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If a sum is paid in order to dismiss an employee and it is necessary for the preservation of the business or its goodwill to dismiss him, and to make a payment to do so, the sum is deductible in computing the business profit¹. A gratuity paid voluntarily to a retiring employee was held in Incorporated Council of Law Reporting for England and Wales² to be deductible on the ground that the employees expected to receive a gratuity on retirement and, therefore, were likely to serve for somewhat smaller salaries than would otherwise be payable.

Generally there will be little difficulty in justifying the deduction of a termination payment on one or other of these grounds, or on the basis that it is necessary to retain the goodwill of the continuing employees and so to protect the continuing business³. For a case where provision was made for payment of sums on the termination of employee's contracts see Owen (HM Inspector of Taxes) v Southern Railway of Peru Ltd⁴.

However, where a termination