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Structure for Problem Questions - Employment income Basic structure: Step 1: Does T hold an employment?
Step 2A: Is there employment income? Does the income arise from employment? (s 9 ITEPA) Step 2B: Is it a gift from a third party? (s 62 ITEPA) Step 2C: Is it an employment benefit? (s 62 ITEPA, Benefits Code) Step 3: Are there any exemptions of payments and benefits?
Step 4: Are there allowable deductions? (s 336) Rate: Personal allowance of PS11,000 20% up to PS32,000 per annum 40% above this amount 45% for taxable income above PS150,000 Step 1: Does T hold an employment? (s 4 ITEPA) Fall v Hitchen introduced the general test of whether the contract was for services (selfemployment) or of services (employment). (s 4 ITEPA states 'any employer under a contract of service)?Largely the test looks at the wider economic reality and the degree of integration of the taxpayer into his paymaster's business: In Hall v Lorimer, a freelance mixer provided services to a number of production companies under short term contracts, and court held that he was in business on his own account, and hence self-employed. This was also the test in Market Investigations. o In doing so, per Lorimer, 'The object of the activity is to paint a picture from the accumulation of detail. The overall effect can only be appreciated by standing back from the detailed picture which has been painted, by viewing it from a distance and by making an informed, considered, qualitative appreciation of the whole'. The test was also applied in Addison v London Philharmonic: o The applicants were musicians who performed with the respondent's orchestra on a sessional basis. They were not employees. o Waterhouse J: 'There was a binding finding of fact in the Tribunal that there was some degree of control by the respondent while the applicants were working, but no more than was required by the very nature of the work. In short, therefore, we do not consider that the argument on control could be regarded in any way as a
odecisive pointer to a contract of service in the light of the tribunal's findings of fact.' [Some control is not decisive if it is no more than is required by the nature of the job]
The court then applied the test in Market Investigations: 'The most that can be said is that control will no doubt always have to be considered, although it can no longer be regarded as the sole determining factor; and that factors which may be of importance are such matters as whether the man performing the services provides his own equipment, whetherhe hires his own helpers, what degree of financial risk he takes, what degree of responsibility for investment and management he has, and whether and how far he has an opportunity of profiting from sound management in the performance of his task.' Each applicant remained essentially a free-lance musician. It may be that they became part and parcel of the respondent's orchestra for specific performances but not essentially of the respondent's business.
A three-tier test is proposed by MacKenna in Ready Mixed Concrete: A contract of service exists if (1) the servant agrees that, in consideration of a wage or other remuneration, he will provide his own work and skill in the performance of some service for his master; (2) he agrees that in performance of that service he will be subject to the other's control in a sufficient degree to make that other master; (3) and the provisions of the contract are consistent with its being a contract of service. The test was 'wide enough to take account of investment and loss, in determining whether a business was carried on by a person for himself or for another it was relevant to consider who owned the assets or who bore the financial risk'. o Various indicators considered by McKenna J in Ready Mixed: o 1. A contract which obliges one party to build for the other, providing at his own expense the necessary plant and materials. This is not a contract of service (i.e. not employment), even though the builder may be obliged to use his own labour and accept a certain degree of control: it is a building contract. o 2. A contract obliges a labourer to work for a builder, providing some simple tools and accept the builder's control. The contract is one of service (i.e. employment); the obligation to provide simple tools is not inconsistent with the nature of a contract of service and not sufficiently important to affect the substance of the contract. o 3. A contract obliges one party to work for the other, accepting his control and providing his own transport. This is a contract of service; the obligation to provide his own transport does not affect the substance. o An obligation to do work subject to the other party's control is a necessary, though not always sufficient, condition of a contract of service. o On the facts of the case, the contract with L was a contract of carriage, not one of service: L is obliged to make the vehicle available, and he must maintain it, hire a competent driver to take his place and must do whatever is needed to make sure a vehicle and driver are available throughout the contract period. He must do all this at his expense. He has enough freedom to qualify as independent: He is free to decided whether he will maintain the vehicle by his own labour, to decide who to employ and on what terms, to use another's services and to choose a competent driver to take his place (also in that whoever he appoints will be his servant and not the company's).
Emphasis on the genuine intentions of the contracting parties in Autoclenz v Belcher: o The claimant carried out a car cleaning service on behalf of the respondent company; they signed contracts stating they were sub-contractors and not employees. o The court held that it can disregard the wording of the contract if it does not reflect the reality of the working relationship between the parties: 'In the employment context, the courts must be alive to the possibility that written documentation may not accurately reflect the reality of the relationship between the parties'. o Lord Clarke stated that the relative bargaining power of the parties must be taken into account in deciding whether any of the terms of the written agreement in truth represent what was agreed.
Several employments or one profession? 'Series of engagements' cases. Compare Davies v Braithwaithe, Fall v Hitchen and Hall v Lorimer
? In Davies v Braithwaithe, B acted acted in the UK and had separate contracts for each appearance. She also recorded and appeared in plays. She acted in a play in new York and argued that it was an employment and as such she would be taxable at that time only on such sums as she remitted to the UK. The Revenue argued that it was one engagement in her profession as an actress, and she was taxable under Schedule D (now ITTOIA - profits of trades and professions i.e. self-employed). The Revenue won.
