CheckLists.Tax (beta)
F1. Employee monetary income
GENERAL
Priority of charges
Dividends and employment
- ITTOIA s.366(3) gives ITEPA priority over savings and investment income charges other than the charges on
- UK dividends and
- release of close company loans
- Implicitly, therefore the charge on UK dividends has priority over ITEPA (Esprit Logistics, §124: "The words of s366 clearly envisage the ITEPA priority
provisions do not extend to the chapter which the s415 charge inhabits.").
- However, in PA Holdings, a dividend was held not to fall within the charge on dividends and only within the charge on employment income.
Trading and employment
- Income taxable as employment income is excluded from being trading income.
- "My view is that once it is decided that the registrarship is an 'office' and the fees assessable under Sch E, there is no room for any inclusion of those fees under Sch D." (IRC v. Brander & Cruickshank at 45)
Legislation:
Cases:
IRC v. Brander & Cruickshank [1971] 1 All ER 36, HoL;
HMRC v. PA Holdings [2011] EWCA Civ 1414;
Esprit Logistics Management v. HMRC [2018] UKFTT 287 (TC), Judge Raghavan;
HMRC manuals:
Commentary:
See also:
EMPLOYMENT TAX: EARNINGS
Identity of recipient
- Payment to third party can be earnings of employee
General rule
- No general legislative requirement that employee should receive or be entitled to receive the remuneration in order for reward to be taxable.
- Charge applies to money that the employee is entitled to have paid as his/her remuneration whether paid to the employee or a third party (RFC 2012, §41).
- Sufficient that the payment is made to a third party with the agreement or acquiescence of the employee or as arranged by the employee, for example, by assignment, irrespective of whether there was a prior legal right (RFC 2012, §58; Currell, §68).
- "Parliament in enacting legislation for the taxation of emoluments or earnings from employment has sought to tax remuneration paid in money or money's worth. No persuasive rationale has been advanced for excluding from the scope of this tax charge remuneration in the form of money which the employee agrees should be paid to a third party, or where he arranges or acquiesces in a transaction to that effect..." (RFC 2012, §59).
Exceptions
- (1) Earnings only taxable as a "gratuity or other profit or incidental benefit of any kind...in money or money's worth" within ITEPA s.62(2)(b).
- (2) Benefits in kind not taxable as earnings - see the benefits in kind code.
- (3) Cases where the employee acquires only a contingent interest (RFC 2012, §41).
Legislation: ITEPA s.62;
Cases:
RFC 2012 v. Advocate General for Scotland [2017] UKSC 45;
HMRC v. Currell [2026] EWCA Civ 445, Falk LJ;
HMRC manuals:
Commentary:
See also:
Earnings
- Charge on earnings: general
The charge on earnings
- The charge to tax on employment income applies to general earnings (ITEPA s.6) which includes earnings within s.62 (s.7).
- Earnings within s.62 are salary, wages, fees, gratuities, other profits or incidental benefits and anything else that constitutes an emolument of the employment.
Scope of 'earnings'
- Income tax is a tax on income (Apollo Fuels, §3; Currell, §84).
- Things provided for full value are not ordinarily regarded as a receipt of income
- "Goods or services supplied to an employee for full value would not ordinarily be regarded as conferring a benefit on the employee or as involving the receipt of income by him. A tax on the value of such goods or services would therefore be in the nature of a tax on consumption, rather than a tax on income. Of course, it is open to Parliament to deem the value of such goods or services, or indeed anything else, to be income, but one would expect Parliament to do so in clear terms." (Apollo Fuels, §3).
- Necessary to approach identification of what is earnings from employment "with a degree of common sense" (Currell, §84).
- For a counter-intuitive result, Parliament would need to express itself in clear terms (Currell, §84).
Amount charged for a tax year
Legislation:
Cases:
HMRC v. Apollo Fuels Limited [2016] EWCA Civ 157;
HMRC v. Currell [2026] EWCA Civ 445, Falk LJ;
HMRC manuals:
Commentary:
See also:
- Employer pays third party, securing benefit for employee
Employee has no right or liability prior to receiving the benefit: benefit is earnings
- If the employer indicates a willingness to spend money obtaining some benefit for the employee, but without creating any prior right to the benefit, the earnings are the benefit if and when received.
