Non-cash benefits (480: Chapter 27)
Find out about non-cash benefits in connection with termination of employment or from employer-financed retirement benefits scheme
Overview
27.1
Chapter 2 Part 7A
Settlements made on termination of employment may include the provision of benefits in non-cash form. Non-cash benefits may also be given under an employer-financed retirement benefits scheme.
For example, a former employee is allowed to use a company car for a period after the termination. Another example is where instead of paying cash in settlement, property is transferred.
This chapter may tax sums funded through or given under a ‘third-party’ employer-financed retirement benefits scheme – see chapter 1 paragraphs 1.16 to 1.23. Part 7A also contains provisions to avoid double charging of tax. Both Part 7A and Section 394 can lead to tax on relevant benefits given under an employer-financed retirement benefits scheme. The legislation first looks to charge such benefits in Part 7A, but if excluded there, then see Section 394.
If tax is charged on the benefit under Section 394 ITEPA 2003 then there’s no charge to tax on the benefit under any other provision of ITEPA 2003, providing the 394 charge arose as a fall-back from any other charges under general earnings of Chapter 2 of Part 7A. ‘Relevant benefits’ are defined in Section 393B ITEPA 2003. If the benefit given is not a relevant benefit and was not charged under Chapter 2 of Part 7A it is not taxable under Section 394 but may be taxed elsewhere.
Section 401
This section taxes benefits made in connection with termination of employment – but only if they’re not taxed under any other section.
For example, where it’s part of the employment contract that property is transferred on termination, that’s taxed elsewhere and so not under this section.
This section applies to benefits made available by anyone in connection with termination of an employment.
Sections 401(1) and 401(4)
Where such benefits are made to the employee’s spouse, relative or dependant, their value is taxed on the employee. Any such benefits made on the employee’s behalf or instructed by the employee are also taxed on the employee.
27.2
Section 58 Finance Act 1998
Finance Act 1998 introduced new rules for valuing such non-cash benefits received on or after 6 April 1998.
27.3
Section 398
Similar rules apply to non-cash relevant benefits received from an employer-financed retirement benefits scheme (see Employment Income Manuals EIM15120, EIM15025 and EIM45710).
The basic rule for valuing non-cash relevant benefits under Sections 401 and 393 ITEPA 2003
27.4
Sections 415 and 398
The taxable value of the non-cash benefit is the greater of its:
- convertible value
- cash equivalent
In practice, convertible value only needs to be considered if the benefit has grown in value since being acquired by the person giving it – for example, if a former employer transfers to the former employee property worth £75,000 at termination (its convertible value) which cost £30,000.
Otherwise, the employee need only consider the ‘cash equivalent’ of the benefit. The ‘cash equivalent’ of the benefit is found by applying rules in the benefits code (Part 3 ITEPA 2003).
If you’ve ‘made good’ some of the cost of the benefit, this is deducted in arriving at the taxable value.
Trivial benefits are exempt where they meet the conditions described at paragraph 5.24, chapter 5 of the non-taxable payments and benefits guidance.
Cash equivalent of benefits (excluding provided accommodation)
27.5
Part 3
The cash equivalent is found by applying the appropriate rules from Part 3 ITEPA 2003 which are relevant to the type of benefit given.
For example, where the benefit is the use of a car the rules in chapter 11 of the 480 tax guide ‘cars and vans available for private use’ would be appropriate.
But some adjustment to those rules is necessary. For example:
- the rules here apply to all taxpayers
- some provisions in Part 3 ITEPA 2003 will not apply because they deal specifically with circumstances during employment
- for ‘employee’ read ‘former employee’ as necessary
- only those rules in Part 3 ITEPA 2003 which deal with determining the ‘cash equivalent’ of benefits apply - other rules are not relevant
These adjustments must be borne in mind when using rules elsewhere in this tax guide.
The appropriate rules in the 480 tax guide for some particular benefits are:
- other benefits, chapter 6
- use of a car, chapter 11
- car fuel, chapter 13
- beneficial loan, chapter 17
- mobile phone, chapter 22
Cash equivalent of provided accommodation
27.6
Sections 398(6) and 415(7)
The rules in chapter 21 of the 480 tax guide apply – with one modification.
If the ‘cost of providing the accommodation’ (as defined in 21.5) is £75,000 or less, the tax charge is the same as in 21.9. If the ‘cost of providing the accommodation’ (as defined in 21.5) is more than £75,000, and the ‘sum made good’ by the employee exceeds the greater of (1) the ‘annual value’ (as defined in 21.9) and (2) the rent paid (by 6 July following the tax year from 2017 to 2018 onwards) by the employee, then, the amount to be subtracted in 21.11(c) is that excess.
Reporting: termination benefits
27.7
Section 684 and Regulations 91/93 and 96 Income Tax (PAYE) Regulations 2003 (S12003/2682)
Under regulations brought in by the Finance Act 1998, the former employer reports to HMRC all the termination settlement details within 92 days of the end of the tax year.
The former employer must give you a copy of that report within the same time limit.
27.8
Any figures for benefit values in the report will be based on those in force for the year of the termination. These may need to be updated to those in force for the year in which you actually receive or enjoy the benefit. Follow the guidance above to do this.
Reporting: employer–financed retirement benefits schemes
27.9
Sections 251(1) to (2) (e)–(f) FA2004 (S12005/3453)
Under regulations brought in by Finance Act 2004 the person appointed to deal with the scheme’s tax liabilities must:
- tell HMRC when a scheme comes into operation by 31 January following the end of the year of assessment in which it first comes into operation
- report details of relevant benefits provided by 7 July following the end of the tax year in which they’re provided
Exemptions and reliefs
27.10
The main exceptions and reliefs from tax for charges within Section 401 ITEPA 2003 are for:
Section 403(1)
- the first £30,000 of any payment or benefit, excluding post-employment notice pay (all charges within the section for that employment, and for any other employment with the same or an associated employer, must be added together before applying the exception)
Section 406(a)
- payments and benefits made on death
Section 406(b)
- payments and benefits made on account of injury or disability HMRC can advise
27.11
The main exceptions and reliefs from tax for charges under Section 394 ITEPA 2003 are for benefits:
Section 393B (2)-(3) ITEPA 2003 Paragraphs 53 and 54 Schedule 36 Finance Act 2004 Section 395 ITEPA 2003
- given by reason of ill-health or disablement whilst an employee
- given by reason of death by accident whilst an employee
- chargeable under Part 9 ITEPA 2003 (pension income)
- resulting from employer contributions made before 6 April 2006 provided that those contributions have been taxed on the employee and the scheme’s income and gains are all taxed in the UK
- of a description set down in regulations