Income Tax (Employment Income)

Question 1

Where is the bulk of legislation found concerning this topic?

Answer 1

Income Tax (Earning and Pensions) Act 2003 (ITEPA 2003)

Question 2

What are the three components of employment income broken down into?

Answer 2

1) Earnings; 2) Amounts treated as earnings; 3) Amounts which count as employment income

Question 3

What do we mean by ‘earnings’?

Answer 3

Broadly, a receipt of money or something convertible into money. Must be ‘from the employment’.

Question 4

What do we mean by ‘amounts treated as earnings’?

Answer 4

Certain benefits which are taxed under the ‘benefits code’, and they must be paid, provided or made available ‘by reason of the employment’.

Question 5

What does ITEPA 2003 s 7(3) tell us?

Answer 5

That the category of ‘earnings’ and ‘amounts treated as earnings’ are collectively referred to as ‘general earnings’.

Question 6

What does ITEPA 2003 s 7(4) tell us?

Answer 6

That ‘specified employment income’ is defined as amounts which count as employment income but excluding certain ‘exempt income’.

Question 7

What two factors determine where an amount is taxable as employment income?

Answer 7

1) Is the taxpayer in employment (as opposed to self-employment).
2) Does the amount fall within one of the three categories of employment income?

Question 8

What is the distinction between contracts of employment?

Answer 8

Work provided by the self-employed under a contract for services vs. employment under a contract of service.

Question 9

What was the name of the case that Cooke J spelled out the fundamental test to determine whether someone was in employment of service or a provider of services? What was that test?

Answer 9

Market Investigations v Minister of Social Security (1969)

‘Is the person who has engaged himself to perform these services performing them as a person in business on his own account?’ If the answer is yes, then the contract is a contract for services. If not, then the contract is a contract of service. Control will no doubt always have to be considered, but it can no longer regarded as the sole determining factor.

A genuine right to appoint a substitute which make it hard for HMRC to prove an employment relationship.

Question 10

How would it be more accurate to describe the distinctions between the categories of employment and self-employment?

Answer 10

In reality it is often more of a continuum.

Robert Walker LJ questioned in R (on the application of Professional Contractors Group Ltd and Others) v IRC (2002) whether it was correct to continue ‘insisting on the gulf which exists in theory (but not, always, in practice) between them.’

Question 11

What does ITEPA 2003, s 4 tell us?

Answer 11

The definition of ‘employment’, includes (a) any employment under a contract of service; (b) any employment under a contract of apprenticeship; and (c) any employment in the service of the Crown.

Question 12

What does ITEPA 2003, s 5 tell us?

Answer 12

That provisions ‘that are expressed to apply to employments apply equally to offices, unless otherwise indicated.’

Question 13

What did the case of Great Western Railway Company v Bater (1921) tell us about the definition of ‘office’?

Answer 13

Offices denotes a ‘permanent, substantive position which had an existence independent from the person who filled it, which went on and was filled in succession by successive holders.’

Question 14

Why is it significant that we include offices under the employment taxation legislation?

Answer 14

The effect is that office holders such as company directors and bishops are taxable as employees.

Question 15

Where is earnings defined under the legislation?

Answer 15

ITEPA 2003, s 62(2).

Question 16

What does ITEPA s 62(2) tell us?

Answer 16

How earnings are defined:

(a) any salary, wages or fee; (b) any gratuity or other profit or incidental benefit of any kind obtained by the employee if it is money or money’s worth; (c) anything else that constitutes an emolument of the employment.’

Question 17

Where is the definition of ‘money’s worth’ for the purposes of s 62(2)(b) found and what is it?

Answer 17

s 62(3)

‘something that is (a) of direct monetary value to the employee, or; (b) capable of being converted into money or something of direct monetary value to the employee.’

Question 18

How will a discretionary bonus or tips from a customer fall under the legislation?

Answer 18

As money fulfilling the conditions under s 62(2)(b)

Question 19

Broadly, what does case law tell us about ‘money’s worth’. Where is the rationale for this policy supported?

Answer 19

That something can be money’s worth if it is capable of being turned into money, even if that is very unlikely.