- "It seems to me that the taxpayer never acquired any rights against anybody. He received this letter; armed with it, he went to Messrs. Montague Burton's establishment, and Montague Burton expressed themselves as willing to supply him with the clothes he ordered. When the clothes were delivered, then (and then only) the taxpayer got something which was his own. He acquired at that point of time a suit, albeit he had no right against anyone to get the suit...But this was not a case in which he was entitled to call upon the company to pay some sum of money on his behalf, as that phrase is ordinarily understood." (Wilkins at 144)
- It is important that the employee does not incur a liability which is then discharged by the employer - that would fall within the discharge of debt situation, below.
- In Wilkins, it was found that the employee never became liable for the cost of the suit (at 146).
- The benefit being the earnings is relevant because, in such a case, the value of the earnings will be the convertible value of the benefit (in Wilkins, the second hand value of the suit, which was 1/3 the cost to the employer).
- Albeit, now the benefits code would apply to the excess cost to the employer.
- In Currell, money paid to a trust to fund a loan to the employee was not earnings (Wilkins discussed and confirmed at Currell, §§79 - 81).
Employee obtains a right for the employer to pay for a benefit to the employee: right is the earnings
- If, in contrast, the employee obtained an enforceable right to obtain a benefit to be paid for by the employer, the earnings is the right.
- That right may have a convertible value at or close to the amount the employer is obliged to spend in fulfilment of the right.
- "[In Wilkins] the perquisite was the right to get a suit of clothes without payment from a particular tailor - or it may have been the suit of clothes itself. The recipient could not sell or assign the right to get the suit: if he had been entitled to do that the money equivalent would have been almost as much as the tailor's price." (Lord Reid in Heaton v. Bell).
- When the right is exercised, the thing received is not further earnings (it is 'from' the right, not employment and represents a fair bargain, not a benefits code benefit).
Employer discharges employee's debt: earnings is the equivalent of the debt
- If the employer discharges an employee's debt, the discharge of the debt is a benefit, but the value is the equivalent of the debt.
- "If I have incurred a debt - for example, my debt due for income tax comparable to Hartland v. Diggines - and my employer chooses to discharge that debt for me, then it is no doubt true that what I have received in money or money's worth is the equivalent of the debt; and the sum of money is, therefore, properly brought within the scope of the charge." (Wilkins at 144)
- "Well, the only way in which you can make a valuation of money is by money." (Wilkins at 145)
- "But what the officers were really taxed upon was the money's worth of the immunity they were thus given from their own liabilities. No valuation of that money's worth was required, it was obviously of the same value as the liability which had been discharged." (Wilkins at 146)
- Employer may discharge indirectly, by providing credit card (Overdrive Credit Card Ltd).
- Applies even if employee did not request the discharge (at least, perhaps, where the employer doing so is part of a pattern) - Hartland v. Diggines.
- In Nicoll v. Austin, the employer was obliged to pay and did pay for light, heat, telephone and upkeep of the gardens. It was held that the sum expended by the employer was the value of the earnings.
In Wilkins, this was explained a case where the employer discharged employee liabilities (albeit noting the position was unclear as to who hired the gardener - at 145).
- Query the position if the employer is able to discharge the debt by paying a sum less than the full amount outstanding.
- If the employee could have obtained the same discount, presumably the value of earnings is the lower amount.
- But what if the employer obtained the discount, e.g. by paying a number of debts at the same time?
When is the employer discharging a debt v. providing a benefit in kind?
- In Overdrive Credit Card Ltd it was noted that for shops, the contract is made at the till upon purchase, whereas for fuel, the contract is made "drop by drop" as the petrol passes into the tank. This led to the following distinction:
- "[The Dept of Social Security] conceded (or more accurately did not dispute) that where there has never been any personal liability on the part of the card holder to pay for the petrol, there is no correlative liability to contribute. Thus where the card holder tenders his Overdrive card before filling his car with petrol, and thereby makes clear to the attendant that he is buying as agent for his employer, and not as principal, and where the contract proceeds on that basis, then the value of the petrol is not to be included in the employee's earnings. But where, as in the normal case, the charge card is not tendered until after the contract has been made, then the position is, he says, different. In such a case the card holder incurs a personal debt to the garage." (at 640)
- Query whether the employee can make clear he/she is buying on behalf of the employer (Tullett and Tokyo Forex, §19).
Legislation:
Cases:
Hartland v. Diggines (1926) 10 TC 247 (HoL);
Nicoll v. Austin (1935) 19 TC 531 (Finlay J);
Wilkins v. Rogerson [1961] Ch 133 (CoA);
Heaton v. Bell [1970] AC 728 (HoL);
Overdrive Credit Card Ltd v. Department of Social Security [1991] 1 WLR 635 (QBD);
HMRC v. Currell [2026] EWCA Civ 445, Falk LJ;
HMRC manuals:
Commentary:
See also:
- Employee obliged to apply 'income' in a particular way
- If a person is entitled to income but is bound or agrees with a third person to use that income in a particular way, that does not affect the character of the sum as income.
