CheckLists.Tax (beta)
F2. Employee benefits in kind
GENERAL
Company law aspects
- Need for approval
- "Section 190 onwards contains provisions governing substantial property transactions involving directors. The latter provisions are of particular importance where non-cash remuneration avoidance schemes are used because if the transfer is not legal, the argument that there is entitlement to a cash payment is strengthened." (NIM12015).
Legislation:
Cases:
HMRC manuals: NIM12015 - Directors' loan accounts and payments on account of earnings: Miscellaneous;
Commentary:
See also:
EMPLOYMENT INCOME: EARNINGS
- Benefits that can be turned into money are earnings
General rule
- Earnings includes any gratuity, profit or "incidental benefit of any kind obtained by the employee if it is money or money's worth" (s.62(2)(a)).
- Money's worth is defined (s.62(3)) as "something" that is:
(a) of direct monetary value to the employee; or
(b) capable of being converted into money or something of direct monetary value to the employee.
Convertible benefits
- What is taxable is the convertible value (if any) of what the employee receives, not the value of any saving made by the employee as a result of something done by the employer.
- Living accommodation which the employee can only use himself/herself is not a convertible benefit, even though it may save the employee money.
- "But a person is chargeable for Income Tax under Schedule D, as well as under Schedule E., not on what saves his pocket, but on what goes into his pocket. And the benefit which the Appellant derives from having a rent-free house provided for him by the bank brings in nothing which can be reckoned up as a receipt, or properly described as income." (Tennant v. Smith at 171)
- Shares allotted to a director were a convertible benefit in Weight v. Salmon. There was no prior right to the shares. See F6. Shares to employees.
Amount liable to charge: convertible value
- The value of the earnings is the amount of money that could be received by realising/converting the benefit into cash.
- Not the market value of the benefit:
- "Any right or property has different values for different people: if put up to auction many people bid at first but one by one they drop out when the bids of others go beyond its value to them, and the highest bid, the market value, is the value to one alone of all the bidders. Why should a man who finds it only just worth while to accept an unassignable perquisite on favourable terms be taxed on something far above its value to him or what he would have been willing to pay for it? Parliament may see fit to make such an enactment in special cases, as it did in Part IV of the Income Tax Act 1952, but I am satisfied that that is not the meaning of the general provisions with regard to perquisites." (Heaton v. Bell at 745, Lord Reid)
- Not the value of the benefit to the recipient, even if easy to prove (e.g. because T gave up salary to obtain the benefit):
"I am not sure whether in the end counsel supported the argument that the fact that the respondent was willing to forgo a part of his wages to get the perquisite got rid of any difficulty in determining its value to him and that therefore in this case he could be assessed on the value of the perquisite to him. But if the general rule is that the value of a perquisite to the particular recipient is not a basis of assessment consonant with the provisions of the Act, it cannot in my view be right to make exception in cases where it is easy to prove that value. Just how easy must that proof be in order to take the case out of the general rule?" (Heaton v. Bell at 746, Lord Reid)
- It is the money that could have been obtained (e.g. by cancelling a salary sacrifice arrangement):
"In my judgment the recipient of a perquisite other than a sum of money can be assessed, and can only be assessed, on the amount of money which he could have obtained by some lawful means by the use or in place of the perquisite." (Heaton v. Bell at 746, Lord Reid)
- This is different to the previous point: it looks at whether T could cancel the arrangement, not what T gave up in order to obtain the arrangement.
- In Wilkins v. Rogerson, it was the second-hand value of the suit.
- "I think, in Lord Watson's words in Tennant v. Smith, that it is a benefit consisting in "something acquired which the acquirer becomes possesed of and can dispose of to his advantage - in other words, money, or that which can be turned to pecuniary account." This can be realised in cash, and it is that realisable quality which is the measure of the taxpayer's liability." (at 146)
- In Weight v. Salmon, the value was the difference between market value (which T could realise by selling) and the amount paid by the director.
- Where the benefit is the discharge of a debt, the value is generally the amount of the debt - see F1. Employee monetary income.
Restrictions on convertibility
- Lawful restrictions taken into account - e.g. the inability to allow a third party to use the accommodation in Tennant v. Smith and the inability to assign the option in Abbott v. Philbin.
