To Determine if there is an Employment Benefit while open new company UK – Under ITEPA Section 62 and Section 64


The Income Tax Earnings and Pensions Act (ITEPA) was formulated in 2003, which contains different Sections related to UK tax laws for companies setup UK. The Section 62 focuses on the law acts related to the salaries or wages of the employees and the Section 64 discusses the relationship between benefits code and earnings code.

Convertibility Principle under the Earnings Code

Tennant case is an example to test the employment benefit, in which an employee was given a house which was under him to the extent that he could use the facility but could not sub-let or allocate it. Since the facility could not be converted into cash or money, the decision was made that it could not be considered as an employment benefit.

Another example is that of Heaton case, in which an employee was hired by a person who used to provide car loan scheme of voluntary type. The employer purchased cars, got them insured and rented them to employers. The sum of amount of money was calculated that varied with the loan of car and this amount was then deducted from their pay. The hired employee was under this scheme. Under the Schedule E, he was liable to income tax for the amount of pay minus the sum with respect to that car. Hence it was an advantage for the employee’s employment that the benefit of being a part of the car loan scheme could be transferred into a benefit.

So, a rule derived that an employee’s benefit is convertible in the case if as an alternate to the benefit, the employee agrees to a pay increment. However, still, it cannot be traded to a third party. The question arises that why should not he be liable to tax on the basis of the amount of increased salaries under his command? Since he is giving up on the benefit (which could not be cashed and neither assigned), led to the increase in his wage, so the decision was in his hands and when he chose increment as the option, then that increment should be a subject to tax. It is to be noted here that the employee had an agreement with the company that no other person, except for himself, would be allowed to make use of the car. As in Tenant case, where an increment in wage could be accepted instead of being under the scheme of car loan.

Rules to Check the Value of Benefit

Statement of the Rule:

The rule states that the value of benefit that is taken into account is the second-hand value.

In Wilkins case, the facility was provided to its employees to get clothes from a tailor for which the company will provide the cost. This kind of facility was a benefit that it could be converted into money since the employee who had to pay tax could sell the dress. Although the tax of the sold suit was liable on the second-hand value of it, it could be labelled as ‘convertible.’

 

Working of the Benefits Code

The benefits code states that the benefit should be given because of the reason of employment. When the employer provides the benefit to a registered company in London or any other company in UK, if the employer is not an individual who gives the benefit due to personal relationships, then it is given due to the reason of employment.

In the case when the benefit to the employee is not given by the employer, then the court raises a question through a test that “What allows the employee to relish that benefit?”

Under the Section 62 and the Code, where the benefits that are liable to tax, will first be a subject to Section 62 and the remaining amount will be under the code.

Residual Liability in UK Incorporation

Residual liability applies to the rules of tax in the UK incorporation where the benefits given due to the reason of employment can be provided to the employee and his family by anybody whether he or she is an employer or not and whether it is convertible or not.

It is applicable in the case of a service benefitting both the employee and the employer and not solely when the employee gets the benefit.

According to Rendell case, the sum paid to the director who was in a criminal suit was considered as a benefit since the company had paid for his defense and he could not have managed to spend or pay for the sum alone.

An argument rose, as explained by Lord Reid, that the sum that the company had paid to the director was merely the protection of the company’s interests. It could be the case but still, the truth holds that the amount provided by the company benefitted the director and in case if the company did not pay, the director had to empty his own pocket for his defense.

As confirmed by Wicks case, the case is satisfactory even if the employment is merely a condition of benefit (operative cause) and not the main or sole cause.

Cost of Benefit

According to ITEPA Section 205, the cost of benefit, extent of charge or the cash equivalent is the amount of cash given as a benefit to the employee minus any amount that the employee has paid himself or has made good.

In Pepper case, the House of Lords declared the cost to be the marginal cost but not the average cost. This was of concern for a private school where a child of a teaching staff member acquired education and the member had to pay one-fifth of the amount of the normal fee, this being sufficient enough for covering the marginal cost, yet still less than the average cost. It was decided by the House of Lords to make use of the marginal cost as no charge occurred and this all was made good by the employee himself.

Exceptions to the Rule

According to the Section 99, a significant exception was seen that was made with respect to the accommodation given by the companies in the Companies house setup to the employees for the adequate performance of their respective duties.

As restrained to the historical custom and clarified by Vertigan case:

An example of a person who was hired at the post of a nursery foreman. He could not acquire the accommodation by the council resulting in him to buy a bungalow in the vicinity of the office where he started living. It allowed him to reach the work place within a time span of five minutes. It was then decided that it was not a compulsion in performing his duties and the exception does not apply in this case. Then where does the exception apply? The exception was restricted to the scenarios where the employers were expected to provide for the living space in the Companies house setup.

