BIM47005 - Specific deductions: staffing costs: restrictive covenants with employees

A business may make a payment to an employee so that the employee agrees 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 the business and its employee in order to restrict the employee's activities if the employment is terminated.

The employee is chargeable on these payments. This is because they are treated as earnings of an office or employment by ITEPA03/S225. For further information on this point see SE03600 onwards.

If the employee is taxed under ITEPA03/S225, then FA88/S73 (2) provides that the employer can claim relief for the amount paid, either as a deduction, or, if appropriate, as an expense of management under ICTA88/S75.

FA88/S73 (2) overrides ICTA88/S74, so relief is given even if the payment would otherwise be disallowable as capital.

The business can claim the relief in the period that the payment is made, or treated as made, for the purposes of ITEPA03/S225.

If there is no charge under ICTA88/S313, then FA88/S73 (2) does not apply. Guidance on payments made under restrictive covenants to employees where FA88/S73 (2) does not apply is at BIM35595.

For guidance on payments made under restrictive covenants to other traders see BIM35510.