- If the agreement is made with the person from whom the income arises, the same principle applies if the agreed use of the income can be regarded as an application of that income by the person entitled to it.
- Smyth v. Stretton: salary increase was to be retained by employer to be used to provide a provident fund for employees. Employee became entitled to accumulated sums plus compound interest in retirement.
- "… a sum receivable by way of salary or wages is not the less salary or wages taxable because for some reason or another the person who receives it has not got the full right to apply it just as he likes. The fact that income which is income, but which has even by operation of some statute to be devoted compulsorily to some purpose or another, does not prevent it being income." (at 42).
- The result would have been different if, instead, the college had simply awarded bonuses on retirement (at 42).
- Hudson v. Gribble: "I think that under these circumstances all that can be truly said as to these sums is that payment of them was postponed." (at 526).
- But if the obligatory use of the 'income' cannot be regarded as an application of it by the person said to be entitled, that should not be income.
- For instance, if an agreement provides for a sum to be paid at one stage in an agreement and then repaid as a rebate at another stage.
- Or if T is offered a pay rise of £100 as long as T agrees that £50 of that will be paid to an unrelated employee.
- In Smyth, the obligatory application was for the employees own benefit: "It is exactly like the case of a person being obliged to insure his life, that would not prevent the sum being salary."
Legislation:
Cases:
Hudson v. Gribble [1903] 1 KB 517 (CoA);
Smyth v. Stretton (1904) 5 TC 36 (Channell J);
HMRC manuals:
Commentary:
See also:
- Reimbursement of employee expenditure
Round sum allowances
- Sums that are paid under a system not intended as a genuine estimate of expenditure incurred by the employee are earnings.
- "in the case of a defective system, one needs to identify and examine the nature and extent of the defects in the system to ascertain whether they are so egregious as to suggest that, viewed in objective terms, the employer really did not care whether the payments in question were made only in circumstances where mileage or expenses were actually incurred. One such case was the example provided by Mr Vallat at the hearing – an employer who does not ask the relevant employees whether the relevant mileage or expenses were actually incurred before making payments to the employees." (Best Connection, §125).
- Occasional human error can be consistent with the system, overall, having the genuine intention of reimbursing (§126).
- Assuming that every employee was entitled to subsistence payment without any checks was not a genuine reimbursement of expenditure in Best Connection (§128).
- But the system for reimbursing travel expenditure was a genuine attempt to reimburse actual expenditure, despite defects (§138).
Legislation:
Cases:
Best Connection Group Limited v. HMRC [2024] UKFTT 1103 (TC), Judge Beare;
HMRC manuals:
Commentary:
See also:
- No earnings where T would be required to account for any personal profit to the employer (e.g. due to fiduciary duties)
- If T is under an obligation to account for any personal benefit to the employer, there is no benefit/earnings.
- This was the case in Macleod where the employer paid premiums on an insurance policy in the director's name, mistakenly believing that it was the beneficiary of the policy. The director had a fiduciary obligation to account to the employer for the policies.
- "[27] He had to avoid a situation in which he had, or could have, a direct or indirect interest which conflicted or possibly might conflict with the interests of the company (Companies Act 2006, s 175). As soon as he became aware of the mistake he had a duty to avoid any possible conflict between his interests and those of the company. He had a duty not to make a personal profit from the mistake. He had an obligation to account to MMCL for the policies, and to assign them to it on demand."
Legislation:
HMRC manuals:
Commentary:
See also:
"From" employment
- The "from" test: general principles
Is the emolument paid as a reward for service/inducement to provide service or some other reason?
- Looking for the "source or nature" of what was received (Currell, §71) - was it given in respect of the employee's work? (Currell, §72).
- "I think that their meaning is adequately conveyed by saying that, while it is not sufficient to render a payment assessable that an employee would not have received it unless he had been an employee, it is assessable if it has been paid to him in return for acting as or being an employee." (Hochstrasser at 392).
- "in the end we must always return to the words in the statute and answer the question—did this profit arise from the employment? The answer will be “no” if it arose from something else." (Laidler v. Perry at 30)
- "If an emolument is not paid as a reward for past services or as an inducement to enter into employment and provide future services but is paid for some other reason, then the emolument is not received 'from the employment'." (Shilton at 91).
