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HMRC internal manual

Employment Income Manual

Employment income: earnings from employment: compensation from a source other than the employment

Section 62 ITEPA 2003

To be taxable as earnings within Section 62 ITEPA 2003 a payment must come from the employment (see EIM00600).

Sometimes an employee will receive a payment that they would not have received but for the fact that they are an employee. That on its own is not sufficient to make the payment taxable as earnings within Section 62. Lord Woolf, in Mairs v Haughey (66TC273) explained that the authorities had consistently held that a sum paid to relieve distress is not earnings. Additionally there may be separate consideration for the payment showing that the payment does not arise from the employment (see EIM00710).

In Hochstrasser v Mayes (38TC673) an employee received the difference between the purchase and sale price of his house. The payment was made under the employer’s housing scheme relating to employees transferred from one part of the country to another. Under the scheme a transferred employee was reimbursed any loss he sustained on selling his house but he had first of all to offer to sell the house to his employer at market value. It was held that the payment was not a profit from the employment.

The source of the payment was the housing scheme not the employment. In Laidler v Perry (42TC351), Lord Hodson said at page 366 that the decision in Hochstrasser v Mayes:

“…depended on its own peculiar facts, there being a collateral agreement between employer and employee quite outside their contracts of service to compensate the employees for any loss they might incur on selling their houses on transfer from one part to another.”

In the High Court in Hochstrasser v Mayes, 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 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’.” (page 752)

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).