a bonus payment and the matter of ‘for what period’ the bonus payment related. The individual was non-resident for a period of time when it was communicated that they would receive a bonus but resident when payment made

There are 2 key themes arising on this:

It is only the findings of a First Tier Tribunal (FTT)
HMRC set out clear guidance at EIM40009 onwards on the taxation of bonus and incentive payment after discussions between the large accountancy firms (including BDO) and HMRC in the latter half of 2007 and start of 2008. The discussions had centred on hypothetical scenarios when individuals were resident and non-resident and when payments were received in relation to their residency. HMRC somewhat simplistically had initially looked at determining the taxation of these payments based on whether the individual was resident or non-resident at the time of payment.

The FTT did not seem to take account of HMRC’s subsequent guidance set out on this matter (as referred to above) in which they had stated that wider facts and circumstances would have to be considered and that it was not a case of non-taxable if the recipient was non-resident and taxable if the recipient was resident in the UK.

However, care needs to be taken on the reliance placed on this case, particularly if there were only relatively trivial conditions met after the individual broke UK tax residency which ensured that the payment would be made, which happened to be when they were UK tax resident again.

Generally speaking a bonus that, for example, related to a 3 year period with the taxpayer breaking tax residence in the UK 6 months before the earnings period was met, would be taxable on the portion relating to 30 months of the payment (time-apportioned) and non-taxable on the portion relating to 6 months.

Andy Kelly
andrew.kelly@bdo.co.uk