Restrictive covenants: example 6: compromise agreements
Section 225 ITEPA 2003 and Statement of Practice 3/96
An employee is made redundant by the employer. A ‘compromise agreement’ is signed (see EIM03606). The agreement contains a clause that states that it is in full and final settlement of any and all claims that the employee may have against the former employer’. No consideration is attributed for agreeing to the clause. No other restrictive undertakings are contained in the agreement. Consideration of £40,000 is paid to the employee under the terms of the agreement.
The Inspector contends that all of the £40,000 is within Section 225 as nothing would be paid if the employee did not agree to the restriction.
It is true that the settlement sum of £40,000 would not be paid unless the employee agreed to the conditions set out in the document. However, it is also clear that amounts within the lump sum are paid for other reasons:
- payment in lieu of notice
- statutory redundancy pay
- holiday pay.
The only restriction contained in the agreement is the “in full and final settlement” clause and no consideration is attributed to that. In consequence, Statement of Practice 3/1996 applies (see EIM03606 and EIM03610) so there is no charge under Section 225 ITEPA 2003. The £40,000 must be considered under other sections (see EIM12805).