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HMRC internal manual

Business Income Manual

HM Revenue & Customs
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Miscellaneous income: scope of the provisions: services - contracts and arrangements

S687-S689 Income Tax (Trading and Other Income) Act 2005, S979-S981 Corporation Tax Act 2009

The distinction which determines whether income is within the miscellaneous income sweep-up charge is between a gratuitous payment and a payment where it was agreed that the service would be for reward.


Clearly if the payment is made under a contract for services, this shows that it is not gratuitous. The contract can be in writing or it can be verbal. The importance of the contract is that it shows that it was agreed that the service was not gratuitous and that there was going to be a reward.

It is important to remember that the fact that a payment is made under a contract is not enough to make the payment taxable under the miscellaneous income sweep-up provisions. Lord Denning MR said, in Scott v Ricketts [1967] 44TC303 at pages 321I-Page 322B:

‘The judge seems to have thought that, as the payment was made under a contract, that was enough to bring within [the charge]. I cannot agree with him. It must be a contract for services or facilities provided, or something of that kind.’

For payments under a contract to be taxable under the sweep-up provisions, the contract must be one that produces income.

Implied contracts

In cases where there is no express contract, a party may still be able to take action in the courts to obtain a payment where there is evidence that shows that the work was not to be done gratuitously.

An example is a quantum meruit payment - a payment by reference to what the work carried out was worth. A contract may be ‘implied in fact’ if it is suggested by the facts and circumstances that there is a mutual intention to contract.

If a realistic view of the facts shows that a service was provided for reward, it is not a gratuitous payment and is taxable under the sweep-up provisions.

Void contracts

A contract or agreement may be void for reasons of public policy, for example because it is illegal and therefore not enforceable, but this does not alter the fact that there was an intended agreement that a service was to be provided for reward and thus a taxable source.

Brightman J in Alloway v Phillips [1980] 53TC372 at page 381 dismissed the argument that a sum was not taxable because the contract was unenforceable as void:

‘Nor have I been referred to any authority for the proposition that money received and retained under a contract void as against public policy escapes taxation for that reason.’


The parties may have entered an arrangement under which one would pay the other for a service. A payment under such an arrangement is not gratuitous and is taxable under the miscellaneous income sweep-up provisions.

The case of the British Basic Slag Agreement [1963] 2 All ER 807 was under S6 Restrictive Trade Practices Act 1956. However, because the legislation did not define what an ‘arrangement’ was, the court was concerned with what was an arrangement in everyday language.

In a judgment cited with approval by Willmer LJ in the Court of Appeal, Cross J held:

‘As I see it all that is required to constitute an arrangement not enforceable in law is that the parties to it shall have communicated with one another in some way and that as a result of the communication each has intentionally aroused in the other an expectation that he will act in a certain way.’

Willmer LJ also cited with approval Upjohn J’s remark in the earlier case of Re Austin Motor Co. Ltd’s Agreements [1957] 3 All ER 62, that:

‘an arrangement must at least connote an arrangement whereby the parties to it accept mutual rights and obligations.’