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HMRC internal manual

Employment Income Manual

Employment income: scholarship income: taxable as trading or employment income?

Section 776 IT(TOI)A 2005 (Section 331 ICTA 1988)

Although the existence of Section 776 (previously Section 331) as an exempting section suggests that scholarship income of the holder of the award would otherwise be chargeable to tax, this is not necessarily the case. Before considering whether the Section 776 (Section 331) exemption applies it will normally be necessary to consider whether the income is taxable in the first place.

If the sums concerned are taxable as earnings from an office or employment the “scholarship income” is likely to be chargeable to income tax on the holder. The concepts of “earnings” and “scholarship income” are mutually exclusive. However, if there is no office or employment then the income cannot be taxable as employment income. For example, student maintenance grants made available by grant awarding bodies do not constitute taxable income. This is because no income tax liability arises on first principles, not because any such liability is exempted by Section 776 (Section 331). In order to tax the payments as employment income you must be able to demonstrate that the income was received in respect of an office or employment and not under a contract of training. Detailed guidance on offices, employments and contracts of training can be found in the Employment Status Manual (see ESM2505 onwards).

If there is neither an office nor an employment then a charge may arise under the Trading Income rules. For further guidance on any charge under the Trading Income rules see BIM65151.

Where the student comes from overseas the taxation position may be affected by a double taxation agreement. In such cases see DT1930.

Only if there is a taxable source do we need to consider whether the income is exempt from tax under Statement of Practice 4/86 (see EIM06235) or as a scholarship by virtue of Section 776 (Section 331) (see EIM06205 onwards).