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14A.4.5 Restrictive Undertakings |
ITEPA treat the charge arising under section 225 as being in respect of a payment which is treated as earnings under section 7(5). ITEPA section 225 TA 1988, section 313 was introduced110 to reverse the decision of the House of Lords in Beak v Robson.111 In that case a director agreed to continue serving the company at a salary of £2,000 a year and received £7,000 in return for an agreement not to compete with the business within a radius of 50 miles for five years. The £7,000 was held not taxable. |
14A.4.5.1 Payment in Respect of the Undertaking |
Section 225 applies wherever consideration is provided by the employer, whether to the employees or to others, in return for an undertaking, whether or not binding, the tenor and effect of which is to restrict employees as to their activities. The undertaking may be given before, during or after the employment. For the section to apply it must also be shown that the payment was made ‘in respect of’ the undertaking. This requirement is not satisfied where the undertaking involves taking on the very duties inherent in and inseparable from the office or employment itself. So, in Vaughan-Neil v IRC112 a barrister who undertook to cease to practice at the planning bar on taking up his employment with a building contractor was held not taxable under section 225 on the payment in return for the undertaking. |
Valuable consideration other than a payment given in return for a restrictive undertaking is now the subject of a separate provision—ITEPA section 226. |
14A.4.5.2 Taxation |
The whole sum is subject to income tax at basic or higher rates in the usual way113 and the income is to be treated as taxed for the purposes of TA 1988, section 348. Before 1988 the whole was taxed in an unusual way in that it was subject only to excess liability.114 |
14A.4.5.3 Deductibility |
FA 1988 also makes the payment deductible by the payer—whether or not it would be deductible under normal principles and even if it is a capital payment.115 This is achieved by directing that notwithstanding TA 1988, section 74, |