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Table of Contents
1. Section One – Introduction 1.1. Course Information 1.2. Introduction to UK Tax 1.3. UK Tax and Scotland 1.4. Functions of Taxation 1.5. Sources of Tax 1.6. Administration of Tax 1.7. Appeals 1.8. International Aspects 1.9. Tax Avoidance 2. Section Two – Income Tax 2.1. Income Tax - Introduction 2.2. Income Tax – The Schedular System 2.3. Income Tax – Computation 2.4. Income Tax – Employment Income 2.4.1.Income Tax – Employment Income – Employment Benefits 2.4.2.Income Tax – Employment Income – Amounts Treated as Earnings 2.4.3.Income Tax – Employment Income – The Benefits Code 2.4.4.Income Tax – Employment Income – Lower Paid Employees 2.4.5.Income Tax – Employment Income – Exemptions to Taxable Benefits 2.4.6.Income Tax – Employment Income – Summary of Taxable Benefits 2.4.7.Income Tax – Employment Income – General Deductible Expenses 2.4.8.Income Tax – Employment Income – Deductible Travel Expenses 2.4.9.Income Tax – Employment Income –Deductions and Taxable Benefits 2.4.10. Income Tax – Employment Income – Links to Employment 2.4.11. Income Tax – Employment Income – Variation and Termination Payments 2.4.12. Income Tax – Employment Income – Personal Service Companies and IR 2.5. Income Tax – Trading Income 2.5.1.Income Tax – Trading Income – Calculation of Profits 2.5.2.Income Tax – Trading Income – Trading Receipts and Compensation Cases 2.5.3.Income Tax – Trading Income – Trading Expenditure
Revenue Law – LAWS
Combined
Lecture
Notes
2.5.4.Income Tax – Trading Income – Professional Expenses 2.5.5.Income Tax – Trading Income – Basis of Assessment 2.5.6.Income Tax – Trading Income – Trading Losses 2.5.7.Income Tax – Trading Income – Purposes and Nature of Capital Allowances 2.5.8.Income Tax – Trading Income – Forms of Capital Allowances 2.6. Income Tax – National Insurance Contributions 2.6.1.Income Tax – National Insurance Contributions – Forms 2.7. Income Tax – Property Income 2.7.1.Income Tax – Property Income – Basis of Assessment 2.8. Income Tax – Savings and Investment Income 2.8.1.Income Tax – Savings and Investment Income – Interest 2.8.2.Income Tax – Savings and Investment Income – Dividends 2.9. Income Tax – Miscellaneous Income I 2.10. Income Tax – Miscellaneous Income II
3. Section Three – Corporation Tax 3.1. Corporation Tax – Introduction to Corporation Tax 3.2. Corporation Tax – Meaning of a Company 3.3. Corporation Tax – Charge to Tax 3.4. Corporation Tax – Accounting Period 3.5. Corporation Tax – Deductions and Distributions in Computation of Corporation Tax 3.6. Corporation Tax – Final Calculations in the Computation of Corporation Tax 4. Section Four – Capital Gains Tax 4.1. Capital Gains Tax – Introduction to CGT 4.2. Capital Gains Tax – The Charging of Capital Gains Tax 4.3. Capital Gains Tax – Tax Exempt Assets 4.4. Capital Gains Tax – Calculation of the Chargeable Gain 4.5. Capital Gains Tax – Deemed Disposals 4.6. Capital Gains Tax – Underlying Assets 4.7. Capital Gains Tax – Entrepreneur’s Relief 5. Section Five – Inheritance Tax 5.1. Inheritance Tax – Introduction to and History of Inheritance Tax 5.2. Inheritance Tax – Why Tax Wealth? 5.3. Inheritance Tax – Lifetime Transfers 5.4. Inheritance Tax – Exemptions and Exclusions
1.Section One – Introduction
1.1 Course Information
Note – Clean handouts can be taken into the exam. Further information is available in the course guide.
