This article is relevant to candidates sitting Paper F6 (UK) in either the June or December 2014 sittings, and is based on tax legislation as it applies to the tax year 2013-14 (Finance Act 2013).
Benefits feature regularly in the Paper F6 (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. Motor cars are not covered as they are dealt with in a separate article.
There are four aspects to consider:
- The basic benefit is the annual value of the property. If the property is rented then the basic benefit is the higher of the annual value and the amount of rent paid.
- There is an additional benefit if the property cost more than £75,000. This is calculated as:
(Cost - £75,000) x 4% (the official rate of interest)
Cost is the cost of the property plus any subsequent improvements. However, where the property was purchased more than six years before first being provided to the employee, then 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 then the amount paid will also be a benefit.
- If the employer has furnished the property then the benefit for the use of the furniture is based on 20% of its cost.
During the tax year 2013-14 Prop plc provided three of its employees with living accommodation.
Alex has been provided with living accommodation since 1 January 2011. Prop plc had purchased the property in 2010 for £160,000, and it was valued at £185,000 on 1 January 2011. Improvements costing £13,000 were made to the property during June 2012. The annual value of the property is £9,100.
Bess was provided with living accommodation from 1 January to 5 April 2014. The property is rented by Prop plc at a cost of £2,250 per month, and it has an annual value of £10,400. On 1 January 2014 Prop plc purchased furniture for the property at a cost of £16,200. The company pays for the running costs relating to the property, and for the period 1 January to 5 April 2014 these amounted to £1,900.
Chloe was provided with living accommodation on 6 April 2013, and she lived in the property throughout the tax year 2013-14. The company had purchased the property in 2004 for £89,000, and it was valued at £144,000 on 6 April 2013. The annual value of the property is £4,600.
- The basic benefit is the annual value of £9,100.
- The living accommodation cost is in excess of £75,000 so there is an additional benefit. Since the property was not purchased more than six years before first being provided to Alex, the benefit is based on the cost of the property plus subsequent improvements. The additional benefit is therefore £3,920 (98,000 (160,000 + 13,000 - 75,000) at 4%).
- The benefit is the rent paid of £6,750 (2,250 x 3) since this is higher than the annual value of £2,600 (10,400 x 3/12).
- The benefit in respect of the furniture is £810 (16,200 x 20% x 3/12).
- The running costs of £1,900 are also taxed as a benefit.
- The basic benefit is the annual value of £4,600.
- The living accommodation cost is in excess of £75,000 so there is an additional benefit. Since the property was purchased more than six years before first being provided, the benefit is based on the market value when first provided. The additional benefit is therefore £2,760 (69,000 (144,000 - 75,000) at 4%).
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 4%. There are two alternative methods of calculating the 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 then both methods will produce the same result.
The average method applies unless either the employee or HM Revenue and Customs 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 just use the average method, since in reality HM Revenue and Customs only elect for the strict method when it will make a significant difference.
During the tax year 2013-14 Rest Ltd provided three of its employees with loans.
Kim was provided with an interest free loan of £12,000 on 1 June 2013 so that she could purchase a new motor car.
Ming was provided with an interest free loan of £120,000 on 1 May 2013 so that she could purchase a holiday cottage. Ming repaid £50,000 of the loan on 31 July 2013, and repaid the balance of the loan of £70,000 on 31 December 2013.
Newt was provided with a loan during 2011 so that she could purchase a yacht. The amount of loan outstanding at 6 April 2013 was £60,000, and Newt repaid £5,000 of the loan on 31 August 2013, and then repaid a further £5,000 on 28 February 2014. Newt paid loan interest of £970 to Rest Ltd during the tax year 2013-14. The taxable benefit in respect of this loan is calculated using the average method.
- The benefit is £400 (12,000 at 4% x 10/12).
- Since no repayments have been made during 2013-14, both methods will produce the same result.
The benefit calculated using the average method is £2,533 as follows: