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Settlement Agreement: Sums to be paid net of tax (fact sensitive)

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Thanks to Paul Smith of Broadway House Chambers for preparing this case summary

Where a Compromise Agreement is silent as to whether a settlement sum is to be paid gross or net of income tax, how should the term be construed for tax purposes?

As being the gross sum from which income tax should then be deducted, says the High Court in Barden v Commodities Research Unit International.

The Claimant and Defendants had reached a settlement negotiated through mediation. As part of that Compromise Agreement they agreed to pay a settlement sum of £1.35million to the Claimant, but the relevant term of the Agreement did not stipulate whether this sum was to be paid gross or net of income tax.

In a first-instance case peculiar to its facts, the Chancery Division explored the legislative framework surrounding the taxation of payments made in connection with the termination of employment. Emphasising that the test in such cases is objective and not one based upon the subjective knowledge or intentions of the parties, Vos J determined that the reasonable observer would have concluded that the settlement sum would be paid net of income tax. By analogy, the reality of the PAYE system is that no employee expects to receive their gross salary each month, and in arguing the contrary position in respect of a termination payment Mr Barden was advancing a "commercial absurdity"