Whose perspective?
- Employer's purpose in granting a benefit to employee is important factor (MacLeod, §22 - employer mistakenly believed payments were for its own benefit).
- In Shilton, a footballer's current club paid the footballer a sum to induce him to sign for another club in order that the current club would obtain a large transfer fee. It was held that this 'motive' did not prevent it being paid as an inducement to provide services to the new club.
Emoluments that were not requested
- In Hartland v. Diggines, the employer discharged the employee's income tax bill. That was an emolument from employment even though not requested by the employee (albeit it was the general practice of the employer and done for many years).
Relevance of method of calculating payment
- "The issue is what is the payment made for, not how was it quantified." (Haderlein, §29).
- Haderlein - payment made to recognise employee doing the right thing and resigning was not from employment even though calculated by reference to foregone redundancy entitlement and prospective benefits (§29).
Funds from closely held companies
- Commonplace for entrepreneurs to take modest salaries, leaving wealth to build up in company.
- "Funds extracted from the company are not necessarily remuneration just because salaries have been paid at below the market rate." (Currell, §90).
Legislation:
Cases:
Hartland v. Diggines (1926) 10 TC 247 (HoL);
Hochstrasser v. Mayes [1960] AC 376 (HoL);
Laidler v. Perry [1966] AC 16 (HoL);
Shilton v. Wilmshurst [1991] STC 88 (HoL);
Haderlein v. HMRC [2008] UKSPC SPC00710, Judge Gammie QC;
Macleod and Mitchell Contractors Limited v. HMRC [2019] UKUT 46 (TCC), Lord Doherty and Judge Andrew Scott;
HMRC v. Currell [2026] EWCA Civ 445, Falk LJ;
HMRC manuals:
Commentary:
See also:
- Payments to a third party
General rule
- Payments to a third party can be earnings from employment if the from test is satisfied (see identity of recipient, above).
Payments to third party that fund benefit to employee
- A payment to a third party is not "from" an employee's employment simply because it is used to fund the provision of a benefit to the employee.
- In Currell, payments were made to a trust which made a loan to an employee (as was intended), but that did not mean that the payment to the trust (as opposed to the loan) was from employment.
- But the Payment was not in the nature of a reward for services just because its function was to fund the Loan and the Loan was made because of Mr Currell's work. Whether the Payment itself had the character of remuneration is a separate question. Put another way, the need to fund the Loan explains why the Payment was made but not what it was. It does not determine its nature." (§78).
- See also, Wilkins v. Rogerson (referred to above): employer paid for tailor to provide employee with suit, payment to tailor was not earnings from employment (Currell, §81).
- Employer payment to third party to fund travel season ticket for employee, treated as loan to employee - payment to third party not earnings from employment (Currell, §83).
Legislation:
Cases:
HMRC v. Currell [2026] EWCA Civ 445, Falk LJ;
HMRC manuals:
Commentary:
See also:
- Emoluments from third parties
General rule
- There is no reason why a payment by a third party (i.e. not the employer) cannot satisfy the test to be from employment.
- "Section 181 is not confined to 'emoluments from the employer' but embraces all 'emoluments from employment'; the section must therefore comprehend an emolument provided by a third party, a person who is not the employer." (Shilton at 91).
Third party purposes and motives
- In Shilton, a footballer's current club paid the footballer a sum to induce him to sign for another club in order that the current club would obtain a large transfer fee. It was held that this 'motive' did not prevent it being paid as an inducement to provide services to the new club.
- "Thus Nottingham Forest had a powerful motive for offering an inducement to the taxpayer to become an employee of Southampton. This motive does not alter the fact that the £75,000 paid by Nottingham Forest was an emolument 'from employment' because it was an emolument 'from becoming an employee' indistinguishable from the £80,000 paid by Southampton for the like purpose." (at 91)
Legislation:
Cases:
Shilton v. Wilmshurst [1991] STC 88 (HoL);
HMRC manuals:
Commentary:
See also:
- Inducements to become or remain an employee
General rule: inducements to begin or continue providing service are from employment
- "Section 181 is not limited to emoluments provided in the course of employment; the section must therefore apply first to an emolument which is paid as a reward for past services and as an inducement to continue to perform services and, second, to an emolument which is paid as an inducement to enter into a contract of employment and to perform services in the future." (Shilton at 91).
- In Shilton, lump sums paid by both a footballer's current and new clubs were inducements to provide service to the new club.