This provision of accommodation was determined by the following parameters:

  • The need of an evidence, statistical in nature, to determine how popular or common this practice was.
  • Since how much time the practice had continued
  • The general degree of acceptance of the practice by the applicable employers

Hence, it was concluded that even if the accommodation had been provided in return to the better performance of his particular duties, he was not accustomed to provide them. Any case other than the one discussed above, the employee remains chargeable under the chapter five of the part 3 on the benefit’s cash equivalent.

To determine if there are any Exemptions of Benefits and Payments under ITEPA Part Four

 

Some important provisions under discussion are:

  • Training related to work under Section 250.
  • The allowances of mileage under the Section 229ff. It is to be noted that the Section 229 et seq serves as a whole code. If the approved amount is acquired under the Section 229, the employee is exempted from the tax and in the case of acquiring an excessive amount than that, then he is liable to tax under Section 201.
  • Meals at Workplace under the Section 317.
  • The recreational facilities under the Section 261.
  • Small gifts (£250 per donor) received from the third parties under the Section 324.

To determine if there are any Allowable Deductions under ITEPA Section 336

 

What are the Requirements?

The possible conditions are:

  • The employee is supposed to pay and hold the expenditure as the employment holder.
  • The amount is acquired exclusively, wholly and essentially in performing the employment duties.

Basic Strategies:

  • The expenditure should arise from the character of employment and not from the non-public alternative of the remunerator.
  • It isn't decent that the leader needs the expenditure. The character of the duties itself should need it: in the case of Brown, the director was needed by his leader to affix a London club. He couldn't deduct this expense because it wasn't necessary to the performance of his duties.

Specific Non-Travel Cases:

R & C Comrs Case

  • A specialist register spent cash in attending a coaching course. The court controlled that group action at the coaching course was in performance of her duties, because the specialist register was a coaching post.
  • The employment agreement of B was a ‘training contract by that she was utilized to endure each sensible and theoretical exercises whose final aim was the generation of an offer of qualified medicine consultants’. The court accepted that any thought of skilled advancement was attendant the intention to perform her duties and so the expenditure was incurred completely in her performance of duties.
  • In explicit, it had been obvious that the explanation why B attended the courses and incurred the expense she did in doing thus was as a result of she was needed to attend them as a part of the duties of her employment and since if she failed to do thus, her employment would be terminated. Hence, it had been ‘necessary within the performance of her duties’.
  • Importantly, there's any dicta relating to once expenditure isn't incurred all, completely and essentially for employment duties:

According to Pitch ford LJ case: once, almost like B, cash is spent attending a course, travel fare etc. If there's, as an example, associate degree workplace holding interviews next to the school that I’m attending, then ‘it could be a question of truth whether or not I even have incurred the expense of travel completely within the performance of the duties of my employment or part for functions personal to myself’. Similarly, once T attends school attributable to his employer’s needs, and for his own personal wishes, it's an issue of truth if expenses are an incurred part for private reasons.

In all the instances, it appears to ME, I even have arguably not incurred the expense of trip school completely within the performance of the duties of my employment. it's an issue of truth whether or not I even have in each cases, or in either case, incurred the expense part in performance of my duties and part for reasons personal to myself.

Smith Case:

  • On whether or not the expenses incurred by journalists in buying newspapers and journals were within the performance of their duties. The court command that the expenses incurred were preparation for the performance of duties, and not truly in performance of duties.
  • However, in Fitzpatrick case, land editors were allowed to deduct expenses, as supported a finding of truth, the daily reading before arrival at the workplace was a necessary a part of doing the work of associate degree editor. The sub-editor had to be equipped with the news before he started work once he received the offices of the Daily Mail. so as to pick stories for publication he had to grasp what alternative newspapers were doing a few explicit item.

Subscriptions and ‘self-improvement’ costs:

In Simpson case, subscriptions to skilled bodies paid by a rustic medical practitioner were disallowed, even supposing the journals received enabled him to stay himself properly qualified. this can be reversed by statute, and subscriptions are deductible, however just for restricted skilled membership fees and for annual subscriptions to approved societies.

In Humbles case, an instructor who had attended a series of lectures for the needs of his data couldn't deduct these expenses; a distinction was drawn between qualifying to show and obtaining material on one hand, and making ready lectures for delivery, on another hand.

The same conclusion was reached once knowledgeable football game player sought-after to deduct the prices of assorted dietary supplements in Ansell case.

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