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HMRC internal manual

Employment Income Manual

Employment income: earnings from employment: payments out of employee benefit trusts

Section 62 ITEPA 2003

An employer may set aside funds to enable employees to share in the profits of the business.

For example, in Brumby v Milner (51TC583) a company set up a trust to acquire and hold some of its shares and to distribute the income from the company’s dividends among the company’s employees. The annual distributions of money to the employees were taxed as employment income.

When the scheme was terminated the company’s shares were sold and the money in the fund was distributed among the employees. Employees claimed that this final distribution did not come from the employment but from the decision to wind up the scheme. But the courts held that the final payment was also taxable as earnings within Section 62 ITEPA 2003 (see EIM00515 onwards). Although the money became available as a result of decisions connected with the structure of the company, the sole reason for making the payments was that the recipients were employees of the company.

As regards shares appropriated to employees under approved profit sharing schemes see the Employment-Related Securities Manual (ERSM).