SE02100 - Emoluments of employees and office holders: compensation for loss of office

Sections 19 and 148 ICTA 1988

Payments of compensation for loss of office are chargeable under Section 148 ICTA 1988, not Section 19(1)1 ICTA 1988. However, that label can be applied to a payment when it is not appropriate: see SE13005.

Because payments and benefits chargeable under Section 148 ICTA 1988 may qualify for exemptions (see SE13500), it is important to recognise the principles which determine which Section applies.

Section 148 applies where an employee receives a payment as compensation for cancellation of a contract - as opposed to receiving something to which contractual terms give entitlement. The former could be:

a sum awarded as damages by a court for wrongful repudiation of a contract, or a settlement of agreed damages without Court involvement (see SE13070) or

a payment made in consideration of the employee giving up all contractual rights and ceasing to give services.

Such payments are often described as 'golden handshakes'. They are not emoluments chargeable under Section 19(1)1 ICTA 1988 because they are not profits from the employment. They arise from the cancellation of the service agreement. The employee loses his right to continue to be employed and earn remuneration for his services.

Cases in which payments for cancellation of service contracts were held to be not chargeable under Section 19(1)1 ICTA 1988 are DuCros v Ryall (19TC444), Duff v Barlow (23TC633) and Henley v Murray (31TC351).

Sometimes a lump sum may be paid for more than one reason. It will then need to be apportioned to arrive at the correct treatment of each element: see Wales v Tilley (25TC136) and Carter v Wadman (28TC41).

For instructions on compensation received in connection with the termination of an office or employment the emoluments of which have been treated as income from a trade or profession within Cases I or II of Schedule D, see BIM40135-BIM40140.