It is an aim of the course to understand UK tax law and the primary structures thereof. Most countries have similar tax systems (leaving aside inheritance tax). There are 5 tutorials in the course, with the tutorial signup opening on the 19 th^ of January and closing on the 21 st^ of January. All tutors are external. The best introductory text – although not perfect – is Revenue Law, Principles and Practice. There is a voucher available on the course website which allows this to be purchased at a discount. It is dangerous to use out-dated material.
o Direct taxes are, e.g., income tax and corporation tax which take into account the characteristics of the individual paying them (e.g. level of income, previous gains, personal allowance etc.) o Indirect taxes are, e.g. VAT and stamp duty which do not take into account the characteristics of the individual paying them. These are generally levied on individual goods and collected by another person. Another means of dividing taxes is by progressive, proportional or regressive o A tax system is progressive if it takes a higher proportion of tax from those who have greater income or wealth than from those who have lower income or wealth. The UK system is progressive in that as income increases, tax as a percentage of income increases
- this is both because of the existence of the personal allowance and the higher rate of tax charged on higher incomes. Increasingly in Eastern Europe there is a tax free band with a flat rate of tax above this – thus there is a 0% band then a single positive band when the latter is exceeded. o A tax system is proportionate (‘flat’) if rates are based on the tax base as a whole – e.g. a 20% tax on all individuals is a proportional tax. VAT, for example, seems to be a proportional tax. In fact, VAT is de facto regressive although formally proportional. This means that individuals on low income pay a higher percentage of tax than those on higher taxes. Cigarettes are a good example. A person who is poorer who smokes 20 cigarettes per day and a person who is richer who smokes the same pay, formally, the same amount of tax. Relative to their income, however, the poorer individual pays a far higher proportion of income. o Direct taxes tend to be progressive, while expenditure taxes tend to be formally proportional but de facto regressive. This is bourn out by ONS statistics on the ratio of inequality :
Original Income Gross Income Disposable income
Post-tax income Final Income
Top Quintile 14.7 6.6 5.6 6.9 3.
Bottom Quintile 1 1 1 1 1
o These tables compare the levels of income of lowest and highest quintile of the population. Thus in the original analysis the top quintile have on average 14.7 times more income than the bottom quintile. The next column takes into account state benefits, showing that those in the top quintile have on average 6.6 times more income after the calculation of state benefits. The next column takes into account direct tax showing that those in the top quintile have on average 5.6 times more income after the calculation of direct tax, which is thus slightly progressive.
The next column takes into account indirect tax that those in the top quintile have on average 6.9 times more income after the calculation of indirect tax, which is therefore slightly regressive. The final column column takes into account non-tax benefits (e.g. state provided or state subsidised services) which equalise somewhat the figures. It shows that he top quintile have on average 3.8 times more income after the addition of state provided goods and services. o In the final analysis, then, these figures indicate that it is not the collection but the disposal of taxes which has the greatest effect on inequality. Of course, certain sections of the population consume a higher proportion of goods and services than others. Income tax and national insurance contributions are major-revenue raisers for the state. Changing VAT and income tax rates is the main ways in which the state can raise revenue.
