Chapter 12: Payments treated as earnings
Overview
879.This Chapter deals with certain distinct types of payments that are treated as earnings. Thus the chargeable amounts to which these sections give rise constitute “general earnings” within section 7 of this Act.
Section 221: Payments where employee absent because of sickness or disability
880.Sick pay paid to an employee by an employer under the contract of employment will usually be chargeable as earnings under Chapter 1 of Part 3. This section derives from section 149 of ICTA and provides for payments in the nature of sick pay financed by employers through insurance policies and trust funds to be taxed in the same way. If the particular payment already falls within the scope of Chapter 1 of Part 3, this section does not apply.
881.It has to be inferred from section 149(1) of ICTA that a sickness payment is deemed to be earnings for the period of absence. Subsection (3) makes the position explicit.
882.Subsection (4) derives from section 149(2) of ICTA and ensures that where both the employer and the employees contribute towards the cost of providing sick pay, the benefits paid to employees are taxed only to the extent that the employer finances them.
883.Subsection (6) derives from section 149(1) and (3) of ICTA and ensures that payments to the sick employee’s family or third parties on behalf of the employee (or his family) are also taxable. The source provision uses the term “family or household”. In this section the reference to “household” has been dropped because the term has a different meaning in the benefits code. The range of persons covered is instead included in the definition of a person’s family in section 721(4) of this Act. This is a change of approach explained more fully in Note 27 in Annex 2.
Section 222: Payments by employer on account of tax where deduction not possible
884.This section derives from section 144A of ICTA, which was part of a series of provisions intended to counter difficulties in the application of PAYE where an employee was “paid” in a readily convertible asset eg a gold bar. Many of the provisions made changes to the PAYE vires. Broadly the effect of the changes was to treat the employer as making a payment equal to the amount of income represented by the readily convertible asset. These deemed payments are known as “notional payments” and the PAYE rules apply to them as they do to straightforward cash payments.
885.This particular section deals with one of the consequences of imposing PAYE on “notional payments”. It would not always be possible to “deduct” tax from such “notional payments” and PAYE tax may well be accounted for separately. In order to prevent the employee obtaining a tax advantage it is necessary to adjust the employee’s tax liability. If the employee does not reimburse the employer in respect of that liability within 30 days the section imposes an additional liability on the employee receiving the “notional payment”. The basic conditions for the section to apply are set out in subsection (1), which derives from section 144A(1) of ICTA. The PAYE provisions in Part 11 of this Act, as referred to in subsection (1)(a), omit those that are not about notional payments or contain only definitions.
886.Subsection (2) specifies that the amount of income tax due in respect of the notional payment is treated as earnings from the employment. It therefore reflects the amendment to section 144A(1) of ICTA made by paragraph 4 of Schedule 6 to FA 2002.
887.Subsection (3) derives from section 144A(2) of ICTA. The list of provisions referred to here matches those mentioned in subsection (1)(a) and (1)(b).
Section 223: Payments on account of director’s tax other than by the director
888.This section derives from section 164 of ICTA and denies a tax advantage to directors where their company pays their fees without deduction of PAYE and the company (or another person) then separately pays the PAYE due. If this were done, the cost to the company would be less than paying the equivalent gross fee subject to deduction of PAYE. The amount assessable on the director would be the amount actually received.
889.The section counters this device by treating the amount paid to the Board of Inland Revenue as earnings of the employment chargeable to income tax. It applies only to payments that fall within section 203 of ICTA. It does not apply to “notional payments” in respect of readily convertible assets that fall within section 222 above. It is the different nature of the respective payments that provides the main borderline between this section and section 222. The reference to “the Board” has been retained here (rather than changing to “the Inland Revenue”) so as to be consistent with the provisions dealing with the payment of tax.
890.The section applies only to directors. However the same device in the case of non-directors could fall within the scope of Chapter 10 of Part 3 of this Act (taxable benefits: residual liability to charge).
891.Subsection (1) derives from section 164(1) of ICTA and sets out the basic conditions for the section to apply. The source legislation says that the section applies where “the whole of that amount is not so deducted” (“amount” there means the tax due). This section makes it clear that the provision is not restricted to cases where nothing is deducted, but also applies where not all of the amount is deducted. The fact that section 164 of ICTA applies to partial deductions is clear from the reference in section 164(1) to the amount “so deducted”.
892.Subsections (2) and (3) clarify how the words in section 164(1) of ICTA “where in any year” are interpreted. This change in approach is explained more fully in Note 14 in Annex 2.
893.Subsection (4), which also derives from section 164(1) of ICTA, makes the amount of tax accounted for to the Board of Inland Revenue count as earnings of the director. The year of charge is made explicit. See Note 7 in Annex 2. The amount charged is subject to possible reduction under subsection (6).
894.Subsection (5) derives from the first proposition in section 164(3) of ICTA and provides a timing rule where the tax is accounted for in a year after the employment has ceased.
895.Subsection (6) brings together the provisions regarding the amounts to be deducted in arriving at the net taxable amount. Two of the rules derive from the last part of section 164(1) of ICTA and the other rule from the second proposition in section 164(3) of ICTA.
896.Subsection (7) derives from section 164(2) of ICTA.
897.Subsection (8) derives from section 168 of ICTA. It is necessary to bring the definitions into this section because this provision is not in the benefits code.
Section 224: Payments to non-approved personal pension arrangements
898.This section provides that an employer’s payments under non-approved personal pension arrangements made by the employee are treated as earnings. It derives from section 648 of ICTA.
899.It contrasts with section 308 of this Act, which exempts from income tax as earnings an employer’s contributions under approved personal pension arrangements made by the employee.
900.Subsection (1) sets out that the payments are treated as earnings from the employment. In view of the content of Chapter 2 of Part 2, it is unnecessary to add (as in section 648 of ICTA) that the payments are so treated “for all the purposes of the Income Tax Acts”. The year of charge is made explicit. See Note 7 in Annex 2.
901.Subsection (2) provides that the employer’s payments are not treated as earnings under this section to the extent they are otherwise chargeable to income tax. For example, if contributions are so made that only a charge by virtue of section 62 of this Act (earnings) otherwise applies, section 224 will apply to the extent, if any, that section 62 does not apply.
902.Conversely, if a charge would only arise otherwise by virtue of section 203 of this Act (cash equivalent of benefit treated as earnings), but the payments are wholly or partly exempted from that charge by section 307 of this Act (death or retirement benefit provision), a charge under this section will apply on the amount so exempt.
903.Subsection (3) provides relevant definitions by cross-reference to section 630(1) of ICTA.
904.The Board of Inland Revenue may approve a personal pension scheme. The provisions for approval of a pension scheme are set out in section 631 of ICTA.
Section 225: Payments for restrictive undertakings
905.This section deals with the situation where a monetary payment is made in return for the giving of a restrictive undertaking. It derives from section 313(1), (2), (3) and (6)(a) of ICTA.
906.The sum described as “ … an emolument of the office or employment … ” in section 313(1) has become “ … earnings from the employment … ” in subsection (3). That reflects the general change in terminology in this Act.
907.The section has a timing provision of its own in subsection (3). If there is no employment at the time the payment is made the timing rule in whichever is appropriate of section 17 or 30 of this Act will operate.
908.Section 313(6)(a) restricts the application of section 313 to employments from which the income was or would have been chargeable under Case I or Case II of Schedule E.Subsections (6) and (7) reproduce that restriction for this and the following section.
Section 226: Valuable consideration given for restrictive undertakings
909.This section brings together the provisions that apply when the payment for the restrictive undertaking is in a non-monetary form. That is more logical and convenient than their present separation. It derives from section 313(4) and (6)(b) of ICTA.
910.The use of two sections emphasises the way the section relating to a non-monetary consideration operates through the preceding one.
