In HMRC v Smith & Williamson Corporate Services and Patrick Smiley UKUT [2015], a payment received by a new employee from a third party in respect of his client connections was held to be employment income and not a capital payment in respect of any transfer of goodwill.

  • The Smith & Williamson group (the Group) wanted to expand.
  • Smith & Williamson Corporate Services (SWCS) head hunted various team members (the Team), including Mr Smiley at Butterfield Private Bank (Butterfield) and then employed them.
  • Under the terms of a separate contract with another company in the group Smith & Williamson Investment Management Services Ltd (SWIM) agreed to buy the new employee’s “client relationships” for what they accounted for as a “Goodwill Payment” (the Payment).

HMRC decided that the Payment was employment income made a PAYE determination under Regulation 80.

  • The taxpayer and his employer appealed to the First Tier Tribunal on the basis that the Payment was capital and won.
  • HMRC then appealed to the Upper Tier Tribunal (UT): was the Payment employment earnings after all?

The UT considered various case authorities (see Golden handshakes, signing on fees and unusual payments for separate detailed analysis) and the facts, finding that:

  • A payment made by a third party could be taxable as employment income Shilton v Wilmshurst [1991]
  • The team were employed in the hope and expectation on the part of the Group that that some, at least, of the Butterfield clients would transfer to SWIM.
  • None of the team moving over the SWCS owned any of Butterfield’s assets and they did not have any interest in its goodwill.
  • SWIM did not acquire the personal relationship between a Team member and the client: the Team’s client connections and their relationships were personal to them and SWIM did not regard itself as owning “the client connection transferred to it”. 
  • The so-called client connection was not an asset as it did not provide a separate source of income.
  • The employment contained provisions to ensure that the team stayed with the Group for a period (2 years) and there were restrictive covenants in the Employment Contact protecting the Group from competition from members of the Team in relation to the transferring clients for a defined period after termination of service.
  • Although the team were engaged under two contracts, an employment contract with SWCS, and the contract with SWIM, for the acquisition of client connections. Neither contract would have been negotiated or agreed without the other in place.
  • The parties had all accounted for the SWIM contact as if were a capital purchase of goodwill. The FTT judged had erred in making this a decisive factor in coming to its own judgment.

The respondents (SWCS and Smiley) had also argued that HMRC should be bound by its ERS manual. This was ruled as not relevant, being only guidance to itself.

The UT concluded that the Payment was a reward to the Team for introducing the Butterfield clients to SWIM: it was earnings arising from the employment of the Team by SWCS.


HMRC v Smith & Williamson Corporate Services and Patrick Smiley [2015] UKUT 0666 (TCC)


Taxpayer has appealed to the Court of Appeal; the hearing is scheduled for February 2017.