1.3 UK Tax and Scotland
Scotland contains 8.3% of the population of the UK. Most recent figures estimate that it contributes 8.6% of UK tax revenue, more than can be said for many English regions, NI and Wales. o Whether or not Scotland contributes more than its fair share or less depends hugely on North Sea Oil. Allocating oil on the geographic basis (e.g. by determining within whose coastlines the oil falls) Scotland’s position is different than when oil is allocated on a per capita basis. o Just over 90% of North Sea oil is within Scottish waters. Under an independent Scotland under the current conditions, this oil would contribute around 20% of Scottish tax revenue
- but is it a good basis for revenue raising? The answer would seem to no – the price of North Sea oil is volatile; its future profitability is questionable and its value is dependent on geopolitical factors over which Scotland has little control. Oil fields are aging. o The IFS publishes interesting figures showing how the pattern of tax varies in Scotland:
o Scotland Act 1998 Part 4 - Scottish Government has power to raise or reduce the basic rate of income tax by +/- 3%. This power was never used – a variation of 3% would amount to a £450m change and this was not deemed to be worth the political trouble to introduce. The cost of introducing a variant tax rate may also have outweighed the revenue change which it would generate. o Scotland Act 2012 (inserting Part 4A into the 1998 Act) extends Scottish tax powers. Scottish rate of income tax ( SRIT ) – from 2016 the UK rates of income tax on a “Scottish taxpayer” (i.e. resident in Scotland) will be reduced by 10% and Scotland will suffer a corresponding reduction in its finance from the UK. Thus there will be a basic rate of UK tax of 10% Scotland can then set the SRIT, receiving SRIT income. Applies only to labour and rental income (not investment income). SIRT variation cannot disturb the additional higher tax bands. The SRIT must be the same across all bands and cannot raise aggregate higher taxes between bands by creating a differential between bands. o Stamp Duty Land Tax will be replaced by the Land and Buildings Transaction Tax (LBTT) –LBTT (S) Act 2013 from April 2015. SDLT is an odd tax in that there are band ‘triggers’. Moving into the next band results in paying the whole rate of the band rather than the proportion of the property value over the band. Under the new LBTT, tax is paid on the excess rather than on the whole property. o Landfill tax will be replaced in 2015 by the Landfill Tax (Scotland) Act 2014 o A power to extend the range of devolved taxes by regulation is also given (e.g. carrier bag tax). Following the no vote, further devolution of taxation will occur. The Smith Commission recommended that the rates of income tax on labour and rent income should be fully devolved (not the “base”, not the personal allowance, and not on investment income. Other taxes (apart from LBTT, Aggregates Levy and Air Passenger Duty) remain reserved. Barnett formula to stay, adjusted for income tax.
1.4 Functions of Taxation
Taxation is necessary to run a state, although the kind of state will determine the level of tax need. Until recently, taxes were primarily on capital and the vast majority of the population paid little tax. With the creation of the welfare state, this model became unsustainable. o It was only with the end of the Second World War that the majority of individuals would pay tax. o The way that taxes are raised is also of significance – it can be used to implement government policy (e.g. by making more expensive goods which the government does not wish individuals to consume – cigarettes and tobacco are examples. Others would argue that the reason for taxing these goods is relatively inelastic demand relating thereto. Levying taxes on cigarettes and alcohol creates a lower risk that alternative goods will be used. The government collects four times more tax revenue from tobacco than it spends on tobacco related diseases.
o It is also possible to make certain goods cheaper by giving tax relief thereon. An example is environmental capital allowances which allow a rebate when there is taxed capital expenditure on particular environmentally friendly goods. Does the tax system redistribute actual wealth? Studies found that those who died and were very rich, finding that such people were 60 times more likely to have inherited a large amount of money. This tends to suggest that the tax system does not effectively redistribute transmitted wealth.
1.5 Sources of Tax
The budget is the main source of tax law, issued in March. It can make immediate changes to tax by the Provisional Collection of Taxes Act 1968 provided the changes are subsequently enacted in the following Finance Act. Every year there is a Finance Act – by constitutional practice, many taxes are annual including income tax. Without this annual authorisation there could be no levying of particular taxes. Note that no other government department has access to yearly legislative change. o There are further pieces of legislation which give effect and structure to the tax system, as well as statutory instruments regulating VAT. Because taxes cannot constitutionally be imposed by any actor but the legislature, no case law or common law rule impose taxes. Judicial decisions, however, do have an important interpretative effect and therefore may indirectly expose individuals and groups to liability to tax. o Generally there is a jurisdictional uniformity here – cases may be cited in all jurisdictions and be accepted by the courts thereof. If, however, there is a fundamental difference in the legal system underlying the decision, the particular case in question may be less persuasive. EU law also plays an important part in regulating tax – e.g. the EU VAT directive requires all member states to have a system of VAT. There is a lower impact of EU law on direct tax (although certain TFEU provisions may indirectly affect its collection). ECHR law and the decisions of the ECtHR has a limited impact but in some cases is relevant. In Burden & Burden v United Kingdom , the grand chamber of the ECtHR ruled that it was within the margin of appreciation of the United Kingdom only to permit tax free transfers between spouses and not siblings. HMRC published practice is very important in determining the construction of tax law provisions, although it is not law and particular constructions have been challenged in the past. Occasionally, courts in public law circumstances have protected individuals relying on the published practice on the basis of legitimate expectation. o There are, however, significant constraints to this rule. The taxpayer can only rely on the advice of HMRC if they are transparent about their own financial situation.