By Lord Reid in Heaton v Bell (1969): ‘the division between money and that which can readily be used to produce money is thin.’

Question 20

What did the case of Wilkins v Rogerson (1960) show us?

Answer 20

Facts: Company arranged with a tailor to give each employee a suit or raincoat worth up to £15 as a Christmas present.

Principle: Rogerson was held taxable on the basis that it was possible to convert the suit into money, even though it was unlikely to happen (because the employer would have been displeased if he had done so).

Question 21

What did Tennant v Smith (1892) tell us about ‘money’s worth’?

Answer 21

Facts: Tennnat, in his capacity as an agent of the bank who worked for, resided in part of the bank’s premises rent free which he was required to do.

Principle: This was found not taxable as earnings, as he could neither sublet the premises or use it for any other business. This was despite the fact that he was saving money not needing to find lodgings else where.

Question 22

What did Lord Macnaughton say in Tennant v Smith (1892)?

Answer 22

A person is not liable to tax on earnings ‘on what he saves his pocket, but what goes into his pocket.’ More accurate if he said what might go into his pocket.

Question 23

What if an employee’s pecuniary liability is discharged?

Answer 23

This is treated as ‘money’s worth’ and taxable as earnings.

Question 24

What did the case of Nicoll v Austin (1935) tell us?

Answer 24

Facts: A company agreed to pay, for business purposes, certain maintenance and decoration expenses in relation to a hall which was the home of the governing Director, Austin.

Principle: The payments were not made to Austin, but they discharged debts that Austin would have otherwise paid for, and hence Austin was taxable on the amount of the payments.

Question 25

What was the significance of Richardson v Worral (1985)?

Answer 25

Facts: Employees purchased petrol with credit cards they were issued by their employers, and use it for both business and personal use. Principle: It was held that the employees entered into a contract with the garage at the time they filled up the car, and so the employer's were discharging their pecuniary liability under the rule of Nicoll v Austin, despite the fact that the payment was from the credit card company to the garage. The idea was then that the taxpayer was thus incurred a debt that the employer was paying off.

Question 26

What is the important difference between Richardson v Worral (1985) and Wilkins v Rogerson (1960)?

Answer 26

In the latter there was no debt of the employee to discharge because there was no privity of contract between the tailor and the employee. In the former there was privity of contract between the employee and the garage.

Question 27

What are the two different methods of evaluation that come out of Wilkins (1960) and Nicoll (1935)?

Answer 27

In Nicoll, you are looking at the cost to the employer (as they are paying for decorations etc.) In Wilkins, you are looking at the second hand value (whether the suit can be resold). Hence, if LSE give a professor an iPad, the professor's earnings would be the second hand value of the iPad. However, if they supplied him with a credit card to purchase an iPad with, is earnings would be that of the purchase price.

Question 28

What is the tax liability of reimbursement of expenses? What case highlights this?

Answer 28

Where an employer reimburses an employee for expenses incurred by them in the performance of their duties, the receipts by the employee are not taxable as earnings. Lord Pearce commented in Pook v Owen (1969) that "reimbursements of actual expenses are clearly not intended by 'salaries', 'fees', 'wages' or 'profits'."

Question 29

Are receipts of reimbursement counted as earnings even if the employee would not have been able to deduct them (had they not been reimbursed) in computing their liability to tax?

Answer 29

No: Pook v Owen (1969): the hospital consultant was not taxable on travelling expenses paid, but these did not cover the actual costs of travel and would have otherwise have not been able to deduct the excess costs when calculating his income.

Question 30

What is the tax liability if John pays to go to a conference and is then reimbursed by the LSE; and if the LSE pays for him to attend direct.

Answer 30

1) John is not taxable on receipt as this is reimbursement of expenses. 2) John is taxable on the benefit if it is convertible.

Question 31

What case illustrates the impact on earnings of a salary sacrifice scheme?

Answer 31

Heaton v Bell: the question was whether the 'car loan scheme adjustments' (reduction of a salary in return for participation in the scheme were (a) authorised deductions from his wages, which would not have reduced his earnings, or (b) Bell had accepted a reduced wage in return for the use of the car, which it had accepted would have reduced his earnings. The courts favoured construction (a). An employee who joined the scheme could withdraw and hence was entitled to his original unamended wage and that he had merely chosen to spend a portion of that wage on the hire of a car.

