EIM00610 - Employment income:
earnings from employment: important principles
Section 62 ITEPA 2003
So far in this manual we have considered the meaning of earnings
(see
EIM00515 onwards) and the meaning of
from the employment (see
EIM00600). However, case law has
established some further principles that will help you to decide
whether or not particular payments are taxable as earnings within
Section 62 ITEPA 2003. They are set out below.
- Section 62 is not restricted to payments
such as salaries, wages and tips in return for the performance of
services. It also taxes other types of employment related payment,
such as:
- payments made to employees solely in recognition
of changes made in their conditions of service. Such payments
relate to the employment and to nothing else. They are 'from the
employment'. They come to the employee because he or she is an
employee and for no other reason (see
EIM00600) and
- payments made solely for the purpose of inducing a
prospective employee to enter into a contract of employment.
Payments of this kind usually come from the prospective employer,
but they may also be paid by a third party who has no interest in
the performance of the services which the employee will undertake
under his contract of employment (see
EIM00700).
In the High Court in Hochstrasser v Mayes (38TC673) Upjohn J
said that to be a profit from the employment a payment "must be in
the nature of a reward for services past, present or future".
Decisions in later cases have shown that the words "reward
for services" should not be taken literally. In Bray v
Best (61TC704) Lord Oliver said:
"I cannot read the phrase 'reward for services' as anything more
than a conventional expression of the notion that a particular
payment arises from the existence of the employer-employee
relationship and not, to use Lord Reid's words in Laidler v Perry
(42TC351), from 'something else'" (page752).
Other decided cases that demonstrate that taxable earnings do
not have to be remuneration or reward for services include Brumby v
Milner (51TC583)(see
EIM00740) and Hamblett v Godfrey
(59TC694)(see
EIM00690).
- Payments for services under a contract of
employment are taxable. A sum that an employee receives for her
services under her contract of employment is taxable as earnings
within Section 62 whatever the payment is called. There is more
about this at
EIM00630.
-
Taxable earnings may be paid by a person who is not the
employer. A payment may be from the employment and
therefore taxable as earnings within Section 62, even if it is paid
by somebody other than the employer. What matters is that the
payment is made because the recipient holds the employment, or as a
reward for services provided in the employment, and not for any
personal reasons. Some tax cases that illustrate this principle are
shown in the table below.
- Payments made voluntarily can be taxable
earnings. The cases listed below also demonstrate that the absence
of a legal obligation on a person to make a payment does not
prevent it being taxable as earnings within Section 62. A
hairdresser's tip is an example of earnings that are paid
voluntarily. A voluntary payment is taxable as earnings if it is
from the employment (see
EIM00600). The mere fact that it stems
from the generosity of the payer on whom the employee has no legal
claim does not prevent it being taxable. A gift that does not come
from the employment is not taxable under Section 62 (see
EIM01460). But there may be a charge
under the benefits code if the employee is not in lower paid
employment (see
EIM20006).
Circumstances
| Tax case
|
| Grant paid by a
charitable fund to a poorly paid clergyman | Herbert v McQuade
(4TC489) |
| Tips received by an
employed taxi driver | Calvert v Wainwright
(27TC475) |
| Spectator collections for
professional cricketer | Moorhouse v Dooland
(36TC1) |
For further guidance on this topic, see:
