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HMRC internal manual

Employment Income Manual

Employment income: professional remuneration: exemption for charge to income tax under Part 2 of ITEPA: conditions to be met

Section 6(5) ITEPA 2003, section 16C ITTOIA 2005, section 40B CTA 2009

As shown at EIM03000, income from an office or employment may be exempt from income tax under Part 2 of ITEPA and treated instead as ordinary professional receipts. Section 16C of the Income Tax (Trading and Other Income) Act 2005 and section 40B of the Corporation Tax Act 2009 set out the conditions that must be met before this treatment can be allowed.

The treatment can be allowed where:

  • a payment is received by an individual who carries on a profession (alone or in a partnership)
  • the payment is made to the individual in his or her capacity as an employee or office-holder, but is not made in respect of employment as a director of a company
  • the payment would otherwise be employment income of the individual chargeable to tax under Part 2 of ITEPA
  • where the individual carries on the profession in partnership, the individual is required by the terms of the partnership agreement to account to the firm for the payment and does so

Where this is the case, the payment is to be treated for income tax purposes as a receipt of the trade carried on by the individual or, where the individual carries on the profession in partnership, by the firm if the following conditions are met:

  • the time spent by the individual in performing the duties of the office or employment is insubstantial compared with the time spent by the individual in carrying on the profession
  • the office or employment is related to the profession carried on by the individual (see EIM03003)
  • the amount of the payment is insubstantial compared with either the total amount brought into receipt when calculating the individual’s trade profits or, where the individual carries on a profession in partnership, so much of the total amount brought into account when calculating the firm’s profits as is attributable to the individual

For further information regarding the term “insubstantial” see EIM02502.

Where the fees are derived from the directorship of a company, see EIM02500 to EIM02503.