Question 32

What does ITEPA 2003, s 9(2) say?

Answer 32

To fall within the charge to tax the amount must be derived 'from' an employment.

Question 33

What did Hochstrasser v Mayes (1959) say about earnings derived from employment?

Answer 33

Facts: Company had a scheme whereby if the company transferred them to a new place of employment and the employee consequently had to sell their house, the company would indemnify them of any loss. Mayes was subsequently given £350 from this scheme. Principle: According to Lord Radcliffe stated that '[the payment] is assessable if it has been paid to him in return for acting as or being an employee.' He therefore emphasised that the £350 was not wages as his entitlement to it was not because of 'any services given by him'.

Question 34

What did Shilton v Wilmshurst (1991) say about earnings derived from employment?

Answer 34

Language used in Shilton is arguably broader and so capable of including more payments Facts: Peter Shilton was transferred from Nottingham to Southampton, and Nottingham paid him £75,000 and Southampton paid £80,000 for the transfer. Principle: Lord Templeman said that 'an emolument arises from employment if it is provided as a reward or inducement for the employee to remain or become an employee and not for something else.' He went on to say: 'an emolument 'from employment' means an emolument 'from being or becoming an employee''. Further, he distinguished this from Hochstrasser, when he stated that past authorities had tried to distinguish between emoluments derived 'from being or becoming an employee' and those attributable to something else (which he referred to the scheme as Hochstrasser as being). Found payment by Nottingham satisfied this because unless they did not do so they would not have received £325,000 from Southampton.

Question 35

What did Viscount Simonds in Hochstrasser quote from Upjohn J about past service?

Answer 35

'...the payment must be made in reference to the services the employee renders by virtue of his office, and it must be something in the nature of a reward for services past, present or future.' Would seem that payment for past services will be earnings.

Question 36

What did Lord Templemant indicate in Shilton about past services?

Answer 36

Rewards for past services will only be taxable if they are also 'an inducement to continue to perform services'.

Question 37

What did Viscount Cave LC in Reed v Seymour (1927) say about voluntary payments?

Answer 37

There is a distinction between 'payments made to the holder of an office or employment...by way of remuneration for his services, even though such payments are voluntary' and those 'made to him on personal grounds.' If the former, they are subject to tax, if the latter, they are not.

Question 38

What is the liability to tax from voluntary payments from an employer? What are the two cases featured here?

Answer 38

Most payments from an employer to an employee will be taxable. Laidler v Perry (1965): £10 gift vouchers paid to employees at Christmas were rewards for services and so taxable. Ball v Johnson (1971): the firm, as stipulated in its staff handbook, paid an employee £130 for passing the Institute of Bankers' exam. Plowman J said that the payments were not 'from' the employment and so were not taxable: were for the taxpayers 'personal success in passing his exams'.

Question 39

What is the tax liability for voluntary payments by third parties?

Answer 39

The relevant distinction is still between payments 'in reward for services' and personal gifts: Calvert v Wainwright (1947). If the former, they are assessable to tax; if the latter, they are not.

Question 40

What was held in Cooper v Blakiston (1908)?

Answer 40

Easter offerings accrued to the vicar 'by reason of his office' and so was taxable. Attention was put on the annual nature of the payments and that the 'call for subscriptions was common to all clergymen'. It had not been a gift of an exceptional kind.

Question 41

What were the 6 criteria Brightman J in Moore v Griffiths (1972) to assess whether the voluntary payment made by the third party (the FA) was remuneration for services or a gift?

Answer 41

1) No foreseeable event of recurrence. 2) No expectation of award. 3) Payment was not made or announced until after the performance. 4) Look to the nature of the donor in assessing the quality of its actions. 5) Consider what the donor said when they made the payment. 6) Whether the sum was linked in any way to the quantum of services rendered.

Question 42

What did Jenkins LJ say in Moorhouse v Dooland (1954) about the tax liability of payments given for 'meritorious performance' that was stipulated in the contract?

