Treatment of contributions by the employee
The assessable benefit is reduced by any contribution, which the employee pays to the employer for private use of the car.
Cars provided part way through the year
If a car is available to the employee for only part of the year, the assessed benefit in that year is reduced analogically, depending upon the number of days for which the car is available. This applies if the car is not made available to the employee for the whole of the year or if the car is unusable for a continuous period of at least 30 days during the year. The mileage limits of 2500 and 18000 miles are also reduced analogically in these circumstances.
Second Cars
If the employee simultaneously has a second car, the assessable benefit in kind on this car is generally calculated at 35%. However, the charge is reduced to 25% if such car is used for at least 18000 business miles per year.
Payment of mileage allowance to those employees using their own cars for business travel
If an employee uses his own car on business, he may receive mileage allowances from his employer, calculated at a number of pence per mile. This kind of allowances should strictly be regarded as part of the employee’s income for tax purposes and the employee should then claim for tax relief for the motor expenses, which he actually incurred by him or her on business trips. This would require keeping a large number of records of business and private mileage, fuel costs, car maintenance costs and other.
The alternative (optional) approach is the fixed profit car scheme”, which works by reference to a table of tax-free mileage rates fixed by the Inland Revenue. The 2000/01 ratings are the followings:
Engine Size first 4000 miles in the year miles in excess of 4000
Up to 1000cc 28p 17p
1001 – 1500cc 35p 20p
1501 – 2000cc 45p 25p
over 2000cc 63p 36p
If the mileage allowances paid to an employee exceed the sum calculated using these rates, then the excess is taxable. On the other hand, if the mileage allowances paid to an employee are less than the sum calculated using these rates, the deficit is an allowable expense.
(According to: MELVILLE, Alan. (2000). Taxation – Finance Act 2000. Financial Times - Prentice Hall.)
Question 2
The definition of emoluments includes benefits in kind. Benefits in kind consist of goods or services received by an employee, rather than money. For the purpose of assessing benefits in kind, employees are divided into P11D and non-P11D employees.
P11D employees comprise those who earn at least ₤8500 per year and most company directors. Exemptions to this rule are full-time working directors who earn less than ₤8500 per year and who do not control more than 5% of their company’s ordinary share capital. All other employees are not-P11D employees.
It would be useful to categorize the benefits in kind needed into three categories, which contains the benefits assessable to all employees, the Benefits on P11D employees, and the benefits for non-P11D employees (or lower-paid employees).
The tax treatment on benefits in kind usually depends on the employee’s classification, but certain benefits are assessable in the same way on all employees. Two main benefits are concerned here:
Vouchers
All employees are taxed on the cost to their employer of providing vouchers, which may be exchanged for goods or services. Luncheon vouchers exempt up to 15p per day (the first 15p per day), and vouchers for parking place near the employee’s workplace are also exempt.
Living Accommodation
Each employee is taxed in the same way on the value of any living accommodation provided for them by the employer. The employee is assessed on the rateable value of the accommodation, or the rent that the employee pays for the accommodation. Accommodation costing to the employer more than 75000 is regarded as expensive and gives rise to an increase in the assessable benefit. The increase is calculated by applying an appropriate percentage to the amount by which the cost of the accommodation exceeds ₤75000.
Benefits assessable on P11D employees (over ₤8500)
Assets loaned to the employee for private use
In the occasion of an employer lending an asset to an employee, the employee is assessed annually on the 20% of the asset’s market value on the date of the loan. If the period of the loan exceeds five years, the total of the annual assessments, will exceed the total value of the asset. In the occasion that the asset has been sold or given to the employee, he is assessed in the greater of the market value of the asset when sold, or given, less any amount paid for the asset by the employee, and the market value of the asset when first loaned to the employee, less the amounts already assessed during the period of the loan, less any amount paid for the asset by the employee.
Ancillary services connected with living accommodation
In the occasion that an employer provides living accommodation to a P11D employee, the employee is taxed, not only on the accommodation itself but also on the cost of providing ancillary services, like cleaning, heating, lighting, repairs and maintenance. Furniture for the employee’s use is included under the heading of ancillary services. The benefit is reduced by any contribution made by the employee.
Vans provided for private use
In the occasion that an employee is provided with a van weighing 3.5 tones or less, for private use, the benefit in 2000/01 is:
₤
Van under 4 years old at the end of the year 500
Van over 4 years old at the end of the year 350
Beneficial Loans
The beneficial loan is granted by the employer to the employee, either interest-free, or at a law rate of interest. A loan is considered as a law rate of interest if the rate charged is less than the official rate given by the Treasury. The P11D employees are special taxed on the difference between the interest actually payable to the employer and the interest that would have been payable at the official rate.
In the occasion that a loan is wholly or partly written off by the employer, the amount written off is assessed on the employee in the tax year in which the write-off takes place. This provision applies to all loans, including those made in the ordinary course of money – lending business
Tax treatment of specific benefits where received by a non – P11D employee
The general rule is that employees who are not within the P11D category are assessable only on benefits capable of being converted into cash or on any benefits provided through an employer meeting an employee’s own personal liability. This principle has been modified to some extent, so that, for instance credit vouchers are an assessable benefit even if the employee is not within the P11D category. However, the principle continues to hold good with regard to benefits such as the provision of a company car, free use of assets, beneficial loans and other.
Benefits capable of being converted into cash
Where the benefit is convertible into cash, the measure of assessable benefit is the amount of cash, which could be realized. For example, an employee provided with a new suit by the employer would be taxable on its second – hand value.
(According to: FOREMAN, A. (2000/01). 1st edition. Tax Handbook. Harlow – Pearson Education Limited.)
Question 3
National Insurance contributions (NIC’s) are payable by employees, by employers and by those who are self employed. Contributions are collected by the National Insurance Contributions office of the Inland Revenue and paid into a National Insurance Fund. This fund, supplemented by a grant from the Treasury, is then used to provide contributory social security benefits.
Class 1 NIC’s
The amount of class 1 NIC’s payable in relation to an employee depends upon the employee’s earnings. An employee’s earnings do not include:
a) Mileage allowances received from the employer if calculated at a rate which is less than or equal to the FPCS rate for the first 4,000 miles, regardless of the number of miles actually driven by the employee.
b) Business expenses paid for or reimbursed by the employer, including reasonable travel or subsistence expenses.
Class 1A NIC’s
Benefits in kind, which are not convertible into cash, are generally exempt from Class 1 NIC’s. However, these benefits give rise to a Class 1A contribution instead, payable by the employer only. For 2000/01 this contribution is calculated as 12.2% of the amount of the benefit in kind which is assessed on the employee under Schedule E. Until 6 April 2000, Class 1A applied only to cars and fuel provided for private use but this class of National Insurance has now been extended to cover benefits in kind generally.
According to example 3 in the first question Stephan is supplied with a 1400cc petrol – engined Toyota Corolla, for both business and private use and his employer pays all running costs, but he reimburses nothing to his employer for the cost of the fuel.
SOLUTION
