HMRC internal manual

Business Income Manual

BIM41805 - Specific receipts: voluntary receipts: loss of office

Voluntary payments in recognition of past services or as consolation for the loss of a business connection were held not to be receipts of the trade in Chibbett v Joseph Robinson & Sons [1924] 9TC48; Walker v Carnaby Harrower, Barnham & Pykett [1969] 46TC561; Simpson v John Reynolds & Co (Insurances) Ltd [1975] 49TC693; and Murray v Goodhews [1977] 52TC86.

But the mere fact that a voluntary payment is made following the cessation of the business connection is not sufficient to render the payment non-taxable. In other cases receipts have been held to be taxable as trading receipts (McGowan v Brown and Cousins [1977] 52TC8; Rolfe v Nagel [1981] 55TC585; and Blackburn v Close Brothers Ltd [1960] 39TC164).

In the light of the above case law our view is that voluntary ’compensation’ payments may be regarded as properly excluded from the computation of trading profits where all the following conditions are satisfied:

  • it is clear that the recipient had no legal right whatsoever to the compensation or to anything that it is intended to replace;
  • the payment cannot on any view be regarded as additional payment for past services, though it may be made by way of recognition of past services and consolation for the termination of a personal business connection;
  • it is made after the business relationship has ceased and there is no likelihood of its being renewed.
  • it was unexpected in the sense that it was not sought and that, when the business relationship was entered into, there was nothing to suggest that it would be discontinued after a period and that compensation would be paid on termination.