Employment Tax Notes

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 11,000

20% up to 32,000 per annum

40% above this amount

45% for taxable income above 150,000

Step 1: Does T hold an employment? (s 4 ITEPA)

• 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.

  • 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:

  • The applicants were musicians who performed with the respondent’s orchestra on a sessional basis. They were not employees.

  • 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 decisive 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’.

  • Various indicators considered by McKenna J in Ready Mixed:

  • 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.

  • 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.

  • 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.

  • 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.

  • 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:

  • 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.

  • 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’.

  • Lord Clarke stated that the relative bargaining power of the parties must be taken into account in deciding whether any of...

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