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HMRC internal manual

Employment Income Manual

The benefits code: interaction of the benefits code with the taxing of payments and benefits received on termination or change of employment: continued

Part 3 Chapter 10 and Section 401 ITEPA 2003

Section 401 may apply to payments and benefits received in connection with a termination of employment (see EIM21007).

Change in the duties or earnings of employment

Section 401 may apply also to payments or benefits received when the duties of, or earnings from, the employment change but only where the payment or benefit is not otherwise chargeable to income tax (s401(3). Therefore before considering a charge under Section 401 you must first consider the alternative measures for taxing the payment or benefit (see EIM13000).

For instance, a payment that compensates for changes in the employment should be considered first under EIM00680 to decide if Section 62 ITEPA 2003 applies. If not, it should be considered next under EIM21001 to decide if Section 201 ITEPA 2003 and the benefits code applies. See Change of Practice below.

Under s201 a benefit is taxable if it is provided by reason of the employment. S201(3) determines (EIM20502) that a benefit provided by an employer to an employee inevitably satisfies this condition, unless

  • either the employee is an individual and the benefit was provided in the normal course of the employer’s domestic, family or personal relationships, or
  • the principle of fair bargain applies (EIM21004).

If neither s62 nor s201 applies, s401 should be considered as the final alternative.

Change of practice

Before 6 April 2003 where a payment or benefit provided in association with a change in employment did not fall to be taxed under Section 19 ICTA 1988, the Revenue’s longstanding practice was to treat the payment or benefit as taxable under Section 148 ICTA in priority to Section 154 ICTA.

But in the light of legal advice received during the rewrite of the Schedule E legislation in ICTA 1988 into the Employment Income legislation in ITEPA 2003, this order of priority was reversed from 6 April 2003. From that date where Section 62 ITEPA (the successor to s19 ICTA) does not apply, and either s201 ITEPA (previously s154 ICTA) or s401 ITEPA (previously s148 ICTA) could apply to tax the payment or benefit, s201 always takes priority over s401.

This change of practice was publicised at the time advice was received in 2003 in Tax Bulletin 65/03. HMRC does not believe that the change should affect many people as most payments made in recognition of a change in employment are taxable under s62. Consequently there is normally no need to consider either s201 or s401.

See EIM13010 for details of the types of benefits chargeable under s401.