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HMRC internal manual

Employment Income Manual

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HM Revenue & Customs
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Termination payments and benefits: compromise agreements: earnings, etc

Sections 62, 225 and 401 ITEPA 2003Compromise agreements are nothing new. For example, Carter v Wadman (28TC41) is a case heard in 1946. It concerned an agreement signed at termination, separate to the employment contract, which settled all claims in respect of the employment and its termination.

The £2,000 settlement sum was claimed to be wholly compensation for loss of office (see EIM13005).

But it was held that part of the payment was chargeable to tax under Section 19 ICTA 1988 (now Section 62 ITEPA 2003) (see EIM00600) because it satisfied a right to remuneration in the employee’s contract, which had been met by the provision that the agreement was “in full and final settlement of all claims”.

So you need to consider whether any contractual entitlements have crystallised in order to see whether there are any charges under sections other than Section 401 ITEPA 2003. See example EIM13924.

The same is true of any such agreement made at termination, whether it is called a compromise agreement, an out of Court settlement or other similar phrase.