Compensation for loss of previous status
-
Legislation:
Cases:
Shilton v. Wilmshurst [1991] STC 88 (HoL);
HMRC manuals:
Commentary:
See also:
- Recognition of past service
- Payments on directors ceasing to hold office were held to be gratuitous lump sums paid in recognition of past service and taxable as s.62 earnings in Simrajsar Limited.
Legislation:
Cases:
Simrajsar Limited v. HMRC [2024] UKFTT 1072 (TC), Judge McKeever;
HMRC manuals:
Commentary:
See also:
- Payments due to an employee's personal circumstances
- A payment from a provident/distress fund set up by an employer for the benefit of employees "whose personal circumstances might justify assistance" is not from employment (Hochstrasser at 392).
- In Hochstrasser, an employee's work location was transferred which led to the employee suffering a 'loss' because his new house cost £350 than he sold his old house for. The employer compensated the employee for that loss. It was held that the sum was not a reward for service but "in respect of his personal situation as a house-owner".
Legislation:
Cases: Hochstrasser v. Mayes [1960] AC 376 (HoL);
HMRC manuals:
Commentary:
See also:
- Payment made in substitution for another payment: usually treat the same
Substitution/replacement principle
- "It is inevitable that if a payment is made in substitution for a payment, which might, subject to a contingency, have been payable that the nature of the payment which is made in lieu will be affected by the nature of the payment which might otherwise have been made. There will usually be no legitimate reason for treating the two payments in a different way." (Mairs v. Haughey)
- The principle applies to what the payment is a direct replacement of and cannot be pressed too far.
- Thus, in Mairs v. Haughey a lump sum was paid for the loss of contingent rights under an enhanced redundancy scheme on transfer of the business.
- The lump sum directly 'replaced' the contingent sums under the redundancy scheme and because redundancy sums would not have been taxable, nor was the replacement.
- But note that the redundancy sums would not have been taxable even though they compensate the employee for not being able to earn a living/receive emoluments, even though receiving emoluments plainly would have been taxable.
- Accordingly, it must logically be the case that the redundancy payments do not 'replace' the lost earnings.
Only a guide which is useful in some circumstances
- In E.On UK Plc, the UT agreed with HMRC's submission that "the replacement principle is not an overarching principle but a guide which is helpful in some circumstances but not in others. It is just a tool of varying utility in answering the “from” employment question" (§36).
- CoA agreed with UT on this (§48).
Examples
- Dewhurst v. Hunter - payment for the release of a contingent right to a payment upon loss of office was held not to be from employment, even though it was made as part of an arrangement whereby T was persuaded not to resign. It appears that the payment on loss office was intended to be a lump sum pension (see Tilley v. Wales).
-
Legislation:
Cases:
Dewhurst v. Hunter [1932] All ER Rep 753 (HoL);
Mairs v. Haughey [1993] STC 569 (HoL);
HMRC v. E.On UK PLC [2023] EWCA Civ 1383;
HMRC manuals:
Commentary:
See also:
- Gifts and voluntary payments
General principle
- It makes no difference whether a payment is voluntary if it is 'from' employment.
- In RFC 2012, the executives had not contractual entitlement to the bonuses before the employer decided to give them, but that did not affect the analysis.
- "The fact that bonuses were voluntary on the part of the employer is irrelevant so long as the sum of money is given in respect of the employee’s work as an employee..." (§66).
- In Hartland v. Diggines, the employer voluntary paid the employee's income tax bill. That was employment income.
- "That the payment is voluntary makes no difference; that appears plainly from the case of Blakiston v Cooper" (at 262).
Testimonials
- Cowan v. Seymour - liquidator who gave his services gratuitously was voted a payment by the shareholders upon the completion of the liquidation as a thank you.
- Held: the sum was a gratuity/in the nature of a testimonial: "the undisputed facts show that this was not a payment for services rendered in the true sense, nor was it a profit which accrued to this gentleman by reason of his office, but it was very much more in the nature of a testimonial to him for what he had done in the past while his office, which had then terminated, was in existence." (at 380).
Christmas gifts
- In Wilkins v. Rogerson, the employer made a Christmas gift "to all male members of the staff of clothes suitable for wear at the office up to the value of £15".
-The gift was taxed as employment income (albeit the decision was about the value of the earnings). T did not dispute the existence of a liability.
