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The benefits in kind legislation makes a distinction between two kinds of employee. The categories are:
- Non-director employees earning less than £8,500 annually (that is, lower-paid employees); and
- Employees earning above £8,500 annually (including benefits and expenses) and directors (irrespective of their level of income).
The rules for lower-paid employees in receipt of benefits, who are now quite rare in practice, are slightly different to those for higher-paid employees and directors. This article concentrates on the latter.
How are benefits in kind calculated?
When an employer provides payments to an employee in a form other than cash, this will normally give rise to a benefit in kind.
Broadly speaking, benefits in kind are calculated at their cash-equivalent value (which is defined as the 'expense incurred in or in connection with provision of the benefit'), including VAT.
Generally speaking, any amount made good by the employee towards the provision of the benefit will reduce the chargeable benefit accordingly.
There are special rules relating to certain kinds of benefit and these are considered in the course of this article.
Further guidance on the tax treatment of benefits in kind may be found here: http://uk.accaglobal.com/uk /members/technical/taxation
Special classes of benefit
Certain types of benefit in kind are subject to their own rules for calculation of the cash equivalent of the benefit and the main ones are considered below.
Cars and fuel
A taxable benefit arises from the provision of a car to an employee that is available for private use. Note that the car merely has to be available for private use (whether it is used for that purpose or not is immaterial) for the taxable benefit to arise.
The basic rule for calculating company car benefit is as follows:
[The list price of car + value of any optional extras] x percentage based on the car's CO2 emissions.
The relevant percentages range from:
- 10% for a qualifying low-emission car (CO2 emissions of less than 120g/km); to
- 35% for a petrol car with CO2 emissions of 235g/km, or a diesel car with CO2 emissions of 220g/km.
Further details of the percentages, along with some of the government measures to encourage the use of greener cars and details of forthcoming changes, are shown at http://uk.accaglobal.com/uk /members/technical/taxation
It is the list price of the car rather than the actual price paid for it that is used as the basis of calculation.
When an employee is provided with fuel for private purposes, an additional benefit arises. Fuel benefit is arrived at by multiplying a fixed base figure (£16,900 for the 2009/10 tax year), by the same percentage rate used to calculate the car benefit.
An important point to note with car fuel benefit is that the normal rule whereby the benefit is reduced by a contribution made by the employee does not apply. Car fuel benefit is an all or nothing charge. So if an employer provides an employee with £2,000 worth of fuel for private motoring and the employee reimburses £1,950 of the cost of the fuel, the full fuel benefit still applies. Conversely, if the employee reimburses the full cost of £2,000, no fuel benefit will arise.
Where an employee is provided with a van that is available for their private use, there is a fixed benefit in kind of £3,000. Ordinary commuting and insignificant private use are disregarded for the purposes of determining whether there is any private use.
Where fuel is also provided for private use, an additional fixed benefit of £500 applies.
Interest-free or cheap loans
An interest-free or cheap loan or advance provided to an employee is taxed on two fronts:
- Any amounts written off are taxable; and
- Any difference between the actual interest paid and the 'official rate' is taxable.
Small loans are exempt from beneficial loan interest benefit as long as the maximum amount outstanding at any time during the tax year did not exceed £5,000.
The official rate is prescribed by HMRC.
For the purposes of establishing whether a taxable benefit arises, it is necessary to aggregate all loans and advances. As well as loans in the literal sense, the following are also regarded as loans for these purposes:
Overdrawn director's loan account; and
Advances on account of expenses payments (although, in practice, HMRC disregard advances not exceeding £1,000, provided that the amounts are spent within six months and the employee accounts to the employer at regular intervals for the expenses).
There are two methods of calculating beneficial loan interest:
- Average basis (which is based on the opening and closing balances of the loan); and
- Alternative method (which is calculated on the day-to-day outstanding balance of the loan).
When completing the P11D form (see below) for an employee, the requirement is that the 'normal method' should be used. The 'alternative method' is available to use either at the option of HMRC or the taxpayer.
The provision of living accommodation to an employee represents a taxable benefit.
If the accommodation cost less than £75,000, the benefit is the lower of:
Annual value (gross rateable value); and
Rent paid for it by the provider.
