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HMRC internal manual

Employment Income Manual

HM Revenue & Customs
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Employment income: earnings from employment: sums paid under the terms of a contract of employment: example

Section 62 ITEPA 2003

Henry v Foster (16TC605)

Foster was a company director who had no written service agreement with his company. However, the company’s articles of association provided that if a director ceased to hold office after serving five years or more he would receive a lump sum (except in certain circumstances such as bankruptcy). Foster retired and received the sum he was entitled to. It was held to be taxable as earnings from his employment. Romer LJ said:

“It cannot matter what the parties call the money which is to be paid in the last year of office if one finds, as here, that the only consideration for the payment by the company of that sum is the service by the director, and that it is a sum for which the director must be deemed to have stipulated when offering his services to the company and that it is paid to him by reason of his having performed those services.” (Page 634)

Such a payment is taxable as earnings within Section 62 even though it may be said to be compensation for future earnings, or is calculated by reference to such a loss. It is taxed in the year in which the taxpayer receives the payment. See EIM42260 for the meaning of received. It does not matter that this may be a year after the taxpayer ceased to hold the office (see EIM42220).