Legislation:
Cases:
Cowan v. Seymour (1919) 7 TC 372;
Hartland v. Diggines (1926) 10 TC 247 (HoL);
Wilkins v. Rogerson [1961] Ch 133 (CoA);
RFC 2012 v. Advocate General for Scotland [2017] UKSC 45;
HMRC manuals:
Commentary:
See also:
- Image exploitation: genuine payment for right to use image/require promotion not additional remuneration
- If a payment is genuinely in return for image exploitation rights, the payment is not 'from' employment.
- And may also be a fair bargain so as not to give rise to a benefit under the benefits code, see below.
- In Sports Club Plc, HMRC argued that an agreement with a company to pay players for the right to exploit their image was a means of paying them additional remuneration for their employment as players.
- Argument rejected: "[88]...If it is accepted that the promotional agreements were real, and that the parties intended activities to be performed under them in return for payments, and that the parties could have sued on the agreements, then no authority was cited to us to support the view that those realities could be ignored for income tax purposes."
Legislation:
Cases: Sports Club Plc v. Inspector of Taxes [2000] STC (SCD) 443;
HMRC manuals:
Commentary:
See also:
- Employer's mistaken belief that payment was for its own benefit: not from employment
- Macleod v. HMRC: Company paid the premiums on an insurance policies relating to one of its directors covering a mixture of life insurance, critical illness and income protection. The policies were in the director's name, but the company mistakenly believed it was the beneficiary of the policies. When the error was discovered, the policies were assigned to the company. HMRC assessed the payments of premiums as employment earnings of the director.
- Held: no benefit to employee and not from employment.
- "[20] ... They were not intended to be a reward, return or remuneration for his services. They were intended to benefit MMCL, not him. They were made on the erroneous understanding that MMCL was the policyholder and that it would be the beneficiary of any policy proceeds."
Legislation:
HMRC manuals:
Commentary:
See also:
Residence
- Residence of employer is irrelevant
- The residence of the employer is irrelevant to whether earnings from the employment are taxable on the employee.
- "The residence of the employer has no effect on whether benefits and expenses within the rules in the benefits code are chargeable." (EIM20507).
- It can be relevant to the operation of PAYE.
Legislation:
Cases:
HMRC manuals: EIM20507 - The benefits code: expenses and benefits from non- resident employers;
Commentary:
See also:
- UK resident employee taxable on worldwide employment earnings
Scope of charge
- An employee is taxable on the full amount of general earnings "for a tax year for which the employee is UK resident" (ITEPA s.15).
Split year
- Charge does not apply to earnings for a split year that are attributable to the overseas part of the split year and not in respect of duties performed in the UK (s.15(1)).
- For the meaning of duties performed in the UK, see below in relation to non-resident employees.
Timing of charge
- Whether general earnings are chargeable or not depends on the tax year they are "for".
- The timing of the charge, however, is based on the tax year when they are received (irrespective of residence in the tax year of receipt) (ITEPA s.15).
- Received - ss.18 - 19.
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
- Qualifying new resident: exclusion for foreign general earnings
XX
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
- Non-UK resident employee taxable on earnings from duties performed in the UK
Scope of charge
- An employee is not taxable on general earnings for a tax year in which the employee is not resident in the UK unless they are earnings in respect of duties performed in the UK (ITEPA s.27).
- Earnings in respect of UK duties is determined on a just and reasonable basis (s.41ZA; EIM77020).
Timing of charge
- Whether the earnings are chargeable or not depends on the tax year they are 'for'.
- But, if they are chargeable, they are charged in the tax year when received (irrespective of residence) (s.27(2)).
Duties performed in the UK
-
- Incidental duties - Where:
(i) the employment is, in substance, one whose duties are performed outside the UK,
(ii) duties are performed in the UK that are merely incidental to the duties performed outside the UK
Then: treat the incidental UK duties as performed outside the UK (ITEPA s.39).
- Absence - If a person ordinarily performs duties in the UK and has earnings for a period of absence, treat the earnings as for UK duties except insofar as duties would have been performed outside the UK but for the absence (s.38; EIM40202).
- Ship/aircraft duties - see s.40.
- Continental shelf duties - treated as UK duties - s.41.
Overseas crown employment
- Treated the same as duties performed in the UK.
Double tax treaty
- May contain relief for short-term business visits.
Legislation:
Cases:
HMRC manuals: EIM40202 - Employee resident or domiciled outside the United Kingdom: location of duties: absence from employment;
Commentary:
See also:
EMPLOYMENT INCOME: BENEFITS CODE
Benefits by reason of employment taxable as general earnings
- Charge on benefits provided by reason of employment
XX
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
- Benefits provided at employer's cost deemed to be provided by reason of employment
General rule
- "If the benefit is provided by the employer, in other words he is incurring the cost of providing it, it is automatically deemed to have been provided by reason of the employment" (EIM21220, s.201(3)).
