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HMRC internal manual

Employment Income Manual

Employment income: what counts as negative earnings?

From the employment

It is clear from case law that the mere existence of an employment relationship is not enough for every payment from an employer to an employee to be taxable earnings. Similarly, not every payment made by an employee to an employer will constitute negative earnings (see EIM00838). We can see from case law that the search is for the reason for which a payment is made: does the payment arise directly out of the employment or is there some other reason?

In HMRC v Julian Martin, Judge Warren expressed this as:

“When it comes to ascertaining whether a payment made by, rather than to, an employee is negative general earnings, the search must again, in my view, be for the reasons for which the payment was made. The question, I consider, remains whether the payment is from the employment—or to use what is perhaps a better phrase in the context of a payment by, rather than to, an employee, whether the payment arises directly out of the employment—or for some other reason.”

In summary, we are looking for a payment made by an employee to another person (this is most likely to be the employer but there may be circumstances in which a payment to a third party might qualify) that the employee makes for a reason that directly relates to the employment. See EIM00610 for an explanation of the important principles to consider when deciding whether something is within the meaning of “from the employment”.

Payment to a third party

In HMRC v Julian Martin, at paragraph 58, Judge Warren indicated that for an amount to count as negative taxable earnings it must involve a payment made by the employee to the employer. However, he acknowledged, reflecting the principle derived from *Shilton v Wilmshurst *(64TC78), that there might be circumstances in which a payment by the employee to a third party will qualify.

The facts in Shilton v Wilmshurst were unusual (see EIM00700), involving the payment by the old employer of an amount to induce the employee to accept employment with a new employer.  The amount was held to be chargeable to tax as employment income by virtue of being earnings from the new employment. In a similar case, if the payment were to be offered and accepted on terms that require the employee to pay an amount to the old employer in the event of the new employment being terminated within two years, then an amount paid may count as negative earnings of the new employment.