As the dust settles on the eagerly awaited HMRC v Martin decision (see our previous blog post), thoughts are inevitably turning to how that decision impacts on an employer’s approach to clawback payments, particularly in the world of variable remuneration.

Whilst the judge in the Martin decision was clear that his conclusion turned on the interpretation of that particular contract, employers will be wondering what use the decision is for them as they look to either operate existing clawback arrangements or introduce new clawback arrangements given the Corporate Governance Code’s increased emphasis (see our blog post).

When does Martin matter?

In short, the Martin decision assists in situations where there is a contractual obligation for an employee to repay an earlier cash amount that was itself taxable as employment income. For everything else, Martin doesn’t provide much comfort.

So, what about a clawback of shares that were awarded under a share scheme? Or a clawback that seeks to reimburse an employer that has paid a performance bonus, only to subsequently discover that it has become liable to a fine in respect of the activity that had led to the bonus? And what about a “compensation payment” for something subjective such as the employee damaging the reputation of the employer? Well, the Martin decision is of little use.

Despite the increasing use of clawback provisions in share plans (as opposed to contractual bonus arrangements) and the existence of varying trigger events for clawback, these areas continue to have questions which, unhelpfully, remain unanswered.

HMRC to solve the mystery?

We understand that HMRC will not be appealing the Upper Tribunal’s decision in Martin. It seems that HMRC is comfortable that this was the correct decision given those facts (no doubt this view is helped by the judge making it very clear that the decision was relevant only to those particular facts).

HMRC, it seems, understands the need to address the entire clawback situation, including its operation under share schemes, and is therefore looking to develop a formal policy. Hopefully, that policy will deal with the possibility of employees recovering tax when both cash and share awards are clawed back, and will ideally extend to national insurance contributions (something not covered in the Martin decision).

HMRC has suggested that it will seek views before any policy is created, hopefully giving employers, employees and other interested parties the opportunity to comment and potentially shape the policy. However, until that process begins, companies are likely to only take comfort from Martin when dealing with contractual repayments of cash awards – for everything else, the uncertainty remains.