Income from employment

Assessable earnings include cash wages or salary, bonuses, commission and benefits. The following state benefits are also subject to Income Tax: (i) Statutory Sick pay (SSP) (ii) Statutory Maternity Pay (SMP) (iii) Retirement pension and bereavement allowance (iv) The job-seeker’s allowance that is paid to unemployed. Time of earnings is received. The earliest of: (i) the actual payment, of or on account of, earnings or (ii) becoming entitled to such payment. Expenses deductible from employment

Specific expenditure Authorized by statute Specific expenditure authorized by statute • • •

Unspecified expenditure on travel and other expenditure.

Contributions to approved pensions schemes (within certain limits) Fees and contributions to professional bodies provided they are approved by Inland Revenue and are relevant to the individuals employment Payments to charity made under a payroll deductions scheme operated by an employer

Unspecified expenditure on travel and other expenditure (i) Travel expenditure

Travel expenditure may be deducted only where they: (a) are incurred necessarily in the performance of the duties of the employment, or (b) are attributable to the necessary attendance at any place by the employee in the performance of their duties. Relief is not given for the cost of journeys that are ordinary commuting or for the cost of private travel. Ordinary commuting is the journey made each day between home and a permanent place of work. (ii) Other expenses (a) For non-travel expenses to be deductible they have to be incurred necessarily, wholly and exclusively in the performance of the duties of the employment. (b) Capital allowances Capital allowances are available for plant and machinery necessarily provided by an employee for use in their duties. (c) Approved mileage allowance Employees who use their own cars for business purposes will normally be paid a mileage allowance. The mileage allowance is assessable as a benefit if it exceeds the statutory approved mileage allowances. The approved rate per mile is as follows: First 10,000 miles p.a 40p and/or Over 10,000 miles p.a 25p

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Example: An employee uses her own 1800 cc motorcar for business travel. During 2004/05 she drove 12,000 miles as business travel. Her employer paid her 30p per mile Solution The mileage of $3,600 (12,000 x 30p) will be received tax-free but in addition the employee can make an expense claim of $900 as follows: 10,000 miles x 40p 2,000 miles x 25p Less mileage allowance Expense claim 3,600 900 Benefits in kind $ 4,000 500 4,500

P11D EMPLOYEES When considering how benefits are taxed, we must first consider the two different categories of employee. Some benefits are assessable on all employees, but most benefits are only taxable on those earning in excess of £8,500 per annum. For simplicity, these are referred to as ‘P11D Employees’, as P11D is the name of the form completed by the employer at the end of the year, describing the benefits that have been received. To be included in this category, an individual must be either: • earning in excess of £8,500 per annum, including potential benefits but before allowable deductions, or • a director of the company. Directors are excluded if they: • earn less than £8,500 • own less than 5% of the shares of the company, and/or • work full-time for the company. It is worth noting that the £8,500 threshold has not changed in living memory. Lower-paid employees Any employee who is not P11D is ‘lower paid’. They are only specifically assessed on a small number of benefits. The general rule is that they are only liable if the benefit is ‘readily convertible to cash’, or the company is settling their personal liability. The value of the benefits will be: • readily convertible – the amount to which it could be converted • personal (monetary) liability – the amount of the liability settled. P11D employees and benefits There are a range of benefits specifically covered by statute that are only taxable on P11D employees. These benefits are: • company cars and private fuel • company vans • other assets made available by the company to the employee • interest-free or cheap loans. Any benefits received by P11D employees other than those listed above are valued at the marginal cost to the employer of providing the benefit. Her Majesty’s Revenue & Customs (HMRC) accepts that the following will not give rise to a benefit: • rail or bus travel where fare-paying passengers are not displaced Page 2 of 11

• • •

goods sold at a discount, providing the employee pays at least the cost of production or the wholesale price reduced school fees of at least 15% of the normal fee, given to teachers’ children if they attend the school at which their parent works professional services that are provided by existing partners and staff of the employer.

