Compromise Agreement

If your employee stops working for you, they may have potential claims against you, for example.B. on wages or wages that have not been fully paid. They can deal with this situation through a single agreement, sometimes called a compromise agreement. If the transaction agreement is well drafted, you can minimize your tax debt. Settlement agreements are often used in the context of a dismissal situation, sometimes as a way for your employer to avoid a dismissal procedure. This usually means that your employer takes into account your legal right to severance pay. Such imputation is not widespread. As a general rule, no specific amount is allocated to this undertaking in the agreement, so no royalties are levied. The good news is that for a settlement agreement to be mandatory, you need to get legal advice that your employer normally pays for, and your lawyer should detect such errors. Compromise agreements often contain a “refund clause”. Such a clause provides that, if the worker subsequently initiates proceedings before a court or tribunal, despite the signing of the agreement, the amount paid under the agreement must be reimbursed to the employer. As a general rule, do not argue that such a clause means that an amount is allocated to the company not to sue its rights. In virtually all cases, the amount paid under the agreement can be fully charged to the payment of the claims to be processed.

There is therefore no longer an amount to be allocated to this company, even if there is a refund clause. By agreeing not to assert claims in a court or tribunal, the worker agrees to limit the behavior. It follows that any amount granted for this commitment is covered by Articles 225 to 226 of the ITEPA 2003 (see EIM03601). Such a sum is not covered by practice statement 3/1996 (see EIM03610), since the parties themselves attribute value to the undertaking. Therefore, if the agreement allocates a certain amount to that business, it is taxable. It should be noted that the £30,000 tax exemption is a sum of all these payments relating to this employment. If you received a payment from a previous transaction agreement, it can be taken into account at the same limit. If you add all payments, you must include all payments from the same job. For tax purposes, jobs are considered “equal” when paid to you in connection with: if an employment relationship ends, the worker may enter into an agreement with the former employer to accept payment “in full and final payment” of all outstanding claims on the employer. .

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