| Employment Income: Emoluments |
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14A.1 The Causation Test |
ITEPA is intended to rewrite rather than reform the law. The new Act taxes ‘earnings’ rather than emoluments but then defines earnings in section 62 in a way which includes anything else that constitutes an emolument of the employment. In the 1988 Act section 19 was a charging provision; in ITEPA section 6 charges income tax on general earnings as well as specific employment income and then defines general earnings in a way which covers not only emoluments within section 62(1) but also other matters, principally benefits in kind, which are treated as income. In what follows section 62 will be taken as the modern equivalent of the emoluments previously charged under section 19. |
Two House of Lords’ cases provide the key to the test of a taxable emolument. The first, Hochstrasser v Mayes (1959), talks about of rewards for services. While some refinement of some of the words used in that case may now be needed, it still represents a starting point. The second, Shilton v Wilmshurst (1991), uses more flexible words. The precise relation between the two tests is unsettled. |
14A.1.1 Tests |
In Hochstrasser v Mayes,1 a sum of money paid to compensate an employee for a loss was held not to be taxable. Upjohn J said that the payment would be an emolument if it was made in reference to the services rendered by the employee by virtue of the office and if it was something in the nature of a reward for services past, present or future. In the House of Lords Viscount Simonds accepted this as entirely accurate, subject only to the observation that the word ‘past’ might be open to question. In Laidler v Perry2 Lord Reid added that sums might be taxable even though they are not rewards, eg sums given to employees in the hope that they will produce good service in the future. These comments suggest, as does the Oxford English Dictionary, that a reward is a recompense for something past (whether good or evil). In Bray v Best3 Lord Oliver could not read the expression ‘a reward for services’ as anything more than a conventional expression of the notion that a particular payment arises from the existence of the employer–employee relationship and not from something else. In Shilton v Wilmshurst4 the House of Lords held that there was no reason to limit the scope of emoluments to those situations in which the payer has an interest in the performance of the duties. |
Lord Reid’s words in Laidler v Perry were applied in two decisions of the House of Lords before Shilton v Wilmshurst. In Brumby v Milner5 sums of money held in a profit-sharing scheme were distributed when the scheme was wound up. The House held that this payment, like the previous income payments, arose from the employment and from no other source; it was therefore taxable. In Tyrer v Smart6 the taxpayer applied for shares in his employing company, having preferential right of application as an employee. The House held that he was taxable on the advantage gained. |