A gross-up clause requires one party to increase the payment amount so the other party receives their full agreed amount even after taxes are deducted. For example, if you're owed £10,000 but £2,000 withholding tax applies, the payer increases the payment to £12,500 so you still net £10,000. This protects you from losing money due to tax withholding. It's a fairness mechanism that shifts the tax burden cost to the payer. However, it can create disputes about which taxes qualify for gross-up and how to calculate the final amount.
If you're the one receiving payment, strongly advocate for a gross-up clause—it guarantees you get the money you actually agreed to. If you're the payer, resist this clause or limit it to specific, named taxes only (not all possible future taxes). Get the calculation method in writing with a worked example so both sides understand exactly how much will be paid. ---
Frequently Asked Questions
What does this clause mean in simple terms?
A gross-up clause requires one party to increase the payment amount so the other party receives their full agreed amount even after taxes are deducted.
Why should I care about this clause?
For example, if you're owed £10,000 but £2,000 withholding tax applies, the payer increases the payment to £12,500 so you still net £10,000.
What are my options?
This protects you from losing money due to tax withholding.
How does this affect small businesses?
It's a fairness mechanism that shifts the tax burden cost to the payer.