Benefits

This article is relevant to those of you sitting the TX-UK exam in the period 1 June 2024 to 31 March 2025, and is based on tax legislation as it applies to the tax year 2023-24 (Finance Act 2023).

The Finance (No. 2) Act 2023 did not receive Royal Assent by the exam cut-off date of 31 May 2023, and is therefore not examinable as regards exams falling in the period 1 June 2024 to 31 March 2025.

Benefits feature regularly in the TX-UK exam, although such questions are generally not answered as well as would be expected. The article is not intended to cover every aspect of benefits, but instead mainly covers those areas which are more commonly examined. Cars are not covered as they are dealt with in a separate article.

Living accommodation

There are four aspects to consider where the accommodation provided is not job related:

• The basic benefit is the annual value of the property. If the property is rented, the basic benefit is the higher of the annual value and the amount of rent paid.
• There is an additional benefit if the property is owned by the employer and costs more than £75,000. This is calculated as:
  
  (Cost - £75,000) x 2.25% (the official rate of interest)
  
  Cost is the cost of the property plus any subsequent improvements incurred before the start of the tax year. However, where the property was purchased more than six years before first being provided to the employee, the cost figure is replaced by the market value when first provided (again plus any subsequent improvements).
  
• If the employer pays for the running costs relating to the property, the amount paid will also be a taxable benefit.
• If the employer has furnished the property, the taxable benefit for the use of the furniture is based on 20% of its market value when first made available.

Beneficial loans

There is a taxable benefit where an employee is provided with an interest free loan or where the interest rate payable is below the official rate of interest of 2.25%. There are two alternative methods of calculating the taxable benefit:

The average method: The average is taken of the amount outstanding at the start of the tax year (or when the loan was made if later) and at the end of the tax year (or when the loan was repaid if earlier). The official rate of interest is then applied to this average.

The strict method: The official rate of interest is applied to the amount outstanding on a monthly basis.

If no repayments have been made during the tax year and if no changes to the amount lent have taken place during the tax year, both methods will produce the same result.

The average method applies unless either the employee or HM Revenue and Customs (HMRC) elects for the strict method. In an exam context, both methods should be calculated even if one party opts for the strict method. However, a question might instruct you to use just one method to save having to produce unnecessary workings. Also, in reality, HMRC only elect for the strict method when it will make a significant difference.

There is no taxable benefit if an employee’s beneficial loans do not exceed £10,000 during the tax year.

Use of assets

Where an employee is provided with an asset for their personal use, the taxable benefit is based on 20% of the asset’s market value at the time the asset is first provided (exactly the same as furniture provided along with living accommodation).

If the asset is subsequently sold or given to the employee, there will be a further taxable benefit being the greater of:

• Market value at the date the employee acquires the asset.
• Market value when first made available to the employee less any amounts assessed as benefits for having the use of the asset.

Other benefits

Generally, the basis for calculating the taxable value of any other benefits is the cost to the employer.

There are various benefits which are exempt or partially exempt. Although correctly identifying the tax treatment of such a benefit may result in only a half mark or one mark, it is important that you correctly identify such benefits so that time is not wasted with unnecessary calculations.

Reductions and contributions

There are two further possible adjustments which could apply to most of the benefits which have been covered in this article.

Reduction: The taxable benefit is proportionately reduced if it is only available for part of the tax year.

Contribution: Any contribution made by an employee will reduce the taxable benefit. Contributions are deducted after any reduction has been applied.

Written by a member of the TX-UK examining team