1.6 Administration of Tax
HM Revenue and Customs (HMRC) was formed in 2005 from two separate departments - Inland Revenue (direct taxes) and Customs and Excise (indirect taxes). Its main powers contained in the Taxes Management Act 1970 (TMA) (direct taxes) and VAT Act 1994 (indirect taxes)
o The broad rule is that if a person is attached to the UK through residence, he, she or it will be taxed on all income/capital gains wherever the income or gains arise (this is called “residence” based taxation or “worldwide” taxation). o If the taxpayer is not so attached to the UK, then a charge to UK tax will only arise if the income/capital is in the UK (“source” or “territorial” taxation). And even here, not all assets situated in the UK are within the capital gains tax base. Note that domicile is different from residence. It refers to where the home of an individual is on a long term basis (e.g. where they keep their home, bank accounts and even cemetery plots). It is possible to live abroad for many years but retain a UK domicile. o Those who are UK resident but not UK domiciled (“non-doms”) are subject to special rules, often only subject to taxation of income arising in the UK and income sent to the UK from abroad (the remittance basis - Income Tax (Trading and Other Income) Act 2005 ss.831 and 832) rather than all worldwide income. Thus:
UK residence + UK domicile = UK income and worldwide income is taxable
UK resident + no UK domicile = UK income and only worldwide income remitted to the United Kingdom
o For long term residents who are not UK domiciled (seven years or more residence out of last 9 years), special rules apply: Can choose between being charged £30,000 p.a. (rising to £50,000 when resident 12 of previous 14 years) AND pay tax on remitted income, or being treated in the same way as a UK-domiciled resident and taxed on worldwide basis. Non-residents are generally taxed on income arising in the UK. Precise rules depend on what type of income is received: ITA s 809A et seq. Inheritance tax operates in similar fashion, except that it uses the concept of domicile rather than residence as the connecting factor. There is an extended definition of domicile for Inheritance Tax (see later). There is an obvious risk of taxation by more than one jurisdiction: the UK is a signatory to over 100 Double Taxation Agreements, under which relief is given in the UK to UK residents for foreign tax paid on the certain similar transaction, and the contracting party undertakes to give similar relief to their own residents for UK tax (or will exempt UK source income). Priority to tax is normally given to the country of source, with the residence country providing relief. More common for income tax and capital gains tax than inheritance tax.
1.9 Tax Avoidance
Tax avoidance and tax evasion are different. Tax evasion is illegal – it is fraud and gives rise to criminal liability. Tax avoidance is the exploitation of tax legislation and loopholes in order to profit therefrom and avoid the effect thereof. o Tax avoidance is problematic because it undermines faith in the tax system. To an extent, every tax system relies on voluntary compliance and therefore avoidance is bad for the tax system. o Moreover, tax avoidance means that there is less revenue raised and alternate means must therefore be sought.
