On termination of employment, the employer and former employee may agree a settlement agreement (formerly known as compromise agreement) to settle any potential claims the former employee may otherwise wish to bring before an employment tribunal. Although it is not necessary for the parties to reach agreement as to the nature of the payment in order for it to be treated, for tax purposes, as a compromise settlement. See Clinton v Revenue and Customs Comrs1 where the tribunal accepted the claimant's view that a lump sum payment by her employer was to forestall a claim for constructive dismissal despite the employer regarding her as having resigned.
Settlement agreements
HMRC does not assume that the full amount of any payment made under a settlement (formerly compromise) agreement (or any other out of court settlements) falls wholly within the charge under ITEPA 2003, s 401. Instead, HMRC officers are instructed2 to determine whether some elements of such a payment are chargeable under other provisions, in particular the usual charging provision for earnings3,
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