? Rowlatt J said: 'Where one finds a method of earning a livelihood which does not contemplate the obtaining of a post and staying in it, but essentially contemplates a series of engagements and moving from one to the other... then each of those engagements could not be considered an employment, but is a mere engagement in the course of exercising a profession, and every profession and every trade does involve the making of successive engagements and successive contracts and, in one sense of the word, employments'. [focus on the totality of the actress' activities]
? The approach in Fall v Hitchens was different. In the case, a professional ballet dancers was held to be liable to tax under Schedule E (ITEPA) in respect with one particular company because that contract, looked at in isolation, was one of service and not one for services. [focus on a particular contract]
? Davies v Braithwaite was resurrected in Hall v Lorimer: The court may look at whether the taxpayer is in business and so see how the contract fits with the taxpayer's overall activities. Therefore, a vision mixer who worked for 80 days over a four year period on one or two day contracts was held to be taxable under Schedule D (ITTOIA - business income) rather than Schedule E (ITEPA - employment income) [focus on the totality of the mixer' activities]Further guidance in Inland Revenue guideline, IR 35: 'Where an IT consultant is engaged to undertake a specific piece of work and must work exclusively at home using the worker's own computer equipment that will be a strong pointer to self-employment. But where a worker is provided with office space and computer equipment that points to employment'. In addition, it also clarifies that the right to send a substitute suggests that the personal relationship inherent in an employment contract is not present (Ready
Mixed Concrete). Other factors: the number of clients worked for throughout the year, the length of engagement, basis of payment, opportunity to profit from sound management, whether the work is 'part and parcel' of the client's organisation, employee benefits, the right of dismissal, and intention'. Step 2A: Is there employment income? Does the income arise from employment? (s 9 ITEPA) Relevant test: Does the payment arise from employment?
? Hochstrasser v Mayes o An employer was transferred, and the company reimbursed capital loss on the sale of his house. It was held not to be payment from employment. o 'The payment must be made in reference to the services the employee renders by virtue of his office and it must be something in the nature of a reward for services past, present or future'.
? Shilton v Wilmshurst: o A former goalkeeper received payment from the club he left. The court held that such third party payments were taxable even if the third party did not have an interest in the performance of the employment contract. o 'It is not limited to emoluments provided in the course of employment; the section must therefore apply first to an emolument which his paid as a reward for past services, and second, to an emolument which is paid as an inducement to enter a contract of employment and to perform services in the future. The result is that an emolument "from employment" means an emolument "from or becoming an employee"'.
? Wilson v Clayton (recent case); o The payment was made under a compromise agreement for unfair dismissal. It was not taxable under the general charging provision. o Peter Gibson LJ reasserted the role of the 'reward for services' test: 'It is not enough that C would not have received the employment but for having been an employee. It is not a payment in return or as a reward for being an employee. It is not an inducement to enter into employment or to provide future services. If one looks at for what reason it was paid, the answer is obvious. It was to compensate Mr Clayton for the unfair dismissal'. Specific cases
? *Mairs v Haughey: o Payments to compensate for loss or relieve distress were not taxable, certainly if they were only payable under certain circumstances after the employment has come to an end.
? Owen v Pook: o The taxpayer was a general medical practitioner who had to be stand by and accessible by telephone. Under the terms of his employment, the hospital paid his travelling expenses. o It was held that the travelling allowance was a reimbursement for actual expenditure and not an emolument of the employment. Instead, 'The allowances were used to fill a hole in his emoluments by his expenditure on travel'.
*Laider v Perry: sums might be taxable even though they are rewards e.g. sums in the hope that employees will produce good services for the future, like Christmas gifts. Step 2B: Is it a gift from a third party? (s 9, 62 ITEPA)?The general test is laid out in Moorhouse v Dooland: o In the case, D was a professional cricketer, and under club rules he was entitled to money every time he scored a certain wicket. D qualified for talent money in two seasons. The court held that this was a remuneration for services rendered, as D had a contractual right to the collection and it was only given whenever he performed well [indicators of remuneration for services]. Contrast to Seymoure v Reed below, where S only had one benefit, and his payment was a large one given at the end of his career. o 1. The test of liability to tax on a voluntary payment made to the holder of an office or employment is whether, from the standpoint of the person who receives it, it accrues to him by virtue of his office or employment or, in other words, by way of remuneration of his services. o 2. If the recipient's contract of employment entitled him to receive the voluntary payment, that is a strong ground for holding that it accrues by virtue of the office or, in other words, is a remuneration for his services. o 3. The fact that the voluntary payment is of a periodic or recurrent character affords a further, though less cogent, ground for the same conclusion. o 4. On the other hand, a voluntary payment may be made in circumstances show that it is given by way of present or testimonial on grounds personal to the recipient. In such cases, the proper conclusion is likely to be that the voluntary payment is not a profit accruing to the recipient by virtue of his office or employment, but a gift to him as an individual, paid and received by reason of his personal needs or by reason of his personal qualities and attainments. Seymour v Reed o A professional cricketer was granted benefits on the express understanding that he allowed the proceeds to be invested in the name of trustees. The invested sum was to be handed over at the end of his career. The sum was a personal gift. o This was based on the fact that the terms of his employment did not entitle him to a benefit; that it was granted to provide an endowment for him on retirement; and it was granted only once. o 'Its purpose is not to encourage the cricketer to further exertions, but to express the gratitude of his employers and of the cricket-loving public for what he has already done and their appreciation of his personal qualities.' Moore v Griffiths o Concerned the payment of bonuses by the FA to England's winning team. The payment was not from employment, for services rendered. o Payments are more likely to escape tax where it is made only once. It was considered important that 'the payment had no foreseeable element of recurrence'. In addition, the same amount was given to each player irrespective of whether he played or not.
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