There are a number of legislative approaches to reducing tax avoidance: o 1. Sniper Provisions – Closing a particular loophole which has appeared. If an avoidance scheme involves steps A – B then B – C, and depends on the AB step qualifying for an exemption, the legislation can state that the A B step no longer qualifies for the exemption where it is followed by a BC step eg FA 1986 s 102(5A). o 2. Relief or Motive Tests – Hedging a relief or an exemption with a motive test – eg ITA 2007 s 684 – relief only available where the transaction does not have a main object of tax avoidance. (Generally referred to as a “TAAR” (targeted anti-avoidance rule)) o 3. Re-Writing – Re-writing of transactions e.g. the “associated operations” rule for inheritance tax IHTA 1984 s 268. Since 2004, “promoters” of certain tax avoidance schemes are required to notify HMRC of schemes at an early stage (FA 2004 s.306 et seq). Enables earlier legislative intervention and is regarded by HMRC as having “changed the economics of avoidance” (HMRC 2009) although the NAO concluded in 2012 “There is no evidence that the use of such schemes is reducing” (NAO Tax Avoidance – Tackling Marketed Tax Avoidance Schemes). After a false start in 1996, a general anti-avoidance rule (a GAAR ) was eventually introduced in Finance Act 2013, following the recommendations of a report commissioned by the Treasury (the Aaronson Report, Nov 2011) This aims to target
“artificial and abusive tax avoidance schemes which, because they are often complex and/or novel, could not have been contemplated directly when formulating the tax legislation. The GAAR will apply to counteract, on a just and reasonable basis, the tax advantage that would otherwise be obtained.”
o Thus where an individual fails the GAAR test, HMRC can tax an individual on a just and reasonable basis. o The UK GAAR is narrower in focus than most GAARs in place in other jurisdictions – in the UK the rule calls itself a general anti-ABUSE rule. Two notable judicial approaches have been taken to combat tax avoidance: o 1. Literal construction of statutes: IRC v Duke of Westminster [1936] AC 1 o 2. Development of a judicial anti-avoidance principle? The “new approach”: IRC v Ramsay [1981] STC 174, Furniss v Dawson [1984] 1 All ER 530 After over 30 years of judicial development, much of it in the House of Lords,, the present position appears to be that there is no general judicial anti-avoidance principle after all, but that it is all a matter of statutory construction: BMBF v Mawson [2005] STC 1 and statutes must be interpreted purposively and applied to transactions viewed realistically.
Reading: Revenue Law 31st or 32nd ed ( hereinafter - RL) ch 1, ch 2 part I (Introduction), ch 18 to 18.30 The Overseas Dimension (31st ed only) - ignore the position prior to 6 April 2013,ordinary residence, partnerships and trustees.
2. Section Two – Income Tax
2.1 Income Tax - Introduction
Note – There are computational examples of income tax at the end of the handout
Each source has its own rules for determining the amount of taxable income, deductible expenses etc. Note that the general rule is no source, no tax (subject to anti-avoidance rules), although there is little that is not mentioned. The year of assessment is as follows: o Income Tax (also capital gains tax and inheritance tax): April 6 to April 5 o Corporation Tax - April 1 to March 31 Some aspects of income tax are subject to exemptions: o Exempt because of character of receipt (part 6 of ITTOIA has a long list – examples are): Some social security benefits ITEPA part 10 chs 4 and 5 First £30,000 of redundancy/golden handshake ITEPA s 403 Interest on UK Savings Certificates ITTOIA s 692 Income from Individual Savings Accounts ITTOIA s 694 Scholarship Incomes ITTOIA s 776 “Rent a Room” income up to £4,250 ITTOIA s 789 o Exempt Recipients o Charities: ITA part 10 (s.518 et seq.)
2.3 Income Tax – Computation
To compute income tax the following steps should be followed: o 1. Calculate all income from each source (e.g. salary and employment benefits) after allowable expenses and aggregate o 2. Make any deductions which are permitted FROM income (eg losses) (Contrast expenses in generating income – these come off at 1. above) o 3. Check that a personal allowance (PA) (ITA s.35) is available (note the PA is reduced for individuals with high income – see later under computation) and deduct. Individual PA (unreduced) 2014-15 - £10,000. o 4. Calculate liability to tax 20% (basic rate) on income (after PA) up to £ 31, 40% (higher rate) on income in excess of £31,865 up to £150, 45% (additional rate) on income in excess of £150,000. Note that this straightforward scale does not apply to some income (namely savings income to taxpayers with little other income and dividend income). o 5. Give effect to reliefs which reduce tax o 6. Subtract any tax which has been deducted at source (e.g. tax taken off on bank interest, PAYE).
Note – It is important to be able to work out how something is gross of tax if the net of tax is given.
