Legal background to expenses payments and benefits (480: Chapter 1)
Find out about the legal background to expenses payments and benefits received by directors and employees.
Overview
1.1
Under general tax law some, but not all, expenses payments and benefits are taxable remuneration. Since 1948 the Income Tax law has also contained special rules affecting most directors and employees. The broad effect of these special rules was that expenses payments made to them and benefits provided for them became taxable.
1.2
The Finance Act 1976 and subsequent Finance Acts have extended these special rules to a greater number of individuals and provided new arrangements for taxing a variety of benefits provided for directors and certain employees (for example, motor cars, loans and vans).
Enquiries
1.3
Enquiries by taxpayers (or their agents) about the application of the provisions of ITEPA 2003 to their particular circumstances should be made using these contact details.
The benefits code
1.4
Sections 1(1), 62(1), 7(5) and (6)
In ITEPA 2003, Income Tax is chargeable on employment income that includes:
- earnings – salary, wages, fees and other emoluments
- amounts treated as earnings – including the benefits code
Sections 63(1) and (2)
- amounts which are not earnings but count as employment income (see Employment related securities and arrangements: Chapter 23 and Non-cash benefits: Chapter 27 of this tax guide)
The benefits code concerns expenses payments to, and benefits provided for, directors and employees.
Deductible expenses
1.5
Sections 336-338
Directors or employees affected by these provisions will not necessarily have to pay tax on the full amount or value of expenses payments or benefits given. They may be entitled to a deduction for certain expenses. More information on this is given in Deductions for work experiences: Chapters 7 to 10 and Taxation of entertainment expenses: Chapter 20.
From 6 April 2016 expenses and benefits that would previously have been within a dispensation may be covered by the exemption for paid or reimbursed expenses Chapter 2.
Who’s affected
1.6
Section 63(1), Section 67(1), Section 216(3)
The benefits code applies to directors and employees. Up to 5 April 2016 the benefits code applied only to:
(a) Directors and certain other persons in controlling positions whatever their remuneration, but not to certain full-time working directors and certain directors of charities and non-profit making concerns.
(b) Employees, including the directors excluded under (a) above, who are remunerated at the rate of £8,500 or more a year including all expenses payments and benefits before the deduction of any allowable expenses other than:
- contributions to an approved superannuation fund for which the individual is entitled to tax relief as an expense
- exempt profit-related pay
- contributions under an approved payroll giving scheme
For guidance on the application of the benefits code up to 5 April 2016 and the exclusion of certain directors and employees refer to tax guide 480(2015).
Certain motoring expenses are disregarded for purposes of assessing the car and car fuel benefits described in Chapters 11 to 13. All these motoring expenses, in addition to the car and fuel benefit charges mentioned in Chapters 11 to 13, must be taken into account for the purposes of the £8,500 test (see paragraph 11.14).
Directors
1.7
Sections 67(1) and 67(2)
The word director includes directors of companies and any person in accordance with whose instructions the directors are accustomed to act (other than a person who’s merely a professional adviser). The word company includes an unincorporated association.
Section 1119 CTA 2010
The word director also includes a member of the committee which manages such an association and any member of a body whose affairs are managed by its members.
Exclusion of ministers of religion from the benefits code
1.8
Sections 290C to 290G
The benefits code does not apply to ministers of religion who are paid at a rate of less than £8,500 a year including all expenses payments and benefits before the deduction of any allowable expenses.
Meaning of employment
1.9
Section 66(3)
The word employment as used in this tax guide means any office or employment whose earnings are chargeable as employment income.
Meaning of remuneration
1.10
For simplicity, the word remuneration has been generally used in this tax guide in place of the word earnings in ITEPA 2003 and means any kind of pay for a job. It includes salaries, fees, pay, wages, overtime pay, leave pay, bonus, commission, perquisites, tips, gratuities, benefits in kind and expenses payments and allowances.
Benefits provided for the family or household of an employee
1.11
Section 201(1), Section 721(5), Section 174(6), Section 993 ITA 2007
Subject to minor exceptions any benefit provided for the members of the family or household of an employee ranks as if it were provided for the employee personally. The term family or household covers the employee’s:
- spouse
- children and their spouses
- parents
- servants, dependants and guests
- registered civil partner
Where benefits are provided in connection with loans and share incentive schemes there are different definitions of the family circle. For beneficial loan arrangements see paragraph 17.10.
Provision of benefits by employer
1.12
Sections 201(3) and 117
Where expenses payments are made to, or benefits are provided for, an employee or members of the employee’s family or household by the employer, they’re deemed to have been made or provided by reason of that employment – they’re regarded as part of the reward for the job.
