Settlement for services

The taxpayer set up a hedge fund in 1999. A company was needed to sponsor the fund which arranged to operate under the umbrella of Tilney Investment Management.

The taxpayer joined Tilney as an employee.

The firm left the hedge fund market in 2001 and the taxpayer made a new sponsorship arrangement with Luxembourg bank Dexia of which he became an employee with the agreement that he would receive an investment bonus.

The business made him redundant in November 2001. He received a redundancy payment but no bonus. He started legal action against Dexia but settled out of court with the bank agreeing to pay compensation of £310 000.

The taxpayer treated the compensation payment as a capital receipt in his 2002/03 return. HMRC carried out an enquiry and then issued a closure notice treating the sum as chargeable to income tax under TA...