An individual has a duty to fill in a tax return if they have untaxed income or capital for the year. Most, however, have income which is taxed to source through PAYE.
Exam papers for this course can also be found under the name ‘Taxation (Ordinary)’
2.4 Income Tax – Employment Income
Employment income is the kind of income which most people receive. The first stage in calculating this is determining whether an individual is in employment (or not, as the case may
be). There is no bright line and it can sometimes be difficult to determine if someone is in employment or not. o Take e.g. casual but habitual employment which is effected under a contract with a clause restricting employment and another allocating work. Moreover, the contract provides for holiday pay. Each of these aspects bring the employee closer to a contract of service (which constitutes employment) and not services (which does not). o In Ready Mixed Concrete (Southeast) Ltd v Minister of Pensions and National Insurance some clarification of when an individual is employment:
“A contract of service exists if these three conditions are fulfilled.
(i) The servant agrees that, in consideration of a wage or other remuneration, he will provide his own work and skill in the performance of some service for his master.
(ii) He agrees, expressly or impliedly, that in the performance of that service he will be subject to the other's control in a sufficient degree to make that other master.
(iii) The other provisions of the contract are consistent with its being a contract of service.”
o The second test (control) is of most significance here. It is important to look at the terms of employment to determine whether or not a person is defined as being employed by another. o Note also the case of Hall v Lorimer (a national insurance case, the same tests for liability to which apply) where the taxpayer was a ‘vision-mixer’ who only provided his own skill and had no equipment. In this case the HMRC argued that the taxpayer was an employee, with the court considering various factors which help to identify whether or not an individual is an employee. o This distinction is important because there are different rules for employees and those providing services (e.g. in the deduction of expenses). Employers must deal with PAYE tax on employees and therefore must know who is employed.
2.4.1 Income Tax – Employment Income – Employment Benefits
It is thereafter important to value the taxable employment income. The most difficult aspect of this is the calculation of benefits given by the employer. It is common, for example, to provide the use of a company car. How are these to be taxed. The system is not particularly rational, unfortunately. A rational system is as follows:
“Salary or wages paid in cash are simply taxed as “earnings”. However, many employees get various “perks” in the form of assets given outright or the use of assets belonging to employers – company cars are an obvious example.
One of the issues in taxing employees is how to deal with such benefits. Clearly they have to be taxed in some way otherwise the opportunities for avoidance are enormous.
How should such benefits be taxed in principle?
A starting point would be to ensure that a person receiving a benefit is in the same position as a person who received income instead and buys the benefit personally.
Let’s say H buys a laptop costing £400. If he is a basic rate (20%) taxpayer, he will need to earn an extra £500 of income before tax to earn enough to buy the laptop. So this would suggest, should H be given a laptop by his employer, that he should be taxed as if he had received an extra £500 of income.
Earnings are defined in s.62 ITEPA as follows:
“a) any salary, wages or fee,
o Ordinary contractual payments (wages, salary and bonuses) are caught by a).
b) any gratuity or other profit or incidental benefit of any kind obtained by the employee if it is money or money’s worth, or
o For example, money paid in leaving employment, annual presents, any other benefit from employment. The important limitation here is that the earning must be money or money’s worth. o Money’s worth means that it is possible to convert what one receives into cash. In Tennant v Smith the an employee was provided with living accommodation – the employee was not given the accommodation outright but they were allowed to live there rent free. It was sought to tax that benefit but it was determined that this was not a taxable benefit as the accommodation was not convertible into cash. The taxpayer was not allowed to sublet the property. o Thus where a person is given the use of something by an employer, rather than convert it, this will probably not be caught under earnings (although it may be liable to tax under the benefits code). One small exception was elaborated in Heaton v Bell where the employee could have use of a company car or increased salary. The use of a company car is not generally a convertible benefit. The problem was, of course, that the employee was given an alternative. The benefit was determined to be taxable.
c) anything else that constitutes an emolument of the employment.”