1.13
Sections 201(3) - Proviso
There’s one statutory exception to this – where the employer is an individual and a benefit provided by the employer has been made in the normal course of domestic, family or personal relationships. In addition, Chapter 11 paragraph 11.10 gives details of certain exemptions which apply where a company provides cars for 2 or more members of the same family.
Provision of benefits by someone other than the employer
1.14
Section 201(2) Section 209
Benefits provided for employees (or members of their families or households) by reason of their employment by someone other than their employer are taxable in the same way as if they had been provided by their employer.
1.15
Section 554A
Finance Act 2011 introduced new rules in Part 7A ITEPA 2003, which apply in certain circumstances where there are arrangements to use third parties to reward employees.
These rules are sometimes referred to as the ‘disguised remuneration’ regime. Broadly speaking, if third-party arrangements are used to provide for what is in substance a reward or recognition, or a loan, in connection with the employee’s current, former or future employment, then an Income Tax charge arises and the amount concerned will count as employment income.
1.16
Section 554A, 554B, 554C and 554D
The rules only apply where a defined step is taken through a ‘relevant third person’.
1.17
Section 554A
The direct employer is not a ‘relevant third person’ unless it’s acting as a trustee.
1.18
Section 554A
A company that’s a member of the same group of companies as the employing company at the time the step is taken is not a ‘relevant third person’ unless the:
- step is taken as part of a tax avoidance arrangement, or
- group company is acting as a trustee
1.19
Sections 554Z(5) and (6)
In determining whether 2 companies are members of the same group for this purpose, a special test is used. This test applies the group membership rules for Corporation Tax on chargeable gains with one modification.
The chargeable gains test is a 75% test. For the purposes of the group exception, use 51% instead of 75%. But otherwise the test works the same way.
1.20
Sections 554E to 554X inclusive
The rules in Part 7A ITEPA 2003 contain detailed exclusions. These prevent the legislation from catching certain arrangements, even where there’s a ‘relevant third person’ involved.
Generally the exclusions are targeted at arrangements which are not tax avoidance arrangements. The exclusions are subject to conditions and cover topics such as employee share and share option schemes, employee car ownership schemes, certain pension schemes and transactions under employee benefit packages.
1.21
For more information on the new rules, refer to the CWG2(2017 to 2018), Chapter 5, paragraphs 15.7 to 15.8 titled Employment income provided through third parties (‘Disguised Remuneration’ rules).
Close companies – treatment of benefits
1.22
Sections 1064(1), (2) and (4) CTA 2010
A benefit which falls within the special provisions described in this tax guide is excluded from the extended definition of distribution for close companies which normally includes benefits in kind afforded to a participator or to an associate of a participator.
1.23
Part 9, Chapter 2 CTA 2010
Broadly speaking, a close company is one under the control of 5 or fewer participators and their associates or of directors who are participators and their associates.
There are special definitions for this purpose of control, participator and associate. There are exceptions. For example, a company whose shares are quoted on the Stock Exchange is not normally close if 35% or more of its shares are held by the general public.
Optional remuneration arrangements
1.24
Schedule 2 Finance Act 2017
From 6 April 2017 special rules determine the amount of a benefit treated as earnings from the employment where the benefit is provided as part of optional remuneration arrangements. Optional remuneration arrangements are arrangements where an employee gives up the right, or the future right, to salary (commonly called salary sacrifice) or the right to some other form of cash remuneration in return for the benefit. They include flexible benefit packages with a cash option.
Where a benefit is chosen instead of some form of cash pay, the taxable value of the benefit and the amount liable for National Insurance contributions is the greater of the:
- amount of salary or cash pay foregone
- taxable value of the benefit under the normal benefit in kind rules, ignoring any amount made good
For most benefits, where those benefits are provided through optional remuneration arrangements the existing tax exemptions do not apply from 6 April 2017.
The following benefits are not affected by the new rules:
- payments by employers into registered pension schemes
- childcare vouchers, workplace nurseries, and directly contracted employer provided childcare
- bicycles and cyclist safety equipment (including Cycle to Work)
- Ultra-Low Emission Cars (ULEVs) with CO2 emissions of no more than 75g per kilometre that are in the scope of the car benefit charge
- payments and benefits connected with taxable cars and vans
Transitional provisions apply for a limited period. Subject to certain specific exceptions, optional remuneration arrangements entered into before 6 April 2017 continue under the normal benefit rules until the earlier of:
- variation, renewal (including auto-renewal) or modification of the arrangement, and
- 6 April 2018
Those exceptions are cars with CO2 emissions of more than 75g kilometre, living accommodation and school fees where the latest date for transitional protection ending is 6 April 2021.
There’s more guidance about optional remuneration arrangements in Appendix 12.