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HMRC internal manual

Employment Income Manual

Employment income: negative taxable earnings

Section 11(3) ITEPA 2003

As explained at EIM00800, loss relief may be available under section 128 ITA 2007, to be given by set-off against general income, where the amount that is the total amount of any taxable earnings from that employment in the tax year is negative.

Chapters 2 to 5 of Part 2 ITEPA 2003 spell out the method for calculating the amount that is chargeable to tax as employment income.  That represents a new approach.  However, as explained in the preamble to ITEPA, it is:

“An Act to restate, with minor changes, certain enactments relating to income tax on employment income ….”

In general, ITEPA 2003 did not change the law.

Although the identification of the concept of taxable earnings was new, the concept is not.

Positive and negative taxable earnings

The legislation only refers to taxable earnings.  However, section 11(3)(a) introduces the concept that the total amount of any taxable earnings from that employment in the tax year may be negative without any explanation of how that might arise.

The answer, indicated by the Upper Tribunal in the case of HMRC v Julian Martin (see EIM00810), is that a proper understanding requires recognition that calculation of the total amount of any taxable earnings means taking account together of any positive taxable earnings and any negative taxable earnings from that employment in the tax year.

It can be seen from the structure of the legislation at Chapters 2 and 3 of Part 2 ITEPA 2003, and the definition of “general earnings” at section 7(3) (see EIM00511), that the principal focus of employment income in general and “general earnings” in particular is concerned with something that an employee receives.  Logically, positive taxable earnings must be general earnings of an employee that are positive and derive from something that the employee receives in the tax year.

In contrast, negative taxable earnings must envisage payments that are made by the employee that would be negative general earnings from the employment (for illustration see examples at pages EIM00842 to EIM00845).