o This incorporates old case law in emolument (the previous term used to describe earnings). Convertibility determines the value of a benefit for tax. The general rule is the second hand value of the benefit is used. In Wilkins v Rogerson a man was given a suit by his employer costing £14.50 but its second hand value was £5. The court decided that the second hand value was taxable, not the full value. o A common mistake is to confuse convertibility with ability to put a value on a benefit. E.g. – Free haircuts given to trainee hairdressers which would have cost the paying client £50 are not taxable as they cannot be converted into money. Realistically, it is not saleable. Also caught under b) is the discharge of an employee’s liabilities. In Nicoll v Austin a company director lived in a large, expensive house belonging to the company. The company agreed to pay the director’s electricity bills – was this taxable? Yes, this was a money’s worth discharge of obligations. o If the individual was provided with free electricity, this would not be a convertible benefit
- it is not possible to transfer the right. The payment of bills was a means of avoiding tax on particular benefits before the institution of the benefits code. o The valuation of these ‘discharge of liability’ benefits for tax purposes is the extent of liability discharged.
2.4.3 Income Tax – Employment Income – The Benefits Code
This section deals not with normal wages, but the situation in which the employee is given a benefit in kind, such as a holiday or use of a car or accommodation or incurs expenses which are reimbursed. These are defined in section s.75 ITEPA as: o 1. Amounts taxable under the IR 35 provisions (see later), o 2. Benefits taxable under the Benefits Code o 3. Amounts treated as earnings under Ch.12 Pt.3 (a rag bag of bits which don’t come anywhere else, e.g. payments by an employer to an unapproved pension fund on behalf of the employee) and o 4. Balancing charges (a capital allowance concept – ignore). The Benefits Code is of most importance here. The benefits code does not require the convertibility test to be satisfied before the value is taxed as income, unlike “earnings”. It has separate rules for valuation too. o There can be overlap between the benefits code and the convertibility test – if the former is used, the cost to the employer is the determining value while under the latter the second hand value is the determining value. The highest of the two valuations are taken. There are various tax categories under the benefits code, with variant rules on whether or not the benefit is taxable. Chapters 3-8 of the benefits code are of most relevance here and are examined in turn. CHAPTER 3 – Expenses o Reimbursement of expenses: sums paid to an employee. o Amount taxed: the amount reimbursed. o The reimbursement can be reduced by any payment which would qualify for a deduction as an allowable expense, for example under s 336 (covered later) – s 72. CHAPTER 4 – Vouchers and Credit Tokens o Vouchers (whether cash or non-cash) or credit tokens are taxed where provided by reason of the employment unless of a kind made available to the public generally and not made available on more favourable terms.
Are the following benefits taxed under s 62 as “earnings”? If so, what is the value at which they are taxed? (Ignore any special tax rules, discussed later, concerning any of these benefits. You are not asked here which are taxed under the Benefits Code) Weekend use of office car, use of office holiday flat in Marbella, reimbursement of mobile phone bill, mobile phone itself (does it make a difference it if is given for use by the employee, ownership remaining with the employer, or it is given outright to the employee?), free train travel for employees of a train company, free electricity in property occupied by the employee but owned by the employer (what difference does it make if the electricity bill is in the employee’s own name and is paid for by the employer, or is in the employer’s name and paid directly by the employer)? (Answers to this and other questions on the handout are on the course webpage)
o No fuel charge if the employee makes good all the cost of private journeys or the fuel is only made available for business travel: ( s.151 ). There may be agreements between employers and employees for the amount to be paid in tax on a car. CHAPTER 7 – Employment related loans o Cheap or low interest loans are taxable as a benefit, broadly on an amount which represents the difference between the interest paid by the employee (if any) and the official rate of interest. Further details not required. CHAPTER 8 – Residual charges o Very wide: covers other benefits or facilities of any kind provided for an employee or his family by reason of his employment (e.g. if an employer pays for an employee’s child to go to boarding school). o The use of an employer’s asset by an employee is dealt with by the wide s.205. o Amount taxed: normal rule where asset is