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HMRC internal manual

Employment Income Manual

The year that earnings are “for”: the approach to take

Lord Oliver’s approach set out in Bray v Best (61TC705) at page 752 should be observed when determining the year that earnings are “for”:

“The period to which any given payment is attributed is a question to be determined as one of fact in each case, depending upon all of the circumstances, including its source and the intention of the payer so far as it can be gathered either from direct evidence or from the surrounding circumstances”.

Finding out the facts

An essential starting point is to obtain contemporaneous evidence. This may include all or any of the following:

  • an understanding of the intention of the employer in developing the incentive programmes
  • bonus plans
  • award letters
  • notes of meetings
  • correspondence between the parties
  • obtain an analysis of amounts paid out
  • an explanation of how awards are treated in the employer-company accounts

These documents may indicate the understanding of the parties regarding the performance period that awards are intended to be “for”. The intention of the employer as disclosed to the employee and the understanding of the employee are particularly significant.

Unsubstantiated recollections of the employee regarding intention should be considered but given less weight than contemporaneous documented statements.

If plan documents and contemporaneous information do not provide clarity, it’s reasonable to make inferences from available evidence.

You may ask the Large Business Team or Customer Compliance Manager dealing with the Corporation Tax affairs of the employer company how the bonus awards have been treated in the employer company accounts. The company may claim a deduction for a single year or may create provisions to spread the deduction over a longer period. This may indicate the period the employer considers the award to be “for”. The accounting treatment is not conclusive, but it is significant. In the absence of clear statements in the plan documents the accounting treatment may be evidence of the employer’s understanding of what the scheme was intended to achieve.

Lump sums may be made up of amounts arising from different bonus periods and different deferred remuneration plans. If component amounts are “for” different tax years, different rules within Part 2 Chapters 4 and 5 may apply, to produce different liabilities to Income Tax.