»Ê¹ÚÌåÓýapp

Sections 225 to 226 ITEPA 2003

General

An employee may receive a payment in connection with his or her employment for agreeing to restrict their future conduct or activities. Such an agreement is known as a restrictive covenant or undertaking. It is usually (though not invariably) made between employee and employer in order to restrict the employee’s activities if the employment is terminated.

»Ê¹ÚÌåÓýapp Inland Revenue took the view that such payments were taxable as earnings and chargeable under the equivalent of Section 62 ITEPA 2003 (see EIM00511). »Ê¹ÚÌåÓýapp courts took a different view in the case of Beak v Robson (25TC33). Mr Robson had been a company director for many years. In 1937 he entered into an agreement that included a clause that prevented him from competing with the company within a fifty mile radius of Newcastle-upon-Tyne if he left the company within five years. »Ê¹ÚÌåÓýapp Courts decided that the payment was not a profit from his office, as it was in respect of a covenant operative only after that office had ceased. It was not chargeable.

Under ITEPA 2003 receipts for restrictive covenants are treated as earnings from the employment (see EIM00513).