SE03600 - Restrictive Covenants

Section 313 ICTA 1988

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.

The Inland Revenue took the view that such payments were emoluments of the employment and chargeable under the equivalent of Section 19 (1) (1) ICTA 1988. The 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. The 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 an emolument and not chargeable under Section 19.

Legislation was introduced in Finance Act 1950 to bring the consideration into charge. The rules were changed again in Finance Act 1988 and incorporated into ICTA 1988 at Section 313. Payments for restrictive covenants entered into on or after 9 June 1988 are treated as emoluments of an office or employment and are chargeable under Schedule E.

The guidance listed below deals only with the 1988 rules.