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Compromise agreements: Payment under compromise agreement not taxable

This report relates to 1 case(s)

  • expand disabled

    Wilson (HM Inspector of Taxes) v Clayton [2004] IRLR 611 HC (0 other reports)

Key points

In Wilson (HM Inspector of Taxes) v Clayton, the High Court holds that:

  • A payment received from an employer (following the compromise of employment tribunal remedy proceedings) was not taxable as income, as it had been received purely in connection with, and as a consequence of, the termination of employment and fell within s.148 of the Income and Corporation Taxes Act 1988 (ICTA).
  • Although an employment tribunal has no jurisdiction, under the Employment Rights Act 1996, to award both compensation and reinstatement, the High Court did not regard the payment as double recovery because the lump sum had resulted from a fairly negotiated compromise of a dispute about the termination of the employment and a prior finding of unfair dismissal.
  • The money received by the employee, although arising from the fact of his having been employed, was not taxable as an emolument, either as pay or a bonus, (under s.19 of the ICTA) or a benefit in kind under s.154 of the ICTA. A sum paid as consideration for an agreement to compromise proceedings or give up rights does not constitute a taxable benefit.