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HMRC internal manual

Employment Income Manual

HM Revenue & Customs
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Employment income: restrictive covenants: contents

Sections 225 to 226 ITEPA 2003


An employee may receive a payment in connection with his or her employment for agreeing to restrict their future conduct or activities. Such an agreement is known as a restrictive covenant or undertaking. It is usually (though not invariably) made between employee and employer in order to restrict the employee’s activities if the employment is terminated.

The Inland Revenue took the view that such payments were taxable as earnings and chargeable under the equivalent of Section 62 ITEPA 2003 (see EIM00511). The courts took a different view in the case of Beak v Robson (25TC33). Mr Robson had been a company director for many years. In 1937 he entered into an agreement that included a clause that prevented him from competing with the company within a fifty mile radius of Newcastle-upon-Tyne if he left the company within five years. The Courts decided that the payment was not a profit from his office, as it was in respect of a covenant operative only after that office had ceased. It was not chargeable.

Under ITEPA 2003 receipts for restrictive covenants are treated as earnings from the employment (see EIM00513).