- "I say by lawful means because I can see no ground for the Revenue being entitled to disregard a genuine condition restricting the recipient's right to use or dispose of the perquisite. But of course if any restrictive condition is a sham or inserted simply to defeat the claims of the Revenue it can be disregarded." (Heaton v. Bell at 746, Lord Reid)
- In Ede v. Wilson a promise by the employee not to sell shares did not mean that they could not sell (with the risk of dismissal). It was suggested that the clog may affect the value.
Timing of conversion to money
- Need not be convertible in the tax year in which the benefit is received.
-"Moreover, the respondents say that unless the shares can be turned into money during the year of assessment they are not taxable. This is, I think, going too far, and would exclude a present of land made so late in the year that it could not be sold before the end of it." (Ede v. Wilson at 369).
- Where there is a restriction on sale or realisation for a period of time, it may still be possible to convert to money by agreeing with a third party that when the restriction lifts, they will get the benefit.
Interaction with the benefits code
- If the same benefit would give rise to an amount of earnings and an amount treated as earnings under the benefits code, the amount taxable under the benefits code is reduced by the amount taxable as earnings (s.64).
- Except in relation to living accommodation where the amount taxable as earnings is reduced by the amount treated as earnings (s.64(3), s.109).
Legislation: ITEPA s.62; s.64;
Cases:
Tennant v. Smith (1892) 3 TC 158 (HoL);
Weight v. Salmon (1935) 19 TC 174 (HoL);
Ede v. Wilson [1945] 1 All ER 369 (Wrottesley J);
Wilkins v. Rogerson [1961] Ch 133 (CoA);
Heaton v. Bell [1970] AC 728 (HoL);
HMRC manuals:
Commentary:
See also:
- Legal rights as earnings
- In Heaton v. Bell, if T had actually reduced his salary (which it was held he had not), the perquisite would have been "the right to use the car".
- "It is true that his right to use the car could not be assigned (just as the option in Abbott v. Philbin [1961] A.C. 352 could not be transferred) but the right could be converted into money. The option in Abbott v. Philbin could be exercised and the shares acquired by its exercise could then be sold."
- The convertible value would have been the salary that T could have obtained by terminating the arrangement (see Salary sacrifice, below).
- Wilkins v. Rogerson: "There the perquisite was the right to get a suit of clothes without payment from a particular tailor - or it may have been the suit of clothes itself. The recipient could not sell or assign the right to get the suit: if he had been entitled to do that the money equivalent would have been almost as much as the tailor's price." (Lord Reid in Heaton v. Bell).
- In Weight v. Salmon there was no right to the shares prior to allotment, so the shares were the earnings.
- In Tennant v. Smith, the right to use the accommodation was the benefit, but it had no convertible value.
- In Forde and McHugh it was accepted that "Mr McHugh receives no immediate right in them which he can convert to his own beneficial use. They are paid to a fund in which he has beneficial interest, albeit only a contingent one" (CoA, §§52, 70).
Legislation:
Cases:
Tennant v. Smith (1892) 3 TC 158 (HoL);
Weight v. Salmon (1935) 19 TC 174 (HoL);
Wilkins v. Rogerson [1961] Ch 133 (CoA);
Heaton v. Bell [1970] AC 728 (HoL);
HMRC v. Forde and McHugh Limited [2012] EWCA Civ 692;
Forde and McHugh [2014] UKSC 14;
HMRC manuals:
Commentary:
See also:
- Salary sacrifice
Employee remains entitled to previous salary but agrees to a deduction
- If the correct analysis is that the employee remains entitled to the full salary but has agreed to a deduction in return for the benefit, the employee is taed on his/her full salary - see "Employee obliged to apply income in a particular way".
- In Heaton v. Bell, it was held that T had simply agreed to a deduction from his wages for the use of a car:
"...on a true interpretation of the contractual arrangements the position was that the monetary wage to which the respondent was entitled remained unaltered. When the respondent joined the scheme he agreed that some part of the earnings to which, by his work, he had become entitled might be retained by his employers as the money consideration of his hire of a car."
Employee's salary is reduced and the benefit is provided, but T can terminate arrangement
- If T's salary is genuinely reduced, the benefit is the earnings and if T can give up the benefit in return for a higher salary, that is the convertible value (even if the market value is higher) (Heaton v. Bell).
