Payroll insight
...the special rules for taxing those benefits prevail and a tax charge can still arise even if there is no `benefit’...
benefit because it did not overvalue the employee’s contingent right to receive a payment from the scheme. In reaching their decision, the Special Commissioners underlined that while the legislation covered all benefits they must be capable of being described as benefits (within the normal meaning of the word). “[What was then] Section 154 [of the Income and Corporation Taxes Act 1988] brings benefits into charge. All kinds of benefits are covered; but whatever they are, they must be capable of being described as ‘benefits’. The legislation is aimed at profits … which escape mainstream … provisions for one reason or another. It is not aimed at receipts resulting from fair bargains.” This view was supported by the Court of Appeal (Northern Ireland) which agreed that there is no benefit where there is a fair bargain. HMRC reiterate this point, stating in their Employment Income Manual at EIM21004: “Therefore something provided by an employer, on identical terms both for employees and for the general public (for example, ‘free’ refuse collection or state education), does not become a benefit within the legislation simply because it is provided for people who happen to be employees of that employer. The employees receive on the same terms exactly what they would have received if they had not been employees. That indicates that what they get is a fair bargain and there is therefore no benefit. It is not necessary that the employer actually does deal with members of the public for this principle to apply. If an employer provides something to an employee, and they would be prepared to provide it to any member of the public on exactly the same terms, then that is a fair bargain and not a benefit". The Apollo case The issue of whether a benefit in kind charge arose where an employee leased a car from his employer and paid the full market value was considered in the case of HMRC v Apollo Fuels, B Edwards and others [2016] EWCA Civ 157. HMRC contended that although the employee did not derive any benefit from the lease, the provision of the car nonetheless fell within Part 3 of Chapter 6 of ITEPA (Taxable benefits: cars, vans and related benefits) and consequently the cash equivalent should be determined in accordance with that Chapter. HMRC’s arguments
were rejected by the First-tier and Upper Tax Tribunals, but HMRC appealed the decision. The Court of Appeal upheld the decision of the Upper Tribunal that where there was a fair bargain and the employee paid the same as a member of the public there is no benefit to tax and, as such, the provisions of Part 3 of Chapter 6 for determining the cash equivalent of the benefit were not in point. The court did not find any reason not to give the word `benefit’ its ordinary everyday meaning and, on the facts of the case, the employee had not received a benefit. The point of Chapter 6 was to tax benefits received from employment as employment income and thus, for there to be a tax charge, there had to be a benefit. Further, the court held that any provision deeming something for which the employee had paid full value to be taxable as income had to be clear. ...where there was a fair bargain and the employee paid the same as a member of the public there is no benefit to tax ... Clarification Following HMRC’s defeat in the Apollo case, it was announced at the time of the 2016 Budget that legislation would be brought forward in the 2016 Finance Bill to clarify the circumstances in which the fair bargain rules applies. This clarification takes the form of providing statutory authority to tax an employee on a value that he has not actually received. Worse, it highlights the inherent unfairness of the legislation in taxing more than the value of the benefit; if the playing field were a level one, the cash equivalent value calculation would be nil where the employee had paid at least the market value for the benefit. As things stand, this is not the case. The purported clarification of the rules is found in clause 7 of the 2016 Finance
Bill, which specifically disapplies the fair bargain rule in relation to the provision of living accommodation, cars, vans fuel and related benefit and employment-related loans. In each case, the cash equivalent of the benefit is computed by reference to the specific rules of the relevant chapter, with any amount paid by the employee (regardless of whether this is the same as would be paid by a member of the public) being deducted as `an amount made good by the employee’. Thus, if the statutes deliver a taxable value in excess of the amount payable by way of a fair bargain, the employee is taxed on that excess. There is, however, a specific exemption where the employer’s business is hiring vehicles meaning that the fair bargain rule holds and there is no taxable benefit where the employee hires a vehicle on the same terms as a member of the public. Further, while the Finance Bill clause disapplies the fair bargain rule to cheap and interest free loans, the legislation already contains an exemption (in section 176 of ITEPA) for loans on ordinary commercial terms where the employer is in the business of lending money. Otherwise, the specific rules take precedence over common sense to decide if there is a taxable benefit. Implications The fair bargain rule continues to apply to those benefits the cash equivalent of which is computed by the general rule. However, where the employee is provided with a car (other than one leased on the same terms as a member of the public from an employer whose business is hiring vehicles), living accommodation or a cheap or interest free loan from the employee, the special rules for taxing those benefits prevail and a tax charge can still arise even if there is no `benefit’ in the real sense of the word. In this case, the employee would be better to source the benefit from an independent third party rather than the employer. The `clarification’ provided by clause 7 arguably highlights that there really is no equity in taxation and sets a dangerous precedent in effectively giving the go-ahead for HMRC to charge tax on more than the value actually received. n
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Issue 23 | September 2016
| Professional in Payroll, Pensions and Reward |
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