This article is relevant to those of you sitting the TX-UK exam in the period 1 June 2023 to 31 March 2024, and is based on tax legislation as it applies to the tax year 2022–23 (Finance Act 2022).
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.
There are four aspects to consider where the accommodation provided is not job related:
During the tax year 2022–23, Prop plc provided three of its employees with living accommodation.
Alex has been provided with living accommodation since 1 January 2020. Prop plc had purchased the property in 2019 for £190,000, and it was valued at £240,000 on 1 January 2020. Improvements costing £13,000 were made to the property during June 2021. The annual value of the property is £9,100.
Bess was provided with living accommodation from 1 January to 5 April 2023. 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 2023, 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 2023 these amounted to £1,900.
Chloe was provided with living accommodation on 6 April 2022, and she lived in the property throughout the tax year 2022–23. The company had purchased the property in 2013 for £149,000, and it was valued at £225,000 on 6 April 2022. The annual value of the property is £6,600.
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%. 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.
During the tax year 2022–23, Rest Ltd provided three of its employees with loans.
Kim was provided with an interest free loan of £24,000 on 1 June 2022 so that she could purchase a new car.
Ming was provided with an interest free loan of £120,000 on 1 May 2022 so that she could purchase a holiday cottage. Ming repaid £50,000 of the loan on 31 July 2022, and repaid the balance of the loan of £70,000 on 31 December 2022.
Newt was provided with a loan during 2020 so that she could purchase a yacht. The amount of loan outstanding at 6 April 2022 was £60,000. Newt repaid £5,000 of the loan on 31 August 2022 and then repaid a further £5,000 on 28 February 2023. Newt paid loan interest of £425 to Rest Ltd during the tax year 2022–23. The taxable benefit in respect of this loan is calculated using the average method.
The benefit calculated using the average method is £1,267:
|120,000 + 70,000 x 2% x 8/12
|120,000 at 2% x 3/12
|70,000 at 2% x 5/12
|60,000 + 50,000 x 2%
There is no taxable benefit if an employee’s beneficial loans do not exceed £10,000 during the tax year.
Denise is employed by Repose Ltd. On 6 April 2022, the company provided her with an interest-free loan of £8,200 so that she could purchase a season ticket for the train to work. Denise repaid the loan on 31 January 2023.
There is no taxable benefit for 2022–23 because the beneficial loan did not exceed £10,000 during the tax year.
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:
Joe is employed by Firstly plc. On 6 April 2022, the company provided him with a home entertainment system costing £4,400 for his personal use. Firstly plc gave the home entertainment system to Joe on 31 December 2022 for free, although its market value on that date was £3,860.
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.
Vary plc provides its employees with various benefits. The benefits were provided throughout the tax year 2022–23 unless otherwise stated.
Denzil was provided with two mobile telephones. The telephones had each cost £250 when purchased by Vary plc in January 2022. The company paid for all of Denzil’s business and private telephone calls.
Emily had her health club membership fee of £710 paid for by Vary plc.
Frederick spent five nights overseas on business for Vary plc. The company paid him a daily allowance of £10 to cover the cost of personal expenses such as telephone calls to his family.
Grace was paid £11,000 towards the cost of her removal expenses when she permanently moved to take up her new employment with Vary plc, as she did not live within a reasonable commuting distance. The £11,000 covered both her removal expenses and the legal costs of acquiring a new main residence.
Hillary’s three year old daughter was provided with a place at Vary plc’s workplace nursery. The total cost to the company of providing this nursery place was £10,800 (240 days at £45 per day).
Ian had the use of Vary plc’s company gym which is only open to employees of the company. The cost to Vary plc of providing this benefit to Ian was £340.
June was provided with free meals in Vary plc’s staff canteen. The total cost of these meals to the company was £1,460. The canteen is available to all of the company’s employees.
Kristin regularly works from home two days per week, and was paid an allowance of £288 (48 weeks at £6 per week) to cover the extra light and heat costs which were incurred due to this homeworking.
Larry was given a watch valued at £750 as an award for her 20 years of employment at Vary plc.
Marge had £440 of her medical costs paid for by Vary plc. She had been away from work for two months due to an injury, and the recommended medical treatment was to assist her return to work.
Nile was given a pen valued at £45 as a 60th birthday present.
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.
Justin is employed by Steam plc. On 1 August 2022, the company provided him with a TV costing £3,600 for his personal use. Justin pays Steam plc £20 a month for the use of the TV.
The taxable benefit for 2022–23 is £320 ((3,600 x 20% x 8/12) – (20 x 8)).
Written by a member of the TX-UK examining team