Payments were taxable as earnings

The taxpayers were connected to a limited liability partnership (LLP) which promoted tax planning arrangements. The taxpayers paid their five directors – who all wished to resign from the companies and were also partners in the LLP – £30 000 as compensation for loss of office. There was no written documentation or agreement relating to the termination payments. None of the directors reported the payment in their self-assessment returns on the basis that they were tax-free under ITEPA 2003 s 403(1).

HMRC decided the payments were taxable as earnings within s 62 and issued determinations under reg 80 on the taxpayers.

The taxpayers appealed.

The First-tier Tribunal said that where a s 401 payment was made there would normally be a settlement or termination agreement – yet there was none here. It noted that the directors had all resigned voluntarily and had not been remunerated as directors. ...