B2.426 Employees—termination payments
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 payment is made at the time of the sale of the business or company, or shortly after its purchase, or in connection with the cessation of the trade, a deduction may be denied on the basis that the expense is a capital item or is not incurred for the purpose of carrying on the trade5. The payment must be made for the loss of office. A payment to a managing director of one part of a business