RCI Europe v Kate Woods (HM Inspector of Taxes), High Court, [2003] EWHC 3129 (Ch)

Remember the National Insurance: Haylock was a worker and director of RCI until he resigned in July 1994. He entered into a severance agreement with the company, where he agreed to restrict his future competitive activities in return for restrictive covenant payments.

The payments totalled £2.2m over a three-year period. Schedule E income tax was deducted, but the Inland Revenue decided RCI was also liable for primary and secondary national insurance contributions (NICs) in respect of the payments. RCI submitted that for national insurance to be due, the payments had to be made during the period of employment, not after it had ended.

RCI’s appeal was dismissed. Any sum paid to or for the benefit of any ’employed earner’, which is chargeable to income tax under Section 313 Income and Corporation Taxes Act 1988 (now Section 225 Income Tax (Earnings and Pensions) Act 2003) should be treated as remuneration subject to NICs. Section 313 provides that where an individual gives an undertaking to restrict their conduct or activities in connection with an office or employment they hold or held, any sum paid in respect of the giving of the undertaking should be chargeable to tax under Schedule E.

The restrictive covenant undertakings given by the worker were given ‘in connection’ with his employment and were paid to an ’employed earner’, even though Haylock’s employment had terminated more than three years earlier. Accordingly, the employer was liable to pay NICs on the payments.

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