In most cases, any payment by the employee for the provision of the benefit is deductible. The exception is payments towards fuel for private usage, which are ignored unless they represent full reimbursement of the cost of the private fuel. (i) Vouchers and credit tokens • • • • Cash vouchers are subject to P.A.Y.E Non-cash vouchers are assessable on the employee at the cost of providing them. Luncheon voucher less than $15 per working day are not taxable Credit token (such as a company credit card) is assessed on the value of goods and services bought with the credit token.

However, if the voucher and credit token was wholly, exclusively and necessarily used in the performance of the duties of his/her employment, no benefit arises. (ii) Living accommodation (a) Living accommodation is taxed at the higher of: • The accommodation annual value • Rent paid by the employer (b) Living accommodation is not assessable if the accommodation is job-related and • It is necessary for the proper performance of the employee’s duties (e.g. a caretaker), or • For the better performance of the employee’s duties (e.g. hotel worker) • There is a special threat to the employee’s security and he resides in the accommodation as part of special security arrangements. NB: A director can only claim one of the first 2 exemptions if he is a full-time working and holds no more than 5% of the company’s ordinary share capital. (c) Expensive accommodation and additional benefits If cost of providing the accommodation exceeds $75,000 there is a charge under the normal accommodation rules, there is an additional benefits. The additional benefit is calculated as follows: (Cost of providing the accommodation - $75,000) x 5% Cost of providing the accommodation = the purchase price + expenditure on improvements incurred prior to the start of the tax year. Ex 1 – Living Accommodation B, a sales manager, occupies a flat owned by his employer. Its annual value is $4,000 and B pays his employer $500 p.a for use of the flat. The flat was purchased in 1997 for $120,000. It has been estimated that 25% of the use of the flat may be attributed to business use. Calculate the total benefits assessable on B for 2004/05, assuming an official rate of interest of 5%.

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(a) Expenses connected with living accommodation Example of expenses connected with living accommodation is: • • • Lighting, heating and cleaning Repairing, maintaining and decorating the premises Furniture and other goods normal for domestic occupation

The above cost is taxable on an employee where the cost is met by his employer. However, if the costs are jobrelated accommodation, the taxable limit is 10% of net earnings. Net earnings = salary +other benefits (excl the benefits in question) less any expenditure deductible against employment income (b) Use of assets • If owned by the employer. Benefits = 20% of the asset’s market value at the time it was first provided. E.g. if the employee with a T.V costing $500, the benefits will be $100 ($500*20%) • If rented Benefits = Higher of rental payment or 20% of the asset’s market value E.g. if the annual rental for the T.V is $120, the benefits will be $120. NB: Payments made by the employee for the use of the asset reduces (or eliminate) the benefits. (c) Gift of assets Distinction should be made between asset provided for employee’s use and asset given as gift. For gift, ownership passed on the employee, while in the former, ownership remains with employer If an employer gives his employee (i) (ii) A new asset, Benefit = the cost of the new assets. 2nd hand asset, benefit = Higher of • • The market value of the asset when given, or The market value at the time it was first made available to the employee less the benefits assessed on the employee during the time he had the use of it but did not own it. Ex 2 – Gifts of assets. B’s employer, X ltd, purchased a dishwasher for his use on 1 June 2002, costing $600. On 6 April 2003 X Ltd gave the dishwasher to B (its market value then being $150.) Calculate the total benefits assessable on B on the basis of: • • the circumstances as set out above; and if B paid X Ltd $ 100 for the dishwasher.

(d) Motor cars (i) There is no benefit in kind where there is no private use. Note that travel between home and a permanent place counts as private use.

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(ii)

No individual using a pool is assessed on a car benefit. Pool car • • • car used by more than one employee. Not kept overnight at or near the residence of any employee using it Private use by any employee is incidental.

(iii)

In all other cases, the employee is assessable to a benefit in kind for use of company’s car.

