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HMRC internal manual

Employment Income Manual

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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 (for 2015/16 and earlier only 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:

  • gifts and other voluntary payments - EIM01450
  • tips and gratuities - EIM07900.