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HMRC internal manual

Employment Income Manual

The benefits code: "by reason of the employment": expenses paid and benefits provided by someone other than the employer: third party benefits

Sections 62, 70(1)(b) and 201(2) ITEPA 2003, Part 7A ITEPA 2003

Expenses payments and benefits made or provided by someone other than the employee’s employer are often called “third party benefits”.

Such payments and benefits are within the rules in the benefits code (EIM20006) where they are made or provided “by reason of the employment” (EIM20501) under the normal meaning of those words. But they are not chargeable under those rules if they are otherwise chargeable as earnings, for example, under Section 62 ITEPA 2003. Examples of benefits which are chargeable as earnings are at EIM00530 onwards. Nor are they chargeable under those rules if they are chargeable under Part 7A ITEPA 2003 (Employment income provided through third parties - see EIM45000 onwards and EIM45705).

However, note that in order to come within the scope of Part 7A there must be a “relevant step” and the provision of a benefit will not necessarily fall within any of the defined types of “relevant step. See EIM45055.

In addition, note that as long as there is no tax avoidance involved, relevant steps taken by members of the same group of the companies as the employer are generally excluded from the application of Part 7A - see EIM45035

Interaction of “by reason of the employment” with Section 62 ITEPA 2003

It is important to understand the distinction between Section 62 on the one hand, and Sections 70(1) and 201(2) on the other hand. Section 62(1) applies to earnings “in relation to an employment”, including anything that is an “emolument of the employment” (Section 62(2)(c)). Section 70(1) and Section 201(3) apply to expense payments and benefits provided “by reason of the employment”. Section 62 is based on what was previously Section 19 ICTA 1988, which charged to tax emoluments “from an employment”. Case law shows that the phrase “by reason of the employment” has a wider meaning than “from the employment” (EIM00600). The words “from the employment” are not reproduced in Section 62 but earnings chargeable under that section include emoluments “of the employment” and in this context “of the employment” has the same meaning as “from the employment”.

Case law guidance: by reason of the employment

In Wicks v Firth (56TC338) Lord Denning said that “by reason of the employment” covered cases where an employee would not have received a benefit unless he had been an employee. The employment must be one of the causes of the benefit being provided. It need not be the sole cause or even the main one. But it must be an operative cause in the sense that it was a condition of the benefit being granted.

In the same case Lord Oliver said that the question to ask is “what is it that enables the person concerned to enjoy the benefit?” If the answer to that question properly includes “the employment” as one of the factors then that is “by reason of” the employment.

In Mairs v Haughey (66 TC 273) Lord Chief Justice Hutton preferred Lord Oliver’s way of expressing the test. In particular where the employment was only an incidental factor in past history, and not a current reason for the benefit being provided, his view was that did not amount to “by reason of employment”.

These judicial comments were given as general observation and whilst they carry weight they are not a legally binding restriction on the meaning of the words “by reason of”. In practice you can normally assume that a benefit which is provided by someone other than the employer and which is plainly connected with the employee’s employment has been provided by reason of the employment.

However some third party benefits, small gifts and entertaining, are exempt from tax.