EIM03600 - Employment income: restrictive covenants: contents

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.

The Inland Revenue took the view that such payments were taxable as earnings and chargeable under the equivalent of Section 62 ITEPA 2003 (see EIM00511). 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 chargeable.

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

1. EIM03601

   Restrictive undertakings: statutory conditions
2. EIM03602

   Restrictive covenants: consideration treated as earnings and chargeable as employment income
3. EIM03603

   Restrictive undertakings: operation of PAYE on consideration
4. EIM03604

   Restrictive undertakings: non-cash consideration
5. EIM03605

   Restrictive undertakings: termination agreements
6. EIM03606

   Restrictive covenants: compromise agreements
7. EIM03610

   Text of Statement of Practice 3/1996
8. EIM03620

   Restrictive covenants: example 1: restrictions in the contract of employment
9. EIM03621

   Restrictive covenants: example 2: total or partial fulfilment of restrictive undertakings
10. EIM03623

    Restrictive covenants: example 3: reduction in consideration received
11. EIM03624

    Restrictive covenants: example 4: covenants given by directors in company take-over
12. EIM03625

    Restrictive covenants: example 5: non-cash consideration: transfer of asset
13. EIM03626

    Restrictive covenants: example 6: compromise agreements