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HMRC internal manual

Business Income Manual

Specific deductions - staffing costs: redundancy payments: general principles

On general principles redundancy payments will be allowable as deductions provided that they:

  • are paid wholly and exclusively for trade purposes, and
  • do not result in the trader acquiring assets or rights of a capital nature.

Wholly and exclusively

Case law has identified a number of circumstances in which redundancy payments may not be incurred wholly and exclusively for the purposes of the employer’s trade.

  • Payments in excess of an employee’s pre-existing contractual or statutory entitlement made for the purpose of closing down or selling off the trade (CIR v Anglo Brewing Co Ltd [1925] 12TC803). However, this excludes payments made to employees under a pre-existing contractual or statutory obligation (for example, statutory redundancy payments made to employees originally taken on in the course of the trade). Such payments were considered in the Privy Council case of CIR v Cosmotron Manufacturing Co Ltd [1997] 70TC292, to be normal employment costs and not incurred for the purpose of going out of business and so allowable deductions under general principles.
  • If made as part of a bargain involving the transfer of shares (James Snook and Co Ltd v Blasdale [1952] 33TC244and, by way of contrast, CIR v Patrick Thomson Ltd [1956] 37TC145).
  • When payments are influenced by family or private interest (Samuel Dracup and Sons Ltd v Dakin [1957] 37TC377).

For guidance on the ‘wholly and exclusively’ test generally, see BIM37000 onwards.

Capital expenditure

Payments made in conjunction with employees’ undertakings as to their future conduct, for example restrictive covenants, may be capital expenditure but are allowable if the employee is chargeable to Income Tax on the receipt - see BIM47005.

For guidance on the capital/revenue divide generally, see BIM35000 onwards.

Statutory reliefs that override general principles

In many instances, however, these general principles are overridden to some extent by the statutory relieving provisions for:

  • statutory redundancy payments - see BIM47205;
  • additional payments to redundant employees - see BIM47210.

Guidance on the timing of deductions due under general principles, or by virtue of these specific statutory reliefs, is at BIM47215.