Contract termination payment was a trading receipt

KLA carried on the trade of business coaching. In January 2009 it agreed with T to provide management training for senior management. The contract was for three years but T gave notice of early termination in October 2009 and paid the agreed £1m termination fee.

Mr L said a £1m fee was capital compensation for T’s continued use of secret processes in his unique computerised performance management system. HMRC claimed it was a revenue receipt.

The First-tier Tribunal dismissed the taxpayers’ appeal.

The Upper Tribunal agreed with the lower tribunal that the payment was compensation for the lost opportunity to profit from the remaining period of the contract. It was a therefore trading receipt of KLA. Nothing in the contract transferred intellectual property or secret processes to T and nothing in the surrounding circumstances indicated the payment was as Mr L argued.

The taxpayers also stated that £3m paid under the contract...