transferred new – that is, the cost to employer (s.204) less any amount made good by the employee (s.203(2)). Marginal cost not average cost: Pepper v Hart. In Pepper the taxpayer was a teacher at a private school and the children of the teachers were permitted to attend the schools at significantly reduced fees. The question in the case was – what is the value of the benefit? What was the cost to the employer? Generally, the average cost of educating a child is the school fee as schools do not aim to profit. Was the employee, then, to be charged on the benefit of the average cost (e.g. the difference between the full fee and the reduced amount paid)? The employees argued that the relevant cost was the marginal cost – e.g. the cost to provide a new place for a new child. This marginal cost was significantly lower than the average cost. It was determined in this case that what the teacher paid in this case to the school was sufficient to cover the marginal cost. The House of Lords decided that the relevant cost here was the marginal cost. o This can be applied e.g. if an individual works for an airline. The taxable amount would not be the average cost of taking a person on the airline but rather the marginal cost of the new passenger. o Note that these provisions deal only with those things not dealt with elsewhere in the benefits code. Where a benefit is caught under Code AND is treated as “earnings within Ch.1 Part 3 of the Act” under s 64, the effect is that the value of the benefit is calculated as if it were “earnings” and then valued again under the code, and the higher amount is taxed. Note the following self test question:
1. K (a higher paid employee) is given the use of hi-fi equipment with a market value of £1,000 (cost to employer £800). She used it for 2 years, and then her employer gives it to her when it is worth a) £700, b) £500. On what amount is K taxed in the first year, second year and third year (when it is transferred to her)? (You will need s.206 for this last one.). What difference would it make if K was a lower paid employee throughout? 2. Consider the list of benefits p 22 assuming them to be received by a higher paid employee. Which now have to be considered under the benefits code?
2.4.4 Income Tax – Employment Income – Lower Paid Employees and the Benefits Code
‘Lower paid’ employees are subject to a different regime for taxable benefits under the benefits code. Today, the definition of a lower paid employee is a person with salary and benefits of under £8,500 (s.217) Most parts of the benefits code (Chs.3, 6, 7 and 10, leaving only vouchers and living accommodation) do not apply to benefits provided in relation to “ lower paid employments ” (s.216). o For a lower paid employee, a benefit is only taxable if it can be taxed under the money’s worth rule as “earnings”, or falls under Ch.4/5 of the benefits code. Note the difference for lower paid employees between the employer providing them with a non-convertible benefit (e.g. electricity) and paying an employee's bill. Take e.g. the example of a person with a salary of greater than £8,000. A holiday in Spain worth £600 would not be earnings in terms of the convertibility test but would fall under chapter 10 of the benefits code. Is a person in this situation a high paid employee or a low paid employee? o When valuing a benefit, it is assumed that a person is a higher paid employee. Thus the individual above would have a salary of £8,600 and would pay tax as a higher paid employee. For the purposes of determining if a person is a higher or lower paid employee: o 1. Determine the value of all of the benefits which would be subject to tax if they were a higher paid employee. 2a. If this totalling brings them over the limit of £8,500 they are a higher paid employee and analysis should proceed on this basis. 2b. If this totalling does not bring them over the limit of £8,500 they are a lower paid employee and analysis should proceed on this basis.
2.4.5 Income Tax – Employment Income – Exemptions to Taxable Benefits
The following are not included as earnings under the benefits code: o Reimbursement for expenditure on fuel for private cars used on work-related travel (up to a fixed limit – s.230) Ch. o The provision of workplace parking or reimbursement of expenses incurred on workplace parking, use of a cycle, provision of late night taxis home Ch. o Work related training Ch. o Use of sports facilities, annual parties Ch. o Removal expenses Ch. o Miscellaneous Ch. Accommodation, supplies etc. used in the performance of duties s.316. This is technically a very broad category – anything which is necessary for the completion of employment is tax exempt. Subsidised meals s. Work-place nurseries s. Child care vouchers up to £55 per week s.318A – policy questionable; the government gives a relief where the employer determines. Mobile phones s. o One free medical check per annum s.320B The first £500 of “recommended medical treatment” s.320C o Suggestions awards s.
