INCOME FROM EMPLOYMENT

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INCOME FROM EMPLOYMENT
Theory and practice of taxation AModule
codeC33TA1 Lec 4

• Employment Income Salary, bonus, commission
  XBenefits in kind XShare
  incentives and options XPayments on
  retirement XRedundancy and termination
  payments XIncome from pensions
  X XLess Allowable expenses
  
  (X)Less Allowable pension contributions
  qualifying for relief (X)
  Total assessment X

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Employment Income 1

• Tax is charged on earnings from employment
  (includes an office) ITEPA S6
• Earnings include all salaries, fees, wages,
  profits etc
• Employment is normally evidenced by a contract of
  service not for services. McManus v Griffiths CHB
  1997

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Employment Income 2

• Gifts and voluntary payments unconnected with an
  employment are not taxable
• Reed v Seymour 1927Moorhouse v Doorland
  1954Benefit matches
• Moore v Griffiths 1972 Bonus
• Calvert v Wainwright 1947Tips
• Shilton v Wilmhurst 1990Inducement fee

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Benefits in kind 1Income from employment 4

• a General charging provision
• b Employee status and benefits assessable
• c Tax free benefits
• d Entertainment

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Benefits in kind 2Income from employment 5

• a General charging provision
• Where any benefit is provided for an employee or
  members of his family, by reason of his
  employment, the employee will be charged to tax
  on
• the cash equivalent value of the benefit

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Benefits in kind 3Income from employment 6

• b Employee status and benefits assessable
• Employees earning less than 8,500 p. a.
• Employees earning 8,500 or more and directors

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Benefits in kind 4Income from employment 7

• Determination of the 8,500 level
• Remuneration must be aggregated with expense
  payments and other benefits
• The aggregate is determined before any allowable
  expense deduction is made (other than
  superannuation contributions or amounts deducted
  under a payroll giving scheme)

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Benefits in kind 5Income from employment 8

• 8,500 level illustration
• Salary, less superannuation
  XCommission
  XReimbursed expense
  XBenefits in kind
  X Higher paid level gt 8,500 X
  
  Less allowable expense deduction X Total
  assessment X

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Benefits in kind 6Income from employment 9

• Benefits assessable on employees earning less
  than 8,500
• Benefits are taxable if they can be converted
  into moneysworth the cash conversion test.
  Tennant v Smith 1892
• This will normally be the second-hand value of
  the benefit
• Benefits which are not convertible into cash are
  not taxable. For e.g.
• Interest free loans, private use of company car
  etc.
• Note that certain benefits are assessable
  regardless of the convertibility test.

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Benefits in kind 7Income from employment 10

• Benefits assessable on all employees /directors
• Provision of living accommodationNon-cash
  vouchersCash vouchersCredit cardsShare
  incentive and options

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Benefits in kind 8Income from employment 11

• Benefits assessable on employees earning 8,500
  or more
• Benefits are assessable on the cash equivalent
  value. This is, broadly, an amount equal to
• the marginal cost incurred by the employerPepper
  v Hart 1992
• less any amount paid by the employee

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Benefits in kind 9Income from employment 12

• Benefits assessable on higher paid employees
  (gt8,500) and directors
• Cars or vans provided for private use
• Fuel provided for private use
• Beneficial loans
• Assets loaned to employee for private use
• Ancilliary services connected with living
  accommodation
• Services supplied to the employee or their family
  (e.g. payment of school fees)These benefits
  dealt with later

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Benefits in kind 10Income from employment 13

• c Tax free benefits
• Specifically excluded from tax are Car parking
  expenses Canteen facilities Child care No
  additional cost services Routine medical
  check-ups Provision of sports facilities Directo
  rs liability insurance Training course
  expense Luncheon vouchers (first
  15p) Incidental overnight expenses (5 per night
  in UK, 10 abroad)

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Benefits in kind 11Income from employment 14

• d Entertainment
• Entertaining expenses incurred by employeeThese
  are not allowed as a deduction from employment
  income.
• However, if the employer a reimburses these
  expenses or b pays the employee an
  entertainment allowance
• then the expenses may be offset against the
  amounts received

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Benefits in kind 12Income from employment 15

• Entertaining expenses incurred by employer and
  third parties
• Gifts up to 250 p. a. by third parties are not
  assessable
• Social functions are not taxable benefits
  provided they are reasonable (not gt 150 per head)

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Basis of assessment 1Income from employment 15

• The basis of assessment for income from
  employment for a tax year (2006-07) is the income
  actually received in that year (i.e. from 6 April
  2006 to 5 April 2007)

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Basis of assessment 2Income from employment 16

• a) Receipts basis of assessment
• b) Determination of date of receipt
• c) Circumstances where receipts basis does not
  apply

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Basis of assessment 3Income from employment 17

• a) Receipts basis of assessment
• Employment income is assessable in the year of
  assessment in which they are received
• This is regardless of whether the employment is
  held at the time of receipt or
• whether the income relates to the year of
  receipt or to a different yearITEPA 03 S18

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Basis of assessment 4Income from employment 18

• a) Receipts basis of assessment exampleMr.
  Curry was employed at a salary of 25,000 for the
  year 2006-07. He also received commission paid by
  reference to the profits, as shown in the
  accounts of the company, as follows Year ended
  31 December 2005 (paid 5/5/06) 3,900 Year
  ended 31 December 2006 (paid 28/4/07) 5,500He
  is not a director of the companyShow Mr. Currys
  Employment Income for 2006-07

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Basis of assessment 5Income from employment 19

• a) Receipts basis of assessment example Mr.
  Currys Employment Income for 2006-07Salary 25
  ,000
• Commission 3,900 28,900
• Earnings are charged to tax in the tax year in
  which they are received, irrespective of the year
  in which they are earned. Therefore Mr Currys
  commission received on 5/5/06 is all charged in
  2006-07 and not in the tax years in which it was
  earned (part 2004-05 and part 2005-06)

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Basis of assessment 6Income from employment 20

• b) Determination of date of receipt
• Date of receipt is the earlier of the following
• date when payment is made of, or on account of,
  earnings
• date when a person becomes entitled to payment
  of, or on account of, earnings
• Where a person is a director of a company the
  earliest of
• date the income is credited in the companys
  record
• the last day of a period of account, if the
  earnings for that period have already been
  determined and
• the date the earnings are determined, if this
  falls after the period of account

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Basis of assessment 7Income from employment 21

• c) Non-application of receipts basis
• benefits in kind
• charged to tax at the time when, or in the
  period in which, the benefit is provided
• pensions
• payments on retirement
• redundancy and termination payments
• payments associated with share incentives and
  options
• these will be dealt with later