Answer 42

There is a strong ground for finding that a voluntary payment given by an employer is to be a remuneration for the employee's service if 1) the contract entitles him to receive the voluntary payment and 2) the voluntary is of a periodic or recurrent character.

Question 43

What is the tax liability of inducement payments?

Answer 43

Payments for becoming an employee are taxable, while payments to compensate for a loss or sacrifice on becoming an employee are not taxable.

Question 44

What did Jarrold v Boustead (1964) say about the tax liability of inducement payments?

Answer 44

A signing on payment to Rugby Union played becoming a professional Rugby League player. Payment compensated him for his loss of amateur status and so not taxable. Lord Denning said: 'It is a payment for relinquishing what he considered to be an advantage to him.'

Question 45

What is the tax liability for compensation for other losses?

Answer 45

Compensation paid for personal loss is not taxable as earnings: Hochstrasser v Mayes.

Question 46

What did Mairs v Haughey (1992) say about compensation for other losses?

Answer 46

The case concerned payments to the employees partly for termination of rights under an enhanced redundancy scheme and partly for agreeing to new terms of employment. The court found that the payments under the redundancy scheme would not have been taxable as earning since they would have been paid to compensate or relieve an employee from hardship of becoming unemployed, not as a reward for services. Hence, this payment was not an award for services but was only payable in certain circumstances and only after the termination of employment, and was not an emolument.

Question 47

What does s 216(1) ITEPA tell us?

Answer 47

An employment is an excluded employment [for the purposes of the Benefit Code] if (a) it is in lower-paid employment in relation to that year and if either 216(2): the employee is not employed as a director of a company; or 216(3): the employee is employed as a director of a company but has no material interest in the company and either (i) the employment is as a full-time working director, or (ii) the company is non-profit-making or is a charitable company. Lower paid employment is defined under s 217(1) as an earnings rate of less than £8,500.

Question 48

What did Finance Act 2014 (FA 2015) s 13 do?

Answer 48

Removed the exclusion for lower paid employments.

Question 49

What are the rules concerning vouchers and credit-tokens and the Benefits Code?

Answer 49

Depends on if it is a cash voucher (ITEPA 2003, s 75) or a non-cash voucher (s 84). If the employee or a family member receives a cash voucher, they taxed on the sum of money for which the voucher is capable of being exchanged for: ITEPA 2003, s 81. If it's a non-cash voucher: taxed on the cost of the employer of providing the voucher (s 87). Employee not taxed if the voucher or token is made available to the public generally and hence does not receive it on favourable terms.

Question 50

What are the rules concerning living accommodation and the Benefits Code?

Answer 50

Charged under the Benefits Code but there is an exemption under s 99(2), which is only applied to 'living accommodation provided for an employee if (a) it is provided for the better performance of the duties of the employment, and (b) the employment is one of the kinds of employment in the case of which it is customary for employers to provide living accommodation for employees.'

Question 51

What are the rules concerning loans and the Benefits Code?

Answer 51

The rationale for this being a separate charge is that if a loan was repayable on demand it was not possible to quantify the benefit: O'Leary v McKinlay (1991). The charge is on the amount the interest (if any) is less than a deemed market rate.

Question 52

What are the rules concerning the residual liability to charge and the Benefits Code?

Answer 52

The residual charge only applies to benefits that are not caught by other provisions in the benefits code: ITEPA 2003, s 202. The charge applies both to a benefit (i) for an employee; and (ii) for a member of an employee's family or household. The charge is generally in respect of the marginal cost: Pepper v Hart (1992). So, in the case of in-house benefits, the cost of the benefit to the employer was the additional cost and not a pro rate share of all the costs of the employer.

Question 53

What does it mean that receipts are 'by reason of' the employment and its interaction of the Benefits Code?

Answer 53

If earnings are to be taxable they need to be 'from the employment'. In contrast, for a benefit to be taxable under the benefits code it is generally necessary that it is paid, provided or made available 'by reason of the employment.' Case law suggests the latter term is broader and catches a wider range of situations. As opposed to benefits provided by the employer, case law suggests that for benefits paid by a person who is not the employer there is a different test of causation with a wider ambit of taxability under the benefits code: Wicks v Firth (1982)

Question 54

What is the interaction between earnings with the benefits code?

Answer 54

If the same benefit could give rise to charges both in respect of earnings and under the benefits code, the charge to earnings generally takes priority, and the excess charged under the Benefits Code: s 64(2). Accommodation is taxed (exclusively) under the benefits code: ITEPA 2003, ss 64(3)-(4), 109.

Question 55

What does ITEPA s 329 say?

Answer 55

Not possible to make a loss from employment income (i.e. deductions cannot exceed income).

Question 56

What is the general rule for deductions and where is it found in ITEPA s 336?

Answer 56

ITEPA 2003, s 336: A deduction from earnings is allowed for an amount if both: the employee is obliged to incur and pay it as holder of the employment; and the amount is incurred wholly, exclusively and necessarily in the performance of duties of the employment.

Question 57

How can you tell if something is incurred necessary for the purposes of s 336?

Answer 57

In Ricketts v Colquhoun (1925) Lord Blanesburgh commented that the rule would occur when duties were not personal but objective; they do not extend to duties which are personal to the employee or are the result of his own volition. Objective test: employment must be obliged to incur that type of expenditure but not necessarily incur the same quantum (Pook v Owen; Lord Wilberforce) - i.e. same transport needs but doesn't need to be the same price.

Question 58

What do the two contrasting cases of Brown v Bullock (1961) and Elwood v Utitz (1965) tell us about the need for an expense to be incurred necessarily for the purposes of s 336?

Answer 58

B v B: membership of Pall Mall club was virtually a condition of managerial appointment. But the Membership was not necessary to discharge his duties as bank manager and so no deduction was permissible. E v U: Taxpayer's work brought him to London and was obliged to stay overnight and used his London club for that purpose. B v B distinguished on the basis that club membership was obtained to gain use of the facilities required for the performance of the duties.

Question 59

What two cases highlight the rule that the expense must be incurred in the performance of duties for the purpose of deductions.

Answer 59

Ricketts v Colquhoun (1925): Recorder travelling from London to Plymouth: deductions refused on the basis that 'as a rule, [a judge does not] eat or sleep in the course of performing his duties, but either before or after their performance': Viscount Cave Fitzpatrick v IRC (No 2): journalists and newspapers - claims for the periodicals were refused on the basis that reading these was merely preparatory for the performance of their duties. [Test for wholly and exclusively will be considered when looking at trading income].

Question 60

What did Edwards v Clinch (1981) have to say about the term 'office'?

Answer 60

Played down the emphasis on permanence that existed in Great Western (1920) and instead favoured the requirement that the position had an existence independent of the individual holding it.

Question 61

What does ITEPA s 5 tell us about the term 'office'?

Answer 61

Includes any position which has an existence independent of the person who holds it.

Question 62

What did Hall v Lorimer (1994) say about workers with multiple employers (such as actors?)

Answer 62

The Court of Appeal said that whether the taxpayer was 'dependent or independent' on a particular paymaster may well be significant and this was a more useful test than the 'business on own account' one.

Question 63

What new rules did FA 2014 bring in relating to LLP members.

Answer 63

Removed the presumption of self-employment for LLP members from April 2014 to combat the disguising of employment relationships through LLPs. Category of 'salaried member' applies if 80% of the taxpayer's income comes from a fixed salary rather than a profit share; that the member does not have significant influence over the LLP and that their contribution to the LLP is less than 25% of the anticipated disguised salary.

Question 64

What does ITEPA 2003 Part 2 Chapter 7 provide for?

Answer 64

Where a worker receives remuneration under an agency contract to render personal services to a client under supervision, he is taxable under ITEPA 2003

Question 65

What did Bird v Martland (1982) say about the taxability of payments made to employees when a benefit is withdrawn?

Answer 65

Courts are highly likely to tax these. In this case, compensation was paid following withdrawal of company cars (which did not cause a breach of contract) but the compensation was taxable.

Question 66

What do the rules under ITEPA 2003 ss 70-72 say about the taxability of expenses?

Answer 66

An employee who receives a reimbursement of expenses that he has incurred is taxed on it in full as an amount treated as earnings unless he can claim any deductible expenses.