- Irrelevant whether the benefit is actually by reason of employment where deeming applies (Vermilion).
- Does not apply if employer is individual and benefit provided in the ordinary course of personal relationship.
Only applies to benefits provided by (i.e. at cost of) the employer
- Benefits are provided by the person(s) "at whose cost the benefit is provided" (ITEPA, s.209).
- HMRC say to look for the ultimate source of the funds used to pay the benefit, not who hands it over (EIM21220).
- Benefit provided by trust is provided 'at the cost' of the employer who funded the trust:
- "In my opinion the scholarships were provided at the cost of [the employer] and not at the cost of the trustees because the trustees with moneys supplied by [the employer] were only performing fiduciary duties imposed on them by [the employer]. All the trust powers and discretions and other authorised activities of the trustees emanate from and were established and defined by [the employer]... If the course of the scholarship payment can be traced to the employer, then the benefit conferred by that payment is provided "at the cost" of the employer." (Wicks v. Firth at 234).
Group company provides benefit: is expense charged to employer company?
- "If the employer is a company and the employee gets the benefit from a subsidiary company it is the employer who is providing the benefit if the subsidiary charges the expense to the parent company." (EIM21220).
Legislation: ITEPA s.201;
Cases:
Wicks v. Firth [1983] 2 AC 214 (HoL);
HMRC v. Vermilion Holdings Ltd [2023] UKSC 37;
HMRC manuals: EIM21220 - The benefits code: who is the person providing a benefit?;
Commentary:
See also:
- Family member of employee receives benefit
- If family member is also a director or employee, treat as earnings of the family member (EIM20505).
Legislation:
Cases:
HMRC manuals: EIM20505 - The benefits code: provision to a family member employed by the same employer as the employee;
Commentary:
See also:
Cash payments as a benefit
- Monetary payments within scope of benefits code
- "The statutory definition of a benefit is wide enough to include a cash payment which a director or an employee...receives by reason of the employment and which is not chargeable to income tax under some other provision." (EIM21006).
- "The scholarships received by Martin and Christine were benefits as defined by section 61 (2)..." (Wicks v. Firth at 233).
Legislation:
Cases: Wicks v. Firth [1983] 2 AC 214 (HoL);
HMRC manuals: EIM21006 - The benefits code: cash payments can be benefits: Wicks v Firth;
Commentary:
See also:
EMPLOYMENT INCOME THROUGH THIRD PARTIES (PART 7A)
NATIONAL INSURANCE CONTRIBUTIONS
- Directors
Meaning of director
- Includes shadow directors (SSCR r.1(2)).
Annual earnings period
- The earnings period of a director is normally the year in which the earnings are paid (SSCR r.8).
- Does not apply to directors of certain types of company (NIM12003).
- This is to prevent directors voting their whole remuneration in one week and relying on the Upper Earnings Limit (NIM12001).
Payments on account of earnings
- Are treated as earnings, e.g. regular withdrawals from an overdrawn DLA - see K1. Making a loan.
Exceptions for directors
- Certain directors fees received by members of professional partnership are excluded from Class 1 (SSCR r.27; NIM12004).
- Certain payments to nominee directors are excluded (SSCR r.27).
- There is an administrative concession where a non-resident director only attends board meetings in the UK (NIM12013).
Legislation: SSCR, r.8, r.27;
Cases:
HMRC manuals:
NIM12001 - Class 1: Calculating Class 1 NICs for Directors: Introduction;
NIM12004 - Class 1: Fees received by professional partnerships and other companies: Introduction;
Commentary:
See also:
- Nature of NICs
Not a tax
- "[97] National insurance legislation originated in the recommendations of the Report of the Inter-Departmental Committee on Social Insurance and Allied Services ("the Beveridge report") of 1942 (Cmnd 6404). This recommended that every earner should make a flat rate contribution from his earnings, irrespective of the size of his earnings. In addition, it recommended that the state and the employer should also make contributions. All three sets of contributions would be paid into a fund to pay flat rate benefits to those who had contributed to it and their dependants. Thus national insurance is not a tax. The idea was that those who had the capacity to pay would pay tax and thus fund the state's contributions. The original principles have been modified over time. In particular in 1959, graduated contributions were introduced. Those contributions could only be imposed on a person's emoluments for income tax purposes (see section 2(1) of the 1959 Act and section 4(2) of the 1965 Act)." (Forde and McHugh CoA).
