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Payment under Compromise Agreement

The First-tier Tribunal recently ruled that a payment under a Compromise Agreement was taxable as employment income (and not, as claimed by the taxpayer as a capital gain).

The taxpayer was asked to forego salary in return for a loan (representing the unpaid salary).  A Share Option Pool was set up by the company with a verbal commitment ‘of having management stock within people who had foregone their holding at the time of the transaction’, although this was never activated.  When the taxpayer left, a payment of £200,000 was made to him as part of a Compromise Agreement.

HMRC argued that the whole payment was taxable as employment income as there was no evidence of a legal right to shares.

The taxpayer argued that a proportion of the amount paid under the Compromise Agreement was by way of compensation for his giving up rights to receive shares in the future.  The £200,000 could not related solely to the termination of his employment as it represented the equivalent of nearly two years’ salary.

Unfortunately the Tribunal agreed with HMRC that there was no legally enforceable right over any shares and so the £200,000 arose from the termination of his employment contract.



Date: 27th March, 2014
Author: Cathy Corns


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