HMRC internal manual

Employment Income Manual

EIM00710 - Employment income: earnings from employment: sum paid for the surrender of an asset, or for the loss of a valuable right

Section 62 ITEPA 2003

A payment to someone on taking up employment may be compensation for the surrender of a personal asset or the loss of a valuable right unconnected with their employment. If it is, it will not be a profit from the employment. It will arise from something else.

If the sum received is capital and derives from an asset it may be taxable under the capital gains tax legislation (see CG12940).

In Hose v Warwick (27TC459) a lump sum paid to an employee on becoming a director of the company he worked for was held to be compensation for the transfer to the company of the valuable business connections he had built up for himself. It was not taxable as earnings within Section 62.

In Jarrold v Boustead (41TC701) the signing-on fee paid by a Rugby League club to a Rugby Union player was held to be for permanent loss of amateur status. The rules of the Rugby League prohibited signing-on payments except to someone relinquishing amateur status. The payment was thus not a payment of earnings from the employment but compensation for the permanent loss of his amateur status.

[Bear in mind that in the late 1950’s, when the Boustead case was heard, ‘amateur status’ was important. A sportsman who became a professional was barred for life from playing Rugby Union, and from competing in international athletics. Nowadays, of course, amateurism in sport has almost ceased to exist. In the modern era we would argue that the signing-on fee is taxable as earnings because the amateur status that the player had lost was of no real value. See EIM64160.]

In Pritchard v Arundale (47TC680) a senior partner in a firm of chartered accountants left the partnership to work for a company in return for a salary and shares in the company given to him by the principal shareholder. It was held that the shares were not taxable as earnings from the employment. There were three important features:

  • the shares came from a shareholder - not his future employer, the company
  • the shares did not have to be given back if Arundale died before taking up the appointment six months later
  • he was giving up a valuable right - his status as a partner.

Megarry J said he did not think:

“that this decision will provide any passport for tax-free emoluments disguised as initial lump sum inducements to enter an employment; for it is the realities of the payments that matter and not any disguises or labels with which they may be provided.”

It is important to establish all the facts that surround the making of a compensation payment (see EIM00720). (This content has been withheld because of exemptions in the Freedom of Information Act 2000)