Tax bases overlap but not identical
- "That limited link between "earnings" and "emoluments" was, however, cut in 1975 when a new system of national insurance was introduced. Now national insurance contributions are divided into four classes. There is no provision, however, which provides in terms for earnings to be paid by reference to emoluments or deemed emoluments for income tax purposes. There is a complex history of specific provisions in the 2001 Regulations to make payments earnings and vice-versa. Tiley and Collison concludes that as a result the tax bases for income tax and national insurance overlap but that they are not identical." (Forde and McHugh CoA).
- "[14] As FML accepts the proposition that "earnings" in NICs legislation is not to be equated with "emoluments" in income tax legislation, most of the arguments which engaged the Upper Tribunal and the Court of Appeal fall away..." (Forde and McHugh UKSC).
Legislation:
Cases:
HMRC v. Forde and McHugh Limited [2012] EWCA Civ 692;
Forde and McHugh [2014] UKSC 14;
HMRC manuals:
Commentary:
See also:
- NICs on earnings
Earnings are what the employee receives
- "[17]...Earnings in this context are remuneration derived from the employment The use of the word "earnings" points the reader towards what the employee obtains from his employment Looking to what the earner receives avoids the counter-intuitive result." (Forde and McHugh).
Non-convertible benefits can be earnings
- "[18]...It does not matter that Mr McHugh could not immediately convert his entitlement into money because, as I have said, non-convertible benefits in kind are in principle earnings in the NICs legislation." (Forde and McHugh)
Benefit in kind is not earnings
- See Tullett & Tokyo Forex §§22 - 23.
Discharge of debt is equivalent of payment in cash
- "The right approach is to regard the discharge of an employee's debt as the equivalent of a payment in cash, and not less so because that payment is made easier by the use of a charge card." (Overdrive Credit Card Ltd at 641 see also Tullett & Tokyo Forex, §§18, 20).
- On when an employer is discharging an employee's debt v. providing a benefit in kind - see above in relation to employment income tax.
Payment to enhance the value of an asset of employee not earnings
- Payments to enhance assets belonging to an employee are not payments of earnings.
- In Tullett & Tokyo Forex the example was given of an employer paying to repair the employee's car (§25).
- On the facts, payments that increased the value of insurance policies were not earnings (§27). The outcome may well be different applying a realistic view of the facts (Ramsay was not argued - §6).
Legislation:
Cases:
Overdrive Credit Card Ltd v. Department of Social Security [1991] 1 WLR 635 (QBD);
Forde and McHugh [2014] UKSC 14;
HMRC manuals:
Commentary:
See also:
CAPITAL GAINS TAX
- Inducements to take up employment
General position
- Usually taxable as employment income.
- If not taxable as employment income but paid to compensate for rights given up under a previous contract, the sum is a capital sum derived from that contract (CG13066).
Compensation for loss of amateur status
- HMRC accept that: "Signing-on fees paid to amateur players by Rugby League clubs which clearly represent nothing more than compensation for the loss of their amateur status, see SE64160 or EIM64160, are not chargeable to Capital Gains Tax as they are not derived from any asset." (CG13064).
Legislation:
Cases:
HMRC manuals:
CG13064 - Compensation: inducements: employment: introduction;
CG13066 - Compensation: inducements: employment: taking up employment;
Commentary:
See also:
INHERITANCE TAX
Gift with reservation
- Whether remuneration arrangements following gift of shares give rise to a reservation of benefit
-Continuation of existing reasonable commercial arrangements in the form of remuneration and other benefits for the donor's service in a business does not amount to a reservation, provided the benefits are not affected by the gift (IHTM14337).
- If new remunerative arrangements are made, HMRC will investigate whether it amounts to a reservation of a benefit.
- HMRC will normally disregard rights that can only be exercised in a fiduciary capacity (IHTM14395).
- This might be relied on where donor gifts shares to trust and exercises voting rights as trustee.
- No reservation if voting rights carved out by pre-gift re-organisation.
- But query whether the reorganisation + gift will fall within IHTA 1984, s.98(3) - deemed transfer of value that is not a PET (see McCutcheon 7-140).
Legislation: IHTA 1984, s.98(3);
Cases:
HMRC manuals: IHTM14337; IHTM14395;
Commentary: McCutcheon 7-134;
See also: