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Tip of the week 32
Tip of the week 33
Tip of the week 34
Tip of the week 35
Tip of the week 36(latest)
Tip of the Week 32
Q: In preparing P11D returns, what is the correct
way to report essential user allowances paid to employees who use their own cars
for business purposes?
A: The rules for determining the tax and NICs
liabilities, if any, on the payment of mileage allowances changed from April
2002. Instead of having to report the payments unless the employer holds a
dispensation, the arrangements now are that payments are only reported for tax
purposes on form P11D if the total of all mileage allowance payments made in the
year exceed the statutory maximum for the vehicle (i.e. car, van, motorcycle or
bicycle). If more than the maximum is paid, only the excess is reported. A
similar procedure applies for Class 1 NICs, but the comparison between the
payments made and the maximum must be made for each earnings period.
The maximum amount that may be paid without any tax
liability is calculated, in the case of a car or a van, by multiplying the true
business mileage for the tax year by 40p for the first 10,000 miles, and by 25p
for any mileage over 10,000 miles.
The question here is how essential user allowances should
be handled in this context. It has been the practice of some employers over
many years, particularly local authorities and housing associations, to add such
payments to gross pay in each pay period and deduct PAYE tax and NICs
accordingly. Some have continued this practice throughout 2002/03. However,
this is not the correct way of taxing essential user allowances and, if handled
in this way, it raises complications when completing P11Ds and can mean that
employees pay more tax and employers pay more NICs during the year than they
should.
The new P11D WS6 Working Sheet refers simply to the total
“mileage allowance payments” made during the tax year. This term is not defined
and there is nothing on the P11D itself, in the P11D Guide or in the 480 booklet
that reminds employers that essential user allowances should be included in the
total mileage allowance payments. All is made clear elsewhere, however. The
IR124 booklet, written for employees, refers to “mileage allowances that are
based on a set rate per mile, regular lump sum payments and one-off payments
which are paid in recognition of the use of your vehicle for business travel”.
A similar description is found in the 490 Employee Travel booklet.
The intention, therefore, of the new mileage allowance
rules, is that an employee’s tax liability should only be determined at the
year-end, hence the new Working Sheet 6. All the mileage payments made to the
employee during the tax year, including essential user allowances, should be
totalled and, if the total is less than the statutory maximum for the year,
there is nothing to report on form P11D at all. If the total payments for the
year exceed the statutory maximum, only the excess is reported.
All is not lost if essential user allowances have been
taxed through the payroll during 2002/03. In section 1 of the WS6 Working
Sheet, the amount on which tax has been paid is entered as a “minus” amount,
thereby reducing the total allowances for the year before they are compared with
the statutory maximum amount. However, this may serve to demonstrate that the
employee has overpaid tax on the essential user allowances taxed through the
payroll, illustrating that the tax liability on all mileage allowance payments
should only be determined at the year end.
Similarly, if all of the essential user allowances paid
during the tax year have been subjected to Class 1 NICs, it may well be that the
employer, and possibly the employee, have overpaid NICs. The procedures that
should be followed in each earnings period are similar to but a little more
complex than the tax calculation. Examples of the calculations in various
situations are shown in Chapter 6 of the 490 booklet.
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Tip of the Week 33
Q: We provide discount vouchers against future
purchases to members of the public when they spend above a certain value in our
outlets. The employees in our outlets are also able to obtain the vouchers if
they spend the same amounts. Do these non-cash vouchers have to be reported at
the year-end as an employment benefit?
A: The simple answer is No, they don’t, as long as
they are not provided on more preferential terms than those that apply to the
public generally. However, there was no specific provision to this effect in
the voucher and credit token provisions of the Income and Corporation Taxes
Act 1988 (ICTA)(i.e. sections 141 to 143).
This is in contrast to the provision of living
accommodation and loans, where employees have no liability if the benefits are
provided on the same terms as members of the public. For example, employees of
a local authority are not taxed on the provision of a council house if it is
provided on terms that are not more favourable than non-employers in similar
personal circumstances (section 145(7)(b)). Similarly, an employee is not taxed
on a loan that is obtained from the employer on normal commercial terms (section
161B).
When preparing the new Income Tax (Earnings and
Pensions Act) 2003, the Government took the view that there was no reason
why the same exception should not be applied to cash vouchers, non-cash vouchers
and credit tokens. As a result, sections 78, 85 and 93 of the new Income Tax
Act make specific provision for vouchers and credit tokens made available to
the public generally, as long as they are “provided to the employee or a member
of the employee's family on no more favourable terms than to the public
generally”.
Another exception has
also been introduced for vouchers and credit tokens in the new Act that was
missing in the ICTA. The payment of expenses, and the provision of living
accommodation or a company car or van are not taxable where the employer is an
individual and the provision or payment is made “in the normal course of the
employer’s domestic, family or personal relationships” (sections 145(7) and
168(3), (6)(b) and (6)(d)). The new Act extends the same exception to the
provision of cash vouchers, non-cash vouchers and credit tokens.
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Tip of the Week 34
Q: We provide living accommodation for a number of
employees in houses that we have owned for about 10 years. One of the
properties originally cost the company £100,000 to purchase and, just recently,
the company has paid £40,000 to build an extension. A new manager moved into
the property a year ago and has recently paid £20,000 towards the cost of this
extension. Can this payment be used to reduce the reportable value of the
living accommodation?
A: The reporting requirements for the provision of
living accommodation are set out, for the 2002/03 tax year, in sections 145 and
146 of the Income and Corporation Taxes Act 1988. As the basic charge, defined
in section 145, is not related to the cost of buying or improving the property,
the employee’s payment does not affect the calculation of the basic charge.
However, there is specific provision in section 146 for
reducing the cost of the property, in most situations, for the purposes of
calculating the additional charge.
The additional charge applies where the cost of providing
the accommodation exceeds £75,000. The normal way of determining the cost of
the accommodation is to find the total of
- the expenditure incurred in acquiring the
property, and
- the expenditure incurred on improvements to the
property.
The total of this expenditure may then be reduced by any
payments made by the employee “so far as that amount represents a reimbursement
of any such expenditure”. Normally, therefore, the cost of providing the
accommodation in question would be £120,000, i.e. £100,000 to acquire the
property, plus £40,000 for the improvements, less the £20,000 paid by the
employee towards the cost of the extension.
However, this normal method of working out the cost of the
accommodation does not apply if, at the time the employee first occupies the
property, the employer has owned it for more than six years. In this situation,
the cost of the accommodation is the total of
l
the market value of the property on the date the
employee first occupied the property, and
l
the expenditure incurred on improvements to the
property after that date.
Again, this total may be reduced by any
payments that represent reimbursement of such expenditure. If the market value
of the property when the employee moves in were, say, £200,000, the cost of
providing the accommodation would be £220,000, i.e. £200,000, plus £40,000 for
the improvements, less £20,000 from the employee.
Note that a problem would arise if the
employer were paying the £20,000 towards the acquisition of the property rather
than towards the cost of the extension. The cost of expenditure incurred in
acquiring the property has now been replaced by its market value. The
employee’s payment cannot now be used to reduce the cost of providing the
accommodation as the payment is no longer the reimbursement of expenditure.
This last problem was identified when
the Income Tax (Earnings and Pensions) Act 2003 was being
drafted. This Act replaces, from 6 April 2003, the relevant sections of the
Income and Corporation Taxes Act 1988. The reporting rules for living
accommodation for the 2003/04 tax year are defined in sections 97 to 113.
Section 107(3), in defining the cost of the living accommodation in the
“six-year” situation, now provides that the employee’s payment may go towards
the employer’s expenditure in acquiring the property, up to a maximum of its
market value at the date the employee first occupies the property.
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Tip of the Week 35
Q: One of our company cars is made available for
the use of two employees. They both have to make business trips and they decide
between them when to take the car home at night and at weekends. They are also
provided with fuel for private use. How do we calculate their respective car
and fuel benefit charges?
A: Assuming they are both earning at a rate of
£8,500 or more, there is certainly a liability for both a car and fuel benefit
charge, under the provisions of sections 157 and 158 of the Income and
Corporation Taxes Act 1988 (ICTA). Because the car is shared, each
employee’s benefit is determined by calculating the charges as if the car were
used by only one employee and then splitting the charge between them.
This apportionment arrangement is set out, for the 2002/03
tax year, in extra-statutory concession A71. It states: “Where two or more
directors or employees earning £8,500 per year or more have shared use of a car
made available by their employer for private use, only a single car benefit
charge will be made in respect of the car. This will be apportioned between them
having regard to all the relevant facts.” The concession is also treated by the
Inland Revenue as applying to the fuel benefit charge.
The wording of this concession creates a number of
problems. As it specifically refers to “directors” rather than “office
holders”, does the concession apply to “office holders” who are not directors,
e.g. a company secretary? As the legislation requires the car benefit charge to
be calculated for each employee separately, for which employee is the “single
car benefit charge” determined?
These issues have been addressed in the transfer of the
legislation and the extra-statutory concession to the Income Tax (Earnings
and Pensions) Act 2003 (ITEPA) from 6 April 2003. Extra-statutory
concession A71 no longer exists; it is now incorporated into ITEPA, in sections
148, 153 and 169.
The ITEPA introduces the concept of the “benefits code”.
Instead of defining, as did ICTA, the benefits that are taxable on all employees
and, separately, the additional benefits that are chargeable on employees
earning at a rate of £8,500 or more, ITEPA defines the benefits that are taxable
on all employees and, separately, those benefits that do not apply to
“lower-paid employees” with an “earnings rate” of less than £8,500.
The benefits code applies to “employees”, defined in
section 5 of ITEPA as including office-holders. Consequently, the new approach
to determining the car and fuel benefit charges where a car is shared applies to
all office-holders, not just directors.
The calculation of the “single car benefit charge” is a
problem because the charge can relate to circumstances relevant to each
employee, such as ‘private use” contributions, that could create a different car
benefit charge for each of the employees sharing the car. One of the employees
could, therefore, benefit from the circumstances relating to one of the other
employees.
This problem is resolved by defining in section 148 of
ITEPA a requirement for a full car benefit charge to be calculated, initially,
for each employee sharing the car. The individual charges are then reduced “on
a just and reasonable basis”, rather than being apportioned. Which factors
should be taken into consideration in performing this reduction are not defined
but, for example, they might include the number of days that each employee had
private use of the car, and the payment of any capital or private use
contributions.
It should be noted, however, that, if one of the employees
sharing the car is a “lower-paid employee”, for whom the provision of the car
does not create a car benefit charge, the use of the car by that employee may
not be used to reduce the charge for the other employees. In practice, the
total of the reportable car benefit charges should not be less than the lowest,
and not more than the highest, of the individual charges prior to the
reductions. It is likely that, in the event of an audit, a tax inspector would
expect to see the details of how the reductions were performed.
As provided for in section 153 of ITEPA, if the car
benefit charge for an employee is reduced in this way and the employee is also
liable for a fuel benefit charge, a corresponding reduction is also made to that
charge.
Extra-statutory concession A71 also covered the situation
where a car is made available to an employee and to a member of that employee’s
family, where both are employed by the same employer. This situation will be
considered in a later Tip of the Week.
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Tip of the Week 36
Q: One of our clients is a small family-run limited
company. The wife of one of the directors is the company secretary and she is
provided with a company car. Should the benefit of the car be reported in her
name or, because her director husband also has a company car, should both cars
be reported in his name?
A: An extra-statutory concession (ESC A71) provides
special rules that apply where one car is made available to an employee and
another to a member of that employee’s family, where both are employed by the
same employer. The concession has, from 6 April 2003, been moved into the
Income Tax (Earnings and Pensions) Act 2003 (ITEPA) and the terms of the
exemption appears in section 169.
The general rule for taxing company cars (section 114) is
that a liability arises if
l
a car is made available to an
employee or a member of the employee's family or household,
l
it is made available by reason of
the employment, and
l
it is available for the employee’s
or the member’s private use.
The initial response the question,
therefore, is that both cars are taxable on the director. But, it could equally
be argued, from the general rule, that both cars are taxable on the director’s
wife! To resolve the problem, section 169 of ITEPA provides special rules where
the family member is also an employee of the same employer. This states, first
of all, that, where both employees are employees of the same employer, they are
each charged to tax on their own car and the benefit is reported on separate
P11Ds.
However, a complication arises if the
family member is a lower-paid employee, i.e. has an earnings rate of less than
£8,500 and, as a result, any benefits are reported on form P9D. As lower-paid
employees are not liable to pay tax on the provision of a company car, a special
rule applies to prevent tax avoidance by making a family member an employee and
paying a low wage, simply in order to keep earnings below the £8,500 threshold.
For example, an employee with earnings of £6,000 and a company car with a
taxable value of £2,000 would not be liable to pay tax on the car.
There are two defined situations, one
or other of which must apply if the car is not to be taxable on the family
member:
l
where other employees who are not
family members but who are doing the same job as the family member are also
provided with an equivalent company car, i.e. the car is not provided because
the employee is a family member but because the job requires it, or
l
where it is “normal commercial
practice” for a person performing the family member’s job to be provided with an
equivalent car.
The answer to the question, therefore,
depends on the family member’s earnings rate:
l
if the earnings rate is not less
than £8,500, the car is reported on the family member’s P11D
l
if the earnings rate is less than
£8,500, the car is not reportable, but only if the employer believes it can
successfully be demonstrated that it is normal commercial practice for a company
secretary to be provided with a company car.
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