Benefits = A % of the car’s list price. List price =Price inclusive of VAT and the list price on the day before the car’s first registration. Where the car is fitted with accessories the list price of these accessories is added to the list price of the car subject to a maximum price of $80,000. (iv) Reduction in car benefit (a) An employee may reduce the price on which his car benefit charge is calculated by making a capital contribution. The price is reduced by the lower of: • • The capital contribution towards the cost of the car and its accessories, or $5,000. (b) Car was unavailable for part of the year (if repairs is > 30 days) (c) Contribution for private use by employee. (v) • Calculation of car benefit The minimum car benefit = 15% of the price of the car subject to a maximum price of $80,000. The minimum 15% charge applies where there are CO2 emissions of 145 gms per kilimetres. The % charge will increase by 15 for every additional full 5 gms up to a maximum of 35%. A 3% supplement for most diesel cars up to the maximum of 35% is added. Example of calculation of % charge 14% 15% 29% If B’s car has a diesel engine, the charge will increase by 3% to 32%. NB: if an employee is made available more than one car, the 2nd car is taxed in the same way as the first one. Ex 3 – Motor Car During 2004/05 F plc provided the following employees with company motorcars: (i) (ii) (iii) A was provided with a new diesel powered company car on 6 Aug 2004. The motorcar has a list price of $13,500 and an official emission rate of 132 gms per kilometer. B was provided with a new petrol powered car throughout 2004/05. The motorcar has a list price of $16,400 and an official CO2 emission rate of 203 gms per kilometer. C was provided with a new petrol powered car throughout 2004/05. F plc purchased the car for $ 21,000 and C was required to contribute $ 3,000 towards the purchase cost. The motorcar has a list


• • •

B is provided with a company car which has CO2 of 215 gms per k/m. calculate the % charge ((215-145)/5) x 1% Plus minimum charge

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price of $22,600 and an official CO2 emission rate of 264 gms per kilometer. C paid the company $ 1,200 during 2003/04 for private use of the motorcar. Calculate the car benefits assessable on each of the above employees of F plc in 2003/04 (e) Car fuel benefit (i) (ii) • Car fuel benefit = CO2 emission % used to calculate the car benefit x $14,400 Reduction

The fuel benefit is proportionately reduced where the fuel itself is only provided for part of the tax year. E.g. If fuel is provided from 6 April to 30 September 2004, then the fuel benefit will be for 6 months only as the provision of fuel has permanently ceased. However, if the fuel is provided from 6 April to 30 September 2004 and then again from 01 January to 5 April 2005. No reduction since the reduction was only temporary.

No reduction if employee make any contribution unless he pays for all fuel in which case there would be no fuel benefit.

Ex 4 Car Fuel Continuing with situations set in Ex 3 above. A was provided with fuel for private use between 6 Aug 2004 and 5 April 2005. B was provided with fuel for private use between 6 April 2004 and 31 Dec 2005. C was provided with fuel for private use between 6 April 2004 and 5 April 2005. He paid F plc $ 600 during 2003/04 towards the cost of private fuel, although the actual cost of the fuel was $1,000. Calculate the car fuel benefits assessable on each of the above employees of F plc in 2004/05. Ex 5 – Car Fuel C took up employment with W Ltd on 1 July 2004. His remuneration package included a 5 year old 2,500cc petroldriven car, list price $24,000. He took delivery of the car on 1 Aug 2004. The car has CO2 emissions of 240 gms per kilometer. As a condition of the car being made available to him for private motoring, C paid $ 100 per month for the car and $50 per month for petrol. W Ltd incurred the following expenses in connection with C’s car.

$ Servicing Insurance Fuel (of which $1,150 was for business use) Maintenance 450 780 2,500 240

Calculate C’s assessable benefits for 2004/05 in connection with his private use of the car. (f) Cars and Cash alternatives The employee is taxed on the option he chooses either car or cash alternatives.

