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HMRC internal manual

Employment Income Manual

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Employment income: earnings from employment: sums paid to a continuing employee in lieu of remuneration: example

Section 62 ITEPA 2003

Bolam v Muller (28TC471)

Muller was the managing director of a limited company. He had a service agreement under which he was entitled to a fixed salary and to commission based on the distributed profits of the company. Owing to a change in the company’s financial policy, no profits were distributed for two consecutive years, with the result that Muller received no commission for those years. He then entered into an agreement with the company under which he surrendered his right to receive commission, for the rest of the period covered by his service agreement, in return for a payment of £1,250 as ‘compensation’.

On appeal against an assessment to income tax Muller argued that the £1,250 was paid by the company to obtain a release from a future contingent liability and was not assessable to income tax. Nevertheless, the Court decided that the payment in question was remuneration for services to be rendered and was taxable as earnings within Section 62. Atkinson J said:
 

“The mere fact that they agree on another form of remuneration does not alter its character.” (page 475)