Statement of Practice 3 (1996)
Published 4 April 1996
© Crown copyright 1996
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1. Income Tax (Earnings and Pensions) Act (ITEPA) 2003 ss 225-226 impose a charge as earnings from employment on payments made to individuals for undertakings, given in connection with an employment, which restrict their conduct or activities.
2. A financial settlement relating to the termination of an employment may contain terms whereby the employee agrees to accept the termination package in full and final settlement of his or her claims relating to the employment, and/or may expressly provide that the employee should not commence or, if already commenced, should discontinue legal proceedings in respect of those claims. These may relate to claims at common law arising from the contract of employment or to claims arising under employment protection or other legislation. The settlement, therefore, seeks to avoid legal dispute or proceedings, for example before a court or an industrial tribunal, in connection with those rights. The termination settlement may also reaffirm undertakings about the individual’s conduct or activity after termination which formed part of the terms on which the employment was taken up.
3. HM Revenue and Customs will accept that no chargeable value will be attributed under ITEPA 2003 s 225(1)(b) to such undertakings by an employee or former employee.
4. But this does not affect the application of ss 225 and 226 to sums that are attributable to other restrictive undertakings which individuals give in relation to an employment, whether these undertakings are contained in a job termination settlement or otherwise.
Note:
This statement was revised in August 2005.