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Ex 6 – Car and Cash alternatives S and R are both employed by B Ltd. As part of their remuneration package, they are offered the choice between a company car and a cash alternative of $400 per month. S chooses a Volvo 850 with a list price of $19,500. This has CO2 emissions of 205 gms per kilometer. R chooses the cash alternative. Calculate the assessable benefits for R & S for 2004/05. (g) Vans and heavier commercial vehicles (i) Benefits = £3,000. Reduction • • • • If made available for part year. Reduced if payments made by employee for private use. If vans used by more than one employee, benefit is divided equally. Home to place of work does not counts as private mileage unlike the case with car. Hence, if the only private mileage is from home to place of work, there is no benefits. (ii) Fuel £ 500 for private use. (h) Beneficial loans • • • • • If employee is given a loan below the official rate of interest which is 5%, a benefit arises No benefit if the small loans of $5000 or less No benefits if an interest free or cheap loan is used for a purpose that qualifies for tax relief E.g. loan to buy plant used wholly for employment. If all or part of a loan to an employee is written off, the amount written off is a benefit in kind. 2 Methods of calculating the benefits namely: (1) The averaging method (2) The accurate method Ex 7 – Beneficial loan D was granted a loan of $35,000 on 31.03.04 to help finance the purchase of a yacht. Interest is payable on the loan at 3% p.a. On 1 June 2004 D repaid $5,000 and on 1 December 2004 he repaid a further $15,000. The remaining $15,000 was still due on 5 April 2004. D earns $30,000 p.a Calculate the assessable benefit for 2004/05 under (a) the averaging method; and (b) the accurate method. You should assume that the official rate is 5% p.a

BENEFICIAL LOANS

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A benefit may arise when an employer lends money to an employee (or a close relative) with interest being charged at less than a commercial rate. The benefit is the difference between the interest calculated at the official rate and the interest actually paid, if any. There are two methods of calculating the benefit: Normal (Average) method The average loan for the year is calculated by considering the balance outstanding at the beginning of the year (or the opening value if the loan was made in the year), and the balance at the end of the tax year. The official rate of interest, set by HMRC, is then applied to the average amount. Any interest actually paid is then deducted, with the remainder being the taxable benefit. Alternative method The alternative method uses the amount of the loan outstanding on a daily basis to calculate the interest at the official rate. This method can be used at the request of the taxpayer if it gives a lower taxable benefit than the normal method. HMRC will use it where the movement in the value of the loan is unusual, and does not appear to be commercial. EXAMPLE 1 Alex works for Manu Ltd. To allow him to buy a racehorse, the company made him a loan of £40,000 on 6 December 2005. The loan is to be repaid at the rate of £5,000 every six months, with the first repayment due on 6 June 2006. Alex is required to pay interest on the loan, and paid £240 in 2006/07. Assume an official rate of interest of 6.25%. What is the taxable benefit for Alex for 2006/07? Step 1 Find the loan at 6 April 2006 Step 2 Find the loan outstanding at 5 April 2007 Step 3 Average loan for the year 40,000 + 30,000 = £35,000 2 Step 4 Apply the official rate of interest £35,000 x 6.25% = £2,187 Step 5 Deduct any interest paid £(2,187 - 240) = £1,947 Step 6 Consider the alternative method 6 April 2006–5 June 2006 £40,000 x 2/12 x 6.25% 6 June 2006–5 December 2006 £35,000 x 6/12 x 6.25% 6 December 2006–5 April 2007 £30,000 x 4/12 x 6.25% Less: interest paid £40,000 £30,000

£ 417 1,094 625 2,136 (240) 1,896

Taxable benefit is £1,947 using the normal method, so the taxpayer would opt for the alternative method. There will be no taxable benefit where the loan is less than £5,000 throughout the tax year, or is for a qualifying purpose. (i) Scholarship

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A scholarship provided to member of an individuals family or household is taxable unless it is at arm’s length. No benefits – if the benefit arises where • • • The scholarship is awarded from a separate trust scheme. The person receiving it is in full-time education at school, college or university. Not more than 25% of payment made in the tax year from the scheme are made by reason of a person’s employment (j) Payment of director’s tax liability –benefit (e.g. tax on tax)