- If there is a notice period, it was left open in Heaton whether T should be assumed to have given notice prior to the relevant tax year commencing (or whether the notice period reduces the quantum of what could be obtained) (at 747 - Lord Diplock thought it should not be reduced (at 767).
Employee's salary is reduced and the benefit is provided, but T cannot terminate arrangement
- In this situation, the salary does not tell one the value. It is whatever T could actually obtain (by lawful means) for the benefit.
- See Heaton v. Bell on the convertible value, as discussed above.
- Salary sacrifice was contractually effective in Best Connection Group (§§107 - 109).
Legislation:
Cases:
Heaton v. Bell [1970] AC 728 (HoL);
Best Connection Group Limited v. HMRC [2024] UKFTT 1103 (TC), Judge Beare;
HMRC manuals:
Commentary:
See also:
EMPLOYMENT INCOME: BENEFITS CODE
- Charges on benefits in kind: general
Interaction with the benefits code
- If the same benefit would give rise to an amount of earnings and an amount treated as earnings under the benefits code, the amount taxable under the benefits code is reduced by the amount taxable as earnings (s.64).
- Except in relation to living accommodation where the amount taxable as earnings is reduced by the amount treated as earnings (s.64(3), s.109).
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
PAYE
- Readily convertible assets
XX
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
- Section 222 tax (additional income where employer deemed to make notional payment unless employee makes good in time)
Scope
- Only applies to PAYE on notional payments.
- Does not apply to a payment that is to be regarded as a payment of money.
- Even if not actually money:
- "The Revenue submitted an appeal to the Court of Session but, before the appeal reached the Court, decisions in the cases of NMB Holdings Ltd v Secretary of State for Social Security and DTE Financial Services Ltd v Wilson (HMIT) (74TC14) established that the arrangements implemented in such schemes should be construed as involving the payment of money. On that basis, section 144A ICTA 1988 would not apply so the Revenue withdrew its appeal." (EIM11964).
Additional income
- Based on the amount the employer was unable to deduct from other payments.
- Irrelevant whether the employer actually pays the PAYE to HMRC (EIM11956).
- HMRC say if reasonable to construe facts in manner that leads to no charge, they will do so:
- "However, analysis of the facts is not a mechanistic process. If it is reasonable to construe the relevant facts in a manner that leads to the conclusion that one of the requirements is not met then you should accept that there is not a charge to tax under section 222." (EIM11960; EIM11974 makes the same point)
- "the importance of careful and sympathetic examination of all the relevant facts" (EIM11964).
NICs
- Also gives rise to NICs under SSCR r.22(4);
Making good to the employer
- The "due amount" in respect of the PAYE earnings is treated as employment income unless the employee makes good the due amount to the employer.
- Must be made good within 90 days of the end of the tax year (generally) in which the employer is treated as making the notional payment.
- On who is the employer (and thus to whom it must be made good) - see s.222(3) + EIM11978.
Form of making good
- Making good not defined - HMRC say construe in natural sense (EIM11964).
- Need not be monetary form can be "something of value".
- Must be quantifiable in monetary terms:
- "However, because the due amount is calculated as a monetary figure, whatever arrangement is adopted, the value of the item provided must be quantifiable in financial terms and be at least equivalent to the due amount." (EIM11964).
- In most cases a contractual indemnity to make good will be sufficient:
- "It is often contended that the existence of such rules is sufficient to satisfy the making good requirements of section 222. Each case should be examined on its merits but, in most cases, it is likely that the effect of the rules will be sufficient to prevent a charge under section 222." (EIM11966).
- No magic in the word "indemnity":
- "There is no magic in the word ‘indemnity’. The important point is that the terms agreed, however expressed, whether as a withholding provision or otherwise, create a bona fide contractual liability on the part of the employee to reimburse, or otherwise entitle the employer to recover, in full, an amount equivalent to the due amount."(EIM11966).
- Expectation of enforcement
- HMRC say for ordinary share incentive plans with indemnity there will be an expectation that employer will recover PAYE from employee (EIM11968).
- Even if there are exceptional cases where not enforced, provided it is usually enforced, that will not affect value of indemnity according to HMRC (EIM11968).
- If employer failed to enforce indemnity because it was unaware of obligation to account for PAYE, HMRC appear to accept that will not devalue the indemnity (EIM11968 - Example).
- Implication is that if employer routinely did not enforce indemnity, that would prevent making good.
