Income Tax Earnings and Pensions Act (ITEPA) Section 4 and Section 9 - Employment and Tax Setup UK


Income Tax Earnings and Pensions Act (ITEPA) is the act that was introduced in 2003 with amendments in the following years. The Section 4 of ITEPA highlights ‘Employment for the purposes of employment income’ and Section 9 checks if the living is earned from the employment income.

To check if employment is hold by T (ITEPA Section 4)

 

The subject of focus in this section is an employer under a contract of service. The contract can be of two types namely employment (of services contract) or self-employment (contract for services)

 

Tests Involved:

 

The test performed on various UK Company Incorporations focused widely on economic truthfulness and how integrated is the payer of tax into business of his paymaster.

 

In the case of Lorimer, a freelance mixer gave services to UK Company Incorporations (production companies) as short term contracts and the court declared that he was self-employed as he owned a business with his own account. The test was also employed in Market Investigations whereby the activity object is supposed to paint a picture from the provided detail and is approved if it confirms quality, is informative and gives the complete appreciation.

 

When the test was performed in Addison case, it included musicians applicants who were not employees and performed seasonally with the orchestra of the respondent. According to Waterhouse J, It was noted that the respondent had some degree of control (not more than the nature of work) during the work of applicants. Hence, the degree of control could not be chosen as a deciding factor to find the type of contract of service. If the control does not exceed with what is required for the job, it does not remain a deciding factor.

 

When the test was applied in Marketing Investigations, it was inferred that control is not merely the deciding parameter, there can be other important factors such as: whether the person performing the services hires his own helpers, whether he supplies his own equipment, how much management and investment responsibility and financial risk does he take and how much can he benefit from the management while doing his task. It was concluded that every applicant could be labelled as a free-lance musician and they might prove important for the respondent’s orchestra but not necessarily for the business of the respondent.

  

Three-tier Test:

 

As introduced by MacKenna for Ready Mixed Concrete, the three-tier test determines the existence of contract of service under the following conditions:

 
  • If given a suitable pay, the servant agrees to perform his own skill and work as a service to his master
  • The servant agrees to be under the control of the master to some extent in performing the desired service
  • It is proved through the contract provisions that it is indeed a contract of service
 

The test performed was able to cover the accountability of loss and investment, in order to check if the person who performed business formation UK was for someone else or for himself considering the fact that who was the owner of assets or was liable to the financial risk.

 

McKenna J considered the following determining factors in Ready Mixed:

 
  • A contract is considered as a contract of service if makes one party to work for the other, in acceptance to be under control and providence of own transport. However, the transport is not necessarily a determining parameter.
  • A contract is not considered a contract of service (employment) that makes one party use own materials and plants to build for the other. It will be named as a building contract.
  • A contract is considered a contract of service (employment) if it makes the labourer to work for the builder in return of builder’s control and accepting few simple tools. These tools are not sufficiently a determining factor for the nature of contract.
  • An insufficient yet necessary condition of a contract of service is to perform the work under the other party’s control.
  • In case of a contract of carriage, a person was supposed to maintain the availability of a vehicle by hiring a driver who is also available during the period of contract and the expense should be borne by the person. He is free to decide the labour and terms for employees and the driver hired will be under his command, not the company’s.
 

Autoclenz case - Intentions of Contracting Parties after business formation UK

 

The claimant performed the cleaning of a car on respondent company’s behalf, a contract was signed that they were not employees, but sub-contractors. The court said that the wording of the contract would be in contradiction with the actual relationship between the parties. In order to check whether the agreement was being practically followed, the negotiation power of the parties must be focused on.

 

To Check if the Person has Single Profession or Series of Engagements (Multiple Employments)

  

A comparison of Davies case, Lorimer case, and Hitchen case:

 

In the United Kingdom, a person had distinct contracts for every appearance and worked in plays and recordings. An argument occurred between her and the revenue when she performed in a play in New York. She was of the view that it came under employment and she would be liable to taxes under that employment while the Revenue was of the view that it was a single engagement which was under the profits of trades and professions - ITTOIA (former Schedule D) and was self-employed. The revenue’s argument was given more weightage and was accepted.

 

According to Rowlatt J, if a person earns a living through a post but does not intend staying at it permanently and keeps switching engagements instead, then these changing engagements cannot be labelled as employment. However, every profession in company formation UK includes series of engagements, and can be summed up to be called as one single employment.

 

Contrary to this, the case of Hitchens, a group of professional ballet dancers under a contract in a particular company formation UK were considered under employment and were liable to Schedule E (ITEPA) since only that particular contract was focused on.

 

In the case of Lorimer, Davies case was revived. There is a chance that court observe that is the taxpayer in business and with the overall activities of taxpayer’s how the contract fits. Thus, a vision mixer for the period of four years worked for 80 days on a single or double day contracts. This kind of engagement was liable to tax under business income and not employment income, keeping in account the totality of mixer’s activities.

 

The guidelines in Inland Revenue further elaborate that if the worker uses his own computer and works at home, he is self-employed, whereas if he is provided with computer equipment and an office, he is employed. Also, the use of a substitute, as in Ready Mixed Concrete, points towards the absence of personal relationship inheritance.

 

Other parameters include:

 
  • Basis of payment
  • Length of engagement of clients
  • Amount of clients throughout the year
  • Employee benefits
  • Opportunity to profit
  • Importance of work in the client’s organization
  • Intention
  • Right of dismissal
 

To Determine if the Employment is a Source of Income (ITEPA Section 9)

 

In order to examine if a certain income comes from the employment, certain tests are performed as deciding parameters.

  

Test Performed:

 

To answer the following question: Is the payment acquired from employment?

 

Hochstrasser case:

 

Upon transfer of an employer, the capital loss that the company suffered was recovered by selling the employer’s house. Such payment was not considered a payment from employment. Hence concluded that payment from employment is the one which is obtained as a reward for past, present and future services.

 

Shilton case:

 

A goalkeeper who had left the club, received payment from that club. The court declared that such payments were also liable to tax even if the club had no interest in the employment contract.

 

The section should not only focus on the payments during the tenure of the employment but there should be 3 different categories in a contract referring to the payments in past, present and future respectively.

 

Recent case of Wilson:

 

In a case of firing an employee unfairly, a payment was made under an agreement for compensation and was not liable to tax according to general charging provision. The ‘reward of services’ test played its role in this regard and it was stated by Peter Gibson LJ that it was definite that the reward was for compensation and not for the services of the employee.

  

Let’s discuss some specific cases:

  

Mairs case:

 

The payments made to relieve distress and to make compensation of a loss were not liable to tax specifically when paid after the finishing of employment.

 

Owen case:

 

The case was of a medical consultant who had to be available and in reach via telephone. The hospital paid for the expenses of his travelling as decided in his employment terms. It was declared that the travelling expenses were not a payment of employment, rather it was a compensation to fill any void in his actual payments.

 

Laider case:

 

It was stated that the sums are liable to tax even if they are rewards like Christmas gifts. For example, sums hoping that company will benefit from the employees’ services in future.

 

Tests to determine if the Payment is a gift from Third Party

  

The following cases are the example of the test to determine if the Payment is a gift from Third Party:

  

Moorhouse case:

 

The case considered a professional cricketer who earned money each time he scored a wicket, under the rules of club. He qualified for this payment in two seasons. The court was of the view that the payment was for his services and he could collect it only when his performance was outstanding. On the contrary, in Seymoure, the cricketer received only one huge payment at the termination of his career. The following are some important decisions:

 
  • In case of a voluntary payment made to a person, the decision is made depending on the nature of his employment and payment of services.
  • If it is in the contract of the person to receive the voluntary pay, it may be a strong indicator of the payment to be a reward of his services.
  • Another determining factor, although not as forceful, is the periodic nature of the payments given to the recipient.
  • On the contrary, if the voluntary wage is given to the person at specific occasions as a reward, then it would not be covered under his office or employment pay but it may be an informal token of appreciation to admire his qualities and accomplishments.
 

Seymour case:

 

The case was of a professional cricketer as he invested money on some trustees. The calculated total amount was to be given to him by the termination of his career which was a personal reward. The terms signed in his contract did not involve such benefit, it was a one-time payment to be handed over at the time of his retirement. The purpose of this payment is to show gratefulness of the cricket lovers and employers towards him for what he has done in the past and the great personal attributes that he possesses, and not for the appreciation of future exertions.

 

Moore case:

 

England’s winning team was to receive a payment of bonus from the FA. The wage was for services performed and not for employment.

 

The kind of payments which are not repeated and made only once have higher chances of being exclusive of tax.

 

Also, each player was paid with the same amount regardless of the fact that he participated in the game or not.

 

Payment made by a third party have higher chances to be considered as a reward for personal attributes but the tips given for the performed services are liable to tax.

 

Calvert suggests that a tip which is awarded in a routine matter is liable to tax and in ordinary circumstances, will be assessable. However, if the tip is given as a reward at some special occasion as that of a holiday or Christmas, and the boss happily hands over some money as an appreciation for his attributes like faithfulness and loyalty, then it would not be taken under account and would not be assessed, and hence would not be liable to tax. So in such case, the payment would be a distinct one. However, a tip rewarded ordinarily as a payment for services comes under the rule of law and might be liable to tax.

 

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