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HMRC internal manual

Employment Income Manual

Employment income: negative earnings: timing

Actually paid

For an amount to be (positive) taxable earnings of a tax year, it must be received in that tax year. Section 18 ITEPA explains when an amount that is earnings consisting of money is treated as received (see EIM42260).

There is no equivalent provision for negative earnings. However, in HMRC v Julian Martin, Judge Warren held that a requirement for an amount to be negative earnings, and so be taken into account in determining the overall amount of TE from an employment in a tax year, the amount must be paid by the employee in that tax year. As there is no equivalent to Rules 2 and 3 of section 18, this must be regarded as referring to actual payment rather than simply incurring the liability to pay.

An amount received after the termination of an employment may be (positive) taxable earnings from that employment in respect of the tax year in which it is received. Section 16 ITEPA makes provision for determining which tax year earnings are “for”. It applies where the amount received can be properly attributed to any tax year (or part of a tax year) in which the employment was held. However, it is possible for earnings to be received after an employment ended that cannot be attributed to a tax year in which the employment was held. Section 17 ITEPA applies where earnings from an employment would otherwise be regarded as for a tax year in which the employee did not hold the employment and describes the treatment of earnings that are for a tax year in which the employment was not held (see EIM40005). Under section 17(3), where earnings would otherwise be “for” a tax year falling after the last tax year in which the employment was held, those earnings are treated as being “for” the last tax year in which the employment was held.

It is important to identify which tax year earnings are “for” only for the purpose of determining whether the remittance basis rules and the rules for non-UK resident employees might apply for calculating of TE.

There are no equivalent provisions for negative earnings.  However, in HMRC v Julian Martin, Judge Warren held that where there is a payment by the employee to the employer made after the employment has terminated, the amount may be taken into account in calculating TE. For example, although Mr Martin paid the full amount that he was required to pay to his employer within the same tax year that the employment ended, payment was in three instalments, two of which were made before the agreed termination date and one after that date.  The full amount was taken into account in calculating TE in respect of that employment for that tax year (i.e. the tax year in which the employment ended).