Where the accommodation cost the employer more than £75,000, there is an additional charge, calculated as: cost minus £75,000 multiplied by the 'official rate'. If the employer has held an interest in the property for at least six years prior to it first being provided to the employee, then 'cost' is substituted with market value in the calculation.
The official rate for these purposes is the same rate as for the beneficial loan interest rate. However, the rate at the beginning of the tax year is used for the whole year, unless rates fluctuate significantly during the tax year. The rate for 2009/10 is 4.75%.
No benefit in kind arises where the accommodation is job-related accommodation.
Use of assets by the employee
Where an employee has use of an asset owned by the employer (excluding cars, vans and mobile phones), a benefit arises. The amount of the benefit is the greater of 20% of the market value of the asset when first provided to the employee and any actual rental payments paid by the employer.
Any benefits and expenses payments made to a higher-paid employee or director are reported on form P11D. For lower-paid employees, a simpler version of the form, known as a P9D, is used. Copies of the form must be provided to HMRC and to the employee. Benefits in kind (provided they are organised correctly) do not go through the payroll and do not attract class 1 national insurance contributions (NICs). They are subject to a special class of NIC, known as class 1A. Class 1A NICs are payable by the employer only; there is no employee NIC liability on benefits in kind. The rate of class 1A NIC for the 2009/10 tax year is 12.8%.
Any employer who provides either benefits in kind or expenses payments to their employees is required to submit a P11D for each employee. The employer must also submit a form P11D(b) to HMRC with the forms P11D. The form P11D(b) is a return of the class 1A NICs due on benefits provided to all employees during the tax year.
The way in which a benefit is provided is important for determining its tax treatment and how to report it. The options are explained in this table.
Tax legislation specifies that expenses payments reimbursed to an employee - for example, travel expenses, course fees, the cost of entertaining clients - represent taxable earnings and need to be reported on the form P11D. The employee may submit a claim under ITEPA 2003 s336 that an expense should not be taxable because it was incurred 'wholly, exclusively and necessarily' in the performance of their duties of employment.
The requirement for reporting and then claiming business expenses payments as non-taxable can be particularly burdensome and is often exacerbated by difficulty in getting the expenses payments correctly reflected in an employee's PAYE tax code. This burden may be eased by applying for a P11D reporting dispensation.
A P11D reporting dispensation is an agreement with HMRC that removes the requirement to report certain expenses on forms P11D. Expenses covered by a dispensation are not liable to tax or class 1 or 1A national insurance contributions.
In short, the P11D reporting dispensation is a helpful scheme and HMRC is actively seeking to encourage its use. A facility has recently been added to the HMRC website enabling dispensations to be applied for online.
The facility is at https://online.hmrc.gov.uk/shortforms/form/P11DX?dept-name=&sub-dept-name=&location=1&origin=http://www.hmrc.gov.uk
A dispensation can apply for all expenses for which the employee would normally be able to claim as being 'wholly, exclusively and necessarily' incurred. Dispensations cannot be obtained for 'round sum' amounts.
Expenses which may be covered would typically include:
- Travel and subsistence;
- Business entertaining; and
- Professional fees and subscriptions.
When applying for a dispensation, HMRC will seek confirmation that you have an independent system in place to check claims and deductions. This can often cause problems for smaller entities, although it should still be possible to obtain a dispensation, provided that valid receipts are retained in support of all expenses.
For further details on dispensations, see www.hmrc.gov.uk/paye/exb/ schemes/dispensation.htm
PAYE settlement agreements
The PAYE settlement agreement (PSA) allows an organisation to settle PAYE and NICs on certain expenses and benefits directly on behalf of its employees. Items covered by a PSA do not need to be shown on forms P11D or put through the payroll.
The following expenses/benefits may be covered by a PSA:
- minor items (such as small gifts to employees);
- irregular items (such as a non-qualifying business trip for a spouse);
- items which are difficult to value for P9D/P11D purposes (such as items not easily attributable to a single employee).
The employer calculates the tax due on the grossed-up value of the benefits in kind. A special class of NIC, class 1B, is payable on the grossed-up value of the benefit.
For details on PSAs, including calculating the tax and class 1B NIC, go to http://www.hmrc.gov.uk/paye/exb/schemes/psa.htm
Simon Wood and Barinder Chadha are ACCA UK technical advisers