Professional November 2017

Payroll insight

Private use of assets (revisited)

Peter Minchinton, employment taxes consultant at PSTAX, revisits the important issue of use of assets (vehicles) by the emergency services

I n an earlier article (see Issue 33, September 2017), we considered the change to tax legislation when an asset is provided for the private use of an employee. As a reminder, where an asset is provided to an employee and it is available for their private use a benefit arises under section 205 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA). In such cases, the benefit is calculated on the higher of 20% of the market value when first provided as a benefit or the leasing costs, plus any other expenses incurred in the tax year. From that sum an amount may be deducted for any amounts made good by employees. Where the asset is used both for business and private purposes section 365 ITEPA has allowed for a deduction of the business element, so that the employee only paid tax on the element relating to the private use. However, for Class 1A National Insurance contributions (NICs) purposes the benefit before the business deduction was the chargeable figure. Finance Act 2017 made changes to section 205 effective from 6 April 2017, implementing two new paragraphs to be used when calculating the benefit. Under the first new paragraph there is a reduction where the asset is unavailable; and the second allows a reduction where the asset is shared between two or more employees. However, a change to section 365 has eliminated the opportunity for an employee to claim a reduction for the business use of an asset provided under section 205. HM Revenue & Customs (HMRC) have confirmed that the new legislation applies to emergency vehicles. Readers may have seen press coverage alleging that emergency services staff, rather than operational officers, were fitting cars with ‘blues & twos’ to reduce their tax liability. Although such practice is considered

extremely rare, it is hard to fault the logic that where an employee has a car taxed under the asset rules and has unrestricted private use, the benefit should be calculated on similar lines to a company car where any business/private use percentage is disregarded. This is emphasised by the fact that, as mentioned below, there is an emergency vehicle exemption available to the emergency services sector where private use is restricted. ...relevant to officers in the emergency services, particularly those in the fire service... The changes described above are going to be relevant to officers in the emergency services, particularly those in the fire service, who could see their taxable benefits increase sharply. Having discussed the situation with several emergency services we have found that the changes will have some unexpected consequences. Where fuel is provided for a company car via a fuel card or garage account, there is no taxable benefit provided the private element is repaid. Company cars and associated fuel are dealt with in different sections of the legislation, whereas, because the use of assets legislation is one section, all the costs, including fuel provided by the employer, need to be included. This means that although fuel might only be provided for business use it would still need to be included in the total costs and would be part of the reportable benefit on which the officer pays tax.

Given the additional tax payable by officers, emergency services are now looking at alternative methods of providing operational vehicles and focus has turned towards the emergency vehicle exemption. Where private use of an emergency vehicle is prohibited – apart from ordinary commuting and local private mileage when ‘on call’ – then the use of the car can be treated as exempt from a tax charge under section 248A ITEPA. The writer is aware that some fire and rescue services apply this exemption for their flexible duty officers as they are always ‘on call’ whenever they are in their cars and, unless having advised their control otherwise, are always available to respond to emergencies. At a recent HMRC meeting with a client we discussed the impact of the legislative changes and it was confirmed that, from 6 April 2017, the same chargeable amount would be used as the basis for calculating both the tax and Class 1A NICs regardless of whether the asset (vehicle) is used for 99% or 1% private purposes. However, HMRC confirmed that, where an emergency service moved to restrict private use of an emergency vehicle, then the service could move to the section 248A exemption partway through the tax year, although HMRC said that they would expect the policy and mileage records to be exemplary. HMRC also confirmed that, if the service wanted to recompense officers for the additional tax charge up to the date of a change to section 248A, then it would be acceptable for the service to cover the additional tax charge by a settlement on a grossed-up basis. Employers in the emergency service sectors should be considering what changes need to be made to the provision of what are, essentially, operational vehicles, to minimise an increasing tax liability. n

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| Professional in Payroll, Pensions and Reward |

Issue 35 | November 2017

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