#2414 - Taxation Law Problem Question - Tax Law

From 2008, A is employed as a foreman carpenter by B Ltd, an Oxford firm that specialises in restoring period properties in Oxfordshire and Gloucestershire. A, who lives in Witney (12 miles from Oxford, and 10 miles from the Gloucestershire border) is required to work at B’s head office in Oxford, to supervise carpentry work at any property that is being renovated, and when he is not so engaged , to work as a carpenter.

He is regularly telephoned at home by his employer to advise him where he should go for his next assignment, and to tell him what needs to be done. A, thereafter, often makes telephone calls from home to other employees of B Ltd, as well as to their suppliers and to other sub-contractors. A provides his own transport , a small van.

In addition to his basic salary of 2,500 per month , A receives an annual allowance of 1000 because he is a member of the Federation of Master Carpenters. He is paid a mileage allowance of 40 pence per mile for journeys between the Oxford office and the sites he visits. He is paid this rate (calculated as starting from Oxford) even on journeys, for example to Gloucestershire, which begin from home and involve a lower mileage. He also receives occasional cash gifts from the owners of houses where he has worked; and one grateful owner, O, allowed A to use O’s gite in France for a week, free of charge. At the last minute, A was unable to go, but his wife and her sister went instead.

A incurs the following expenditure:

(a) provision and replacement of his own tools (on average 300 p.a .)

(b) membership of the Federation of Master Carpenters (100 subscription )

(c) provision of carpentry overalls , which he wears only at work (average cost 100 p.a.)

(d) purchase of Country Houses, a magazine which contains features about period houses, and which A regards as essential for his work (subscription cost 200 p.a.)

Advise A on his tax liability in respect of the above for the tax year 2010-11.

Would your answer be different if the items in (a) to (d) above had been provided (at no cost to A), by B Ltd?

To calculate A’s tax liability, we must determine whether he is an employee¹ or self-employed²: this is important because the tax treatments are different in each case.

Beginning with ITEPA, S.4 provides a “non-exhaustive” list of arrangements that constitute an employment. The basic distinction is between a contract “of” services and a contract “for” services: there has been a variable list of factors for determining whether it is a contract “for” or “of” services: the “control” over the person test is present in Ready Mixed Concrete v. MPNI and Addison v. London Philharmonic, however Addison goes further in suggesting other factors, namely who bares the prospect of profit or risk of loss, whether the individual was properly regarded as part of the employer’s organisation at the time, who provides the capital, what the parties’ own view of the relationship is and provision of capital. Lightman J in Barnett v Brabyn described the factors that are relevant to deciding employment status as ‘badges of potential significance’: as such there is no one thing that can determine the question but instead the court will look at the issue in its context.

The contract between A and B Ltd indicates A is “required to work at B’s head office in Oxford, to supervise carpentry work at any property that is being renovated, and when he is not so engaged, to work as a carpenter.” This “when he is no so engaged” does not suggest self-employment but simply a different task for A to do when he does not have his primary task of supervision. As such, he is under the control of his employer – (“to tell him what needs to be done”) and the intention of the parties indicates such a contract “of” services – (“A is employed as a foreman carpenter by B Ltd... his basic salary of 2,500 per month”). [WELL ARGUED, THOUGH AS I SAID IN THE TUTE IN A FUTURE PROBLEM IF IT SAYS ‘EMPLOYED’ YOU CAN TAKE IT AS READ]

Having determined that A is an employee, we arrive at his tax liability by addressing the steps given in s.218 of ITEPA:

1) Find the total amount of earnings from the employment for the year [s.218 (1)a]

2) Add the amount to be treated as earnings under the benefit code [s.218 (1)b]

3) Deduct the authorized expenses [s218 (1) STEP 2]

We shall address these parts of the calculation in the order stated by the Statute.

1)The total amount of earnings from the employment for the year

The contentious issue in this calculation is determining when an earning is from employment: A makes 4 gains: the “basic salary of 2,500 per month”, “annual allowance of 1000” and the “occasional cash gifts from the owners of houses” and the use of the gite in France³

If these are earnings from employment, they increase his tax liability by making his taxable earnings greater.

The General rule

In Hochstrasser v Mayes, Lord Radcliffe stated that for an earning to be “from” employment, it must be “paid to him in return for acting as or being an employee”. [GOOD] This case established the principle that the employment is the reason for the payment.

The basic salary of 2,500 per month is paid to A “in return for him being an employee”, such is the nature of a salary, and therefore it constitutes taxable earnings, as it is “from employment”. [AGREED]

The annual allowance of 1000 is more problematic as the payment does not come directly from his employers, B Ltd, but rather takes the form of an annual allowance, resulting from his membership of the Federation of Master Carpenters. [TRUE, IT’S AMBIGUOUS ON THE FACTS AS COULD ALSO BE FROM B LTD IN WHICH CASE I THINK IT LOOKS A LOT LIKE AN INCIDENTAL BENEFIT IN MONEY AND THUS EARNINGS]

Lord Templeman in Shilton v Wilmshurst stated “there is nothing in the authorities to justify inference that an “emolument from employment” only applies to an employment provided by a person who has an interest in the performance by the employee”. As such, third party payments are not precluded from forming part of an employee’s taxable earnings simply because they are made by someone other than the employer. [EXCELLENT] However, the payment must be “caused” by the employment – if the payment is caused by something other than services, it is not taxable, as held in Bridges v Bearsley. There is conflicting indicia in A’s situation as to whether the “annual allowance” is from employment or not: on the one hand, the words “because he is a member of the Federation of Master Carpenters” suggest that the payment is not caused by his employment but rather by his membership of a federation. However, the word “allowance” suggests this payment is caused by his work, and therefore by his employment, as the “allowance” is a sum set aside for an occurrence that may or may not come to pass – in this case, employment as a carpenter. This would indicate that this payment is only made when A is employed, and therefore is earnings from employment as it is paid to him in return for his being a carpenter. However this would depend on knowing whether this allowance is paid to A regardless of whether he is employed or not: if it is paid every year regardless, resulting from his membership of the federation, it would not constitute earnings from employment and would not be taxable.

The occasional cash gifts A receives: it must be determined whether these payments were a reward for services (and therefore taxable) or a gift made in “appreciation of an individual’s personal qualities” (and therefore not taxable). [GOOD] The case-law states a number of factors to be taken into account when deciding this: 1) the frequency of the payments 2) the scope of employees the payment is made to (many or only one employee) (Laidler v Perry) 3) who gives the payment (employer or third party) (Calvert v Wainwright) 4) whether the employee is entitled to the payment under his contract. [PERSONALLY I THINK THE ANALYSIS CAN BE MORE EFFECTIVE IF INSTEAD OF LISTING THESE FACTORS YOU JUST APPLY THEM AS AND WHEN IT MAKES SENSE. I THINK THAT COMES ACROSS AS MORE SOPHISTICATED AND IS PROBABLY QUICKER, THOUGH OF COURSE IT IS NOT WRONG TO LIST THEM FIRST AND THEN APPLY THE RELEVANT ONES] However, these factors are not conclusive, as seen in Seymour v Reed and Moorhouse v Dooland: Seymour concerned a cricketer who at the end of a “distinguished” career was entitled to all the receipts from his “benefit match” – these were held to be non-taxable because it was a personal gift not resulting from his employment, whereas Moorhouse concerned a hat being passed around after a match for spectators to give donations for particularly good play – these sums were held to be taxable earnings because of the frequency and that the contract stated the player was entitled to these sums. However, the result in these cases seems arbitrary: the frequency of the gift does not speak to the reason for which it was given: in Seymour, the money was paid as a reward for the player’s distinguished career – this is still a reward for services, and not a reward (as the Court found) for personal qualities. Further, it is arbitrary to draw a distinction in situations where a contract gives the employee the right to retain such gifts – this contractual term again does not speak to the reason the payment was given, but merely states the employee may keep it. In A’s situation, the payments came “from the owners of houses where he has worked”, this implies the money is a reward for services, despite the fact that the contract did not specifically state he is entitled to such gifts and the fact that...