PAYROLL INSIGHT
Sarah Bradford, of Writetax Ltd, sets out the historic basis of fair bargain and the effect of a clause in the 2016 Finance Bill Benefits in kind and the fair bargain rule
I t would seem logical, fair even, that for there to be a tax charge on a benefit in kind there has to be an actual `benefit’ to the employee; and, conversely, if there is no benefit, for there not to be a tax charge. However, legislation included in the current Finance Bill designed to provide clarification on the `fair bargain’ rule makes it clear that in certain circumstances there does not have to be a benefit to the employee for a benefit in kind tax charge to arise. Tax charge on benefits in kind The tax charge on employment income – in section 6(1) of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) – includes amounts treated as earnings under the ‘benefits code’ which is described in Part 3, Chapters 2–10 of ITEPA. The tax charge on a benefit in kind is determined by reference to its cash equivalent value, which in turn is found either by reference to specific rules, such as those that apply to determine the cash equivalent value of a company car or a beneficial loan, or, where there are no specific rules applicable to the benefit in question, by reference to the general rule. This general rule is found in Chapter 10 (Taxable benefits: residual liability to charge). Section 203(2) provides that: “The
for the purposes of the general rule is very wide. This is acknowledged by HM Revenue & Customs (HMRC) in their Employment Income Manual at EIM21004 (https://goo.gl/4lINP8) that: “Although the definition of ‘benefit’’ in Section 201(2) is extremely wide…it does not cover everything that may be provided by an employer to someone who happens to be an employee or a director of that employer. “As a general principle, a benefit must provide an element of `special bounty’ to the recipient. In other words, the employee must get something over and above what the employer gives at a fair bargain, or would be prepared to give as a fair bargain, to the member of the public, or to other independent third party, dealing on arm’s length terms with the employer.” Thus, while noting that the legislative definition is indeed very wide, HMRC adopt a narrower interpretation in applying the general rule, taking the everyday meaning of the word `benefit’ and requiring the employee to receive more than what is given as a fair bargain to trigger a tax charge. The idea that for a benefit to be taxable the employee had to receive more than the employer would give as a fair bargain on arm’s length terms was considered in the case of Mairs v Haughey 66 TC 273. This case concerned a payment which was made to an employee in return for giving up rights under an enhanced redundancy scheme. The Special Commissioners determined that the payment was not a
cash equivalent of an employment-related benefit is the cost of the benefit less any part of that cost that is made good by the employee in providing the benefit.” This is the default provision. It only applies to the extent that there is no specific rule for determining the cash equivalent of a particular benefit. Where there is a specific rule, as for cars, living accommodation, beneficial loans etc, the specific rule takes precedence. ‘Benefit’ and the fair bargain rule For a tax charge to arise under the general rule, there must be an `employment- related benefit’. For the purpose of this rule, section 201(2) ITEPA provides that a `benefit’ is simply a “benefit or facility of any kind” and that an ‘employment- related benefit’ is a benefit – other than an excluded benefit – that is provided in a tax year for an employee or a member of an employee’s family or household by reason of the employment. The definition of an excluded benefit includes benefits which fall within Chapters 3–9 of Part 2 of ITEPA, and as such are taxed according to the rules set by those chapters. This is important for what comes later. The legislative definition of a `benefit’
...in certain circumstances there does not have to be a benefit to the employee for a benefit in kind tax charge to arise
| Professional in Payroll, Pensions and Reward | September 2016 | Issue 23 28
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