Question 67

What does ITEPA 2003 s 102 stipulate?

Answer 67

The cash equivalent of the benefit of employer-provided accommodation is to be treated as earnings for all employees. (So desite s 62(3)(b), accommodation can be taxed under the benefits code and not as earnings). If an employer provides the living accommodation, the employee is taxed on the value to him of that accommodation less any sum that he 'make goods' (i.e. paying for the use of it). Usually taxed on the rent paid by the employer for that accommodation.

Question 68

When is there no charge for employer-provided accommodation?

Answer 68

No charge arises for 'representative occupation'. This means occupation falling within ss 99(1) and (2) and 100, i.e. accommodation which is: (1) Necessary for the proper performance of the employee's duties (e.g. Tennnant v Smith) (2) Customary for the better performance of the employee's duties. (3) When there is a special threat to his security.

Question 69

What did Vertigan v Brady (1988) say about the customary requirement for employer-provided accommodation?

Answer 69

What was customary depended upon: (1) statistical evidence (how common is the practice); (2) how long the practice has existed; (3) whether the relevant employer accepted the customary practice. Establishes a high threshold for statistical evidence to show it is an established custom.

Question 70

What does ITEPA 2003 Part 3 Chapter 7 stipulate?

Answer 70

Where an employee obtains a loan by reason of his employment, either interest-free or at a low rate of interest, he is taxed on the cash equivalent of that loan. Not necessary to show they derived any advantage from the loan.

Question 71

Difference between 'by reason of the employment' and 'from employment'.

Answer 71

The former casts a wider net in the general charging provision.

Question 72

What about the taxability of a payment after the termination of employment?

Answer 72

Prima facie, not earnings from that employment, however, it may be earnings if it is in the nature of 'deferred remuneration.' Further, a payment made under the employment contract will be taxed in full, even though it is paid because of the termination of the employment: Williams v Simmonds (1981)

Question 73

What is the tax situation when an employer terminates the contract and makes a payment in lieu of notice?

Answer 73

Generally thought that tax is not payable (as the payment is seen as damages for breach of contract - Henley v Murray (1950)). If the payment is made by the employer in exercise of a contractual right to make a payment in lieu of notice, then it will be taxable: EMI Group Electronics v Coldicott (1999).

Question 74

What is the position on expenses?

Answer 74

In general, expenses other than travelling expenses are deductible if the employee was 'obliged to incur and pay [them] as hold of the employment' but only if incurred 'wholly, exclusively and necessarily in the performance of the said duties' (s 336(1)).

Question 75

What about the deduction for travelling expenses?

Answer 75

They are allowed if 'the employee is obliged to incur them as holder of the employment' and they are expenses either 'necessarily incurred on travelling in the performance of duties of the office or employment' (s 337) or 'are attributable to the employee's necessary attendance at any place in the performance of his duties' and are not expenses of ordinary communing or private travel (s 338).

Question 76

What does the need for travel to be 'in performance of duties' as stipulated in s 337 mean?

Answer 76

It excludes a deduction for the expense of travelling to work because it is incurred before the performance of duties.

Question 77

What is the tax situation of travelling expenses when an employee spends a significant amount of his time (40% or more) performing his employment duties at a place of more than 24 months?

Answer 77

It becomes a 'permanent workplace' and the costs of travelling from home will cease to be deductible.

Question 78

What is the link between allowable expenditure and deductions for travel?

Answer 78

Allowable expenditure has to be reasonable: not to say that the cheapest form of transport has to be used, since the matter is one of fact and degree and allowance must be made for the inconvenience of some transport.

Question 79

What does s 4(a) ITEPA 2003 tell us?

Answer 79

That someone is a salaried employee under an employment 'contract of services' which is pursuant to this provision (use at the start of question).

Question 80

What does s70(1)(b) tell us?

Answer 80

That the Benefits Code (Part 3) applies to payments given 'by reason of employment'.

Question 81

What does s 362 tell us?

Answer 81

-

Question 82

How does HMRC define 'living accommodation'? EIM11321.

Answer 82

Gives the occupant the necessary facilitates to live domestic life independently.