CheckLists.Tax (beta)
A5. Attribution of income to another
GENERAL
Whether income actually is income of 3rd party
- Individual can agree to work for third party, who supplies that individual's services
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- Assigning existing right to income from personal exertion does not mean it is not income of the person doing the work
-"Richardson J. said: "There is no justification in principle for differentiating between salary and wage earners and professionals whose income is the product of their personal exertion. In either case the person whose personal exertion earns the income derives the income."
Their Lordships are in complete agreement with these comments and therefore conclude that the reasoning in Everett (supra) would not normally be applicable to the position of partners in New Zealand. Since no income producing proprietary interest was assigned by the taxpayer the argument fails." (Hadlee)
- In Collingwood, a cricket player entered into various contracts to exploit his image and (ineffectually) attempted to assign the benefit to his company. FTT appeared to be of the view that even if the assignment was valid, as the income derived from personal exertion, it was still income of the taxpayer (§§117 - 118).
Legislation:
Cases:
Collingwood v. HMRC [2025] UKFTT 1065;
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INCOME TAX
Settlements code
- Agreeing to work for company for low wage, thereby diverting funds which would ordinarily be received by the worker may be a settlement
General rule
- A person may provide funds to a 'settlement' by entering into a service contract whereby funds that would ordinarily be received by them are diverted to a company.
- If the company is owned wholly by the individual, there may be no bounteous intent. But if it is owned by a trust/others there may be bounteous intent.
- Query whether the company income or the dividends are the income arising under the settlement (or both).
- Consider the three settlements charges (Settlor/spouse retains an interest; income paid to minor children of settlor; capital sum to settlor/spouse).
- See further
Examples
- Crossland v. Hawkins - T was a director, but not a shareholder of a company which a trust for the benefit his children purchased 98% of the shares in using funds contributed by their grandfather. T agreed to serve the company for a modest salary whereas the company received large fees for T's services as an actor. Held: there was a settlement. "when eventually there is a fund of profit derived from Hawkins' services and a distribution of part of it to the trustees, again I see no difficulty in holding that the result of all that has gone before is that he has provided funds indirectly for the purposes of this settlement."
- IRC v. Mills - T, a promising actress, entered into a contract with a company owned by a trust of which she was the beneficiary. T expected a contract worth £30,000 per year, but the company paid her a salary of £400. The company entered into the contract with the third party. Dividends were paid to the trustees. Held: T was a settlor and the dividends were income arising under the settlement.
- "the source of the dividends was money paid for Miss Mills's work and money which but for the arrangement would have been received by her."
- "...funds, which ordinarily would have been received by Mr. Hawkins and by Miss Mills for their acting, were diverted to companies which were channels for their transmission to trustees. It is not the provision of services but of funds which comes within the section."
Legislation:
Cases:
Crossland v. Hawkins 39 TC 493;
IRC v. Mills [1974] STC 130, HoL;
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Transfer of assets abroad
- Entering into an employment contract as a relevant transfer
Query whether it amounts to creation of rights
- In IRC v. Brackett, Hoffmann J held that entering into an employment contract was the creation of rights.
- In Hoey, CoA had "some misgivings about treating the entry into a contract of employment as involving the creation by the employee of rights vested in the employer, even on the broad approach to construction of the legislation which is no doubt appropriate. Those doubts are only increased when they apparently lead to the conclusion that the employee may be chargeable under the TOAA provisions in respect of income of the employer which he has power to enjoy, for example by receipt of a salary, even though the salary will also be chargeable to income tax in his hands as employment income. We were not referred to any provisions which would be effective to prevent economic double taxation of the employee in such circumstances, and indeed the possibility of such penal consequences is clearly contemplated by section 721(5)(a)..." (§148) but did not pursue those doubts further.
Legislation:
Cases:
IRC v. Brackett [1986] STC 521;
Hoey v. HMRC [2022] EWCA Civ 656, Simler, Phillips, Henderson LJJ;
HMRC manuals:
Commentary:
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