Services provided – P11D employees only If the employer also pays for the running costs and services relating to the property there is a further benefit. This will be based on the cost of the services provided. If the property is furnished, the rules for assets made available will apply. The benefit is therefore 20% of the market value of the furniture when it was first made available to any employee. Where the property is JRA, the maximum value for the ‘services’ benefit is 10% of the individual’s net emoluments, excluding any benefits relating to the property. Council Tax is regarded as a benefit attached to the property provided. If the property is JRA, the Council Tax is also exempt. EXAMPLE 2 Alex is employed by Ferguson Ltd. As part of his emoluments he is allowed the use of a companyowned property, for which he pays £200 per month in rent. He moved into the property in October 2002. The following information is relevant: £ Cost of property 220,000 bought June 2001 Cost of extension 20,000 incurred July 2004 Cost of extending downstairs 14,500 ncurred May 2006 Annual value 2,200 Utility bills paid by company 1,500 Council Tax paid 2,500 Cost of redecorating 2,300 Wages of cleaner and gardener 5,600 The house was furnished at a cost of £36,000 when Alex first moved in. Alex is paid an annual salary of £60,000, and has other assessable benefits valued at £10,000 for tax purposes. What is the assessable benefit for Alex assuming: i the accommodation is not job-related ii the accommodation is job-related. Assume an official rate of interest of 6.25%. Solution: i Not job-related 1 Property Annual value Council Tax Less: rent paid 2 Expensive element 6.25% x (220,000 + 20,000 - 75,000) Page 9 of 11

£ 2,200 2,500 4,700 2,300

(2,400) 10,312

3 Services provided Utility bills Redecorating Wages Furniture 20% x £36,000 Total benefit ii Job-related 1 Property Exempt 2 Expensive element Exempt 3 Services provided Utility bills Redecorating Wages Furniture 20% x £36,000 Salary Other benefits

£ 1,500 2,300 5,600 7,200 16,600 29,212 £ nil nil 1,500 2,300

5,600

7,200 16,600 60,000

10,000 70,000 10% x £70,000 7,000 Assessable benefit £7,000 Employees are taxable on income received ‘by reason of their employment’. This includes wages and salary, bonuses, commission, and benefits. The general rule is that anything you receive from your employer, whatever it is called, will be taxed as employment income. It is very likely that taxable benefits will appear in each Paper F6 (UK) exam. A thorough knowledge and understanding of the topics covered in this article should guarantee that good marks can be earned. EXEMPT BENEFITS A small, but important, number of benefits are exempt from income tax for all employees. These include: 1. employer contributions to a pension scheme 2. canteen facilities and tea/coffee etc provided for staff, providing they are available to all staff 3. employee relocation support of up to £8,000 4. security assets 5. workplace nurseries 6. up to £55 per week of vouchers towards approved childcare 7. liability insurance 8. overnight incidental expenses – £5 per night in the UK (£10 overseas) 9. mobile phones (maximum of one per employee if supplied after April 2006) 10. use of computer equipment valued up to £2,500 (unless supplied after April 2006) 11. employee use of subsidised transport 12. £2 per week towards the cost of working from home 13. Christmas parties and similar up to £150 per person per annum 14. bicycles and safety equipment for travelling to and from work 15. breakfast when an employee cycles to work 16. parking at or near the place of work 17. long service awards of £50 per annum (the employee must have completed 20 years or more service and the benefit cannot be in cash) 18. medical treatment and insurance for overseas work trips 19. sports and recreational facilities (these cannot also be available to the public).

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In the exam, if you spot an exempt benefit, remember to state in your script that it is exempt. Do not simply leave it out. SUMMARY It is very likely that taxable benefits will appear in each Paper F6 (UK) exam. A thorough knowledge and understanding of the topics covered in this article should guarantee that good marks can be earned.

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