## Facts

- Peter Shilton, a professional footballer, entered into a contract with Southampton Football Club.
- When Newcastle United wished to acquire his services, Southampton agreed to release him before the contractual term ended and paid him a lump sum to secure his consent to the early termination.
- The payment did not come from his prospective employer, Newcastle, but from Southampton, which had no continuing contractual relationship with Shilton once the transfer was completed.
- The Inland Revenue assessed the lump sum as part of Shilton’s taxable earnings for the fiscal year in which it was received.
- Shilton contended that the amount was a compensatory or capital receipt, asserting that it related to the surrender of contractual rights rather than to the performance of, or reward for, his employment duties.
- The matter eventually reached the House of Lords after lower-court rulings favoured the revenue.

## Issues

1. Does a sum paid by a party that is neither the current nor the future employer fall within “earnings from employment” when it is linked to the termination or variation of an employment contract?
2. In determining taxability, is the decisive criterion the source of the payment (i.e., who pays) or the factual connection between the payment and the employment relationship?

## Decision

- By a majority, the House of Lords dismissed Shilton’s appeal.
- The Lords held that the payment was taxable as an emolument of his employment because it was so closely connected with the employment relationship that it could not sensibly be viewed as anything else.
- Lord Templeman emphasised that the correct inquiry is whether the payment arose “from” the employment. The statutory language does not confine taxable earnings to sums paid by an employer; it captures any sum that derives from the employee’s service or the termination of that service.
- The court regarded the payment as helping Shilton’s transition from one job to another and rewarding him for agreeing to the rearrangement of his professional services. That commercial purpose was indistinguishable from rewarding him for his skill and availability as a footballer.
- The House rejected the argument that a payment is non-taxable merely because it also compensates the employee for surrendering contractual rights. Where employment is the operative cause of the payment, the tax charge is engaged.

## Legal Principles

- Employment income is determined by looking at substance, not formal labels. A tribunal must ask whether the employment is the “occasion” of the payment.
- The identity of the payer is not controlling. Payments by a third party are taxable if they are prompted by the employee’s services, position, or agreement to render or cease rendering services.
- A single payment may have mixed motives. If any substantial part of the payment is employment-related, the whole may be brought into charge unless it can be clearly apportioned.
- The court rejected rigid categorisations such as “capital versus income” when the payment is inextricably linked to employment. Instead, a practical approach considering purpose, timing, and surrounding circumstances is preferred.
- Subsequent guidance from tax authorities reflects these principles, treating transfer signing-on fees, golden handshakes, and release payments as taxable where they are connected with employment.

## Conclusion

Shilton v Wilmshurst confirms that a sum paid by a third party is taxable when employment is the operative cause of the payment. The House of Lords adopted a broad, practical test centred on factual connection rather than the payer’s identity, thereby extending the scope of taxable “earnings” to cover transfer-related inducements and similar payments that arise out of, or are linked to, an individual’s employment.


Shilton v Wilmshurst [1991] 1 AC 684