"If there is evidence that the employer routinely fails to invoke the indemnity agreement, or chooses not to in relation to particular employees, it is likely that the true value of the indemnity agreement will be less than the due amount and the employee will be subject to a charge under section 222 unless the requirement to make good is met in another way." (EIM11970)
- Query why non-enforcement would "devalue" indemnity anyway as long as it could be enforced in full by a third party (perhaps estoppel arises).
- Uncertainty of tax treatment at relevant date:
- HMRC argue that for an avoidance scheme that is hoped to be effective, the value of the indemnity on the relevant date will be reduced because it is contingent on the ineffectiveness of the scheme.
- "Such arrangements should not be construed as satisfying the requirement for the employee to make good for the purposes of section 222. The indemnity agreement may be in existence at the relevant date but it will be contingent on the effectiveness of the avoidance scheme. Even if the value of such an agreement is measurable in financial terms, at the time the agreement is given, the value will be significantly less than the due amount." (EIM11970)
- Query whether a right against the employee in unjust enrichment would amount to making good.
- Could only arise if employer has actually paid HMRC the PAYE.
- There may be uncertainty as to prospects of recovery that mean it is insufficient to make good in full.
Due amount
- The amount that must be made good is the due amount, i.e. the amount of tax the employer was liable to account for in respect of the notional payment but could not deduct from actual payments (EIM11962).
- Does not matter if the employer actually deducted from the other actual payments.
Partly made good insufficient + irrelevant
- If less than the due amount is made good, no relief: "Unlike some other parts of the legislation (for example the benefits code) there is no provision for allowance to be made for any part made good." (EIM11962).
Identifying the relevant date
- Manning:
(1) T exercised share options.
(2) The scheme rules said that beneficial ownership did not pass until the employee had paid the PAYE amount to the company.
(3) T did not pay the sum to the company, so FTT held beneficial ownership did not pass at that time (§17).
(4) Relevant date for making good ran from when employer treated as making notional payment, which was, per the legislation, based on when a beneficial interest was acquired.
(5) Accordingly, the relevant date ran from a later time, when T paid the company, by reference to which it was made good in time (§18).
-
No relief if made good late
- "If the employee makes good the relevant amount of income tax to the employer after the time allowed, the Section 222 charge remains." (EIM11956)
- No flexibility for cases where parties were unaware of the PAYE liability (and, as set out above, it is irrelevant whether the employer actually paid the PAYE to HMRC) (Manning, §14; Chilcott).
- But see above on HMRC's reasonable approach to the facts + Manning re when the relevant date is.
Legislation: SSCR 2001, r.22;
Cases:
Chilcott v. HMRC [2010] EWCA Civ 1538;
Manning v. HMRC [2013] UKFTT 252 (TC) Judge Oliver;
HMRC manuals:
EIM11960 - PAYE: special types of payment: notional payments: employee’s requirement to make good PAYE: case law;
Commentary:
See also:
EXAMPLES
Health related benefits
- Right to sick pay as a benefit
- HMRC say that the right to sick pay is a benefit (EIM06471).
- The right is an excluded benefit (ITEPA s.202(1)(c)).
- Unless it is provided under a salary sacrifice scheme (s.202(1A)).
- In which case see EIM06471 for calculation of the benefit.
Legislation:
Cases:
HMRC manuals: EIM06471 - Employment Income: sick pay and injury payments: provision under a salary sacrifice arrangement;
Commentary:
See also:
- Health checks, eye tests etc.
- Exemptions, subject to conditions, for:
- Eye tests (s.320A).
- Special corrective appliances shown to be necessary by eye test (s.320A).
- Health screenings (s.320B).
- Medical check-ups (s.320B).
- Medical treatment up to £500 to help employee return to work (s.320C).
Legislation: ITEPA s.320A - 320C.
Cases:
HMRC manuals:
Commentary:
See also:
- Medical treatment required as a result of injury sustained during employment
- Employer may be liable to pay for treatment as a result of breach of duty, in which case reimbursement is arguably not a benefit/a fair bargain.
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
- Overseas medical treatment (exemption)
- Exemption for providing employee with medical treatment whilst outside the UK where the need for it arises whilst employee is outside the UK for the purpose of performing the duties of the employment (ITEPA 2003, s.325).
Legislation: ITEPA 2003, s.325;
Cases:
HMRC manuals:
Commentary:
See also: