When do Arrears Payments become taxable? – Fountain v HMRC

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This case is concerned with a payment made in arrears and when such a payment becomes liable for tax.  Whilst this tells us nothing new, it demonstrates a basic principle – most employers will pay their employees in arrears.

Mr Fountain received a payment on 07 April 2007 for work carried out in March 2007.  His contract of employment stated that he would be paid ‘monthly in arrears on the 6^th of the month’.  Mr Fountain believed that he became entitled to payment as soon as the work had been performed and, therefore, he should have been subject to tax in the 2006/07 tax year rather than the 2007/08 tax year as his employer had done.  He argued that the original contract, signed in 2002, was unfair in making him wait until the 6^th of the following month for payment.  HMRC argued, simply, that he became entitled to the wages on 06 April 2007 under his contact of employment, and this date fell in the 2007/08 tax year.

The relevant legislation in this case was the Income Tax (Earnings and Pensions) Act 2003, S18, which states that, for an employee, money is treated as being received (and taxable) at the earliest of:

Rule 1

The time when payment is made of or on account of the earnings

Rule 2

The time when a person becomes entitled to payment of or on account of earnings

The decision was that the payment made to Mr Fountain was in accordance with his contract of employment.  Therefore, he only became entitled to the March 2007 earnings in April 2007, which fell into the 2007/08 tax year.  The Tax Tribunal had no jurisdiction as to the fairness of the contract

Further Information

•  Edward Fountain v Revenue and Customs (2011) UKFTT 570 (TC) (24 August 2011)
• Income Tax (Earnings and Pensions) Act 2003

Tags: Case Law Corner, Fountain v HMRC

This entry was posted on Saturday, October 29th, 2011 at 14:00 and is filed under Case Law Corner. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.