Income Tax (Employment Income) Flashcards
Where is the bulk of legislation found concerning this topic?
Income Tax (Earning and Pensions) Act 2003 (ITEPA 2003)
What are the three components of employment income broken down into?
1) Earnings; 2) Amounts treated as earnings; 3) Amounts which count as employment income
What do we mean by ‘earnings’?
Broadly, a receipt of money or something convertible into money. Must be ‘from the employment’.
What do we mean by ‘amounts treated as earnings’?
Certain benefits which are taxed under the ‘benefits code’, and they must be paid, provided or made available ‘by reason of the employment’.
What does ITEPA 2003 s 7(3) tell us?
That the category of ‘earnings’ and ‘amounts treated as earnings’ are collectively referred to as ‘general earnings’.
What does ITEPA 2003 s 7(4) tell us?
That ‘specified employment income’ is defined as amounts which count as employment income but excluding certain ‘exempt income’.
What two factors determine where an amount is taxable as employment income?
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?
What is the distinction between contracts of employment?
Work provided by the self-employed under a contract for services vs. employment under a contract of service.
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?
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.
How would it be more accurate to describe the distinctions between the categories of employment and self-employment?
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.’
What does ITEPA 2003, s 4 tell us?
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.
What does ITEPA 2003, s 5 tell us?
That provisions ‘that are expressed to apply to employments apply equally to offices, unless otherwise indicated.’
What did the case of Great Western Railway Company v Bater (1921) tell us about the definition of ‘office’?
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.’
Why is it significant that we include offices under the employment taxation legislation?
The effect is that office holders such as company directors and bishops are taxable as employees.
Where is earnings defined under the legislation?
ITEPA 2003, s 62(2).
What does ITEPA s 62(2) tell us?
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.’
Where is the definition of ‘money’s worth’ for the purposes of s 62(2)(b) found and what is it?
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.’
How will a discretionary bonus or tips from a customer fall under the legislation?
As money fulfilling the conditions under s 62(2)(b)
Broadly, what does case law tell us about ‘money’s worth’. Where is the rationale for this policy supported?
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.’
What did the case of Wilkins v Rogerson (1960) show us?
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).
What did Tennant v Smith (1892) tell us about ‘money’s worth’?
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.
What did Lord Macnaughton say in Tennant v Smith (1892)?
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.
What if an employee’s pecuniary liability is discharged?
This is treated as ‘money’s worth’ and taxable as earnings.
What did the case of Nicoll v Austin (1935) tell us?
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.
What was the significance of Richardson v Worral (1985)?
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.
What is the important difference between Richardson v Worral (1985) and Wilkins v Rogerson (1960)?
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.
What are the two different methods of evaluation that come out of Wilkins (1960) and Nicoll (1935)?
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.
What is the tax liability of reimbursement of expenses? What case highlights this?
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’.”
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?
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.
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.
1) John is not taxable on receipt as this is reimbursement of expenses.
2) John is taxable on the benefit if it is convertible.
What case illustrates the impact on earnings of a salary sacrifice scheme?
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.
What does ITEPA 2003, s 9(2) say?
To fall within the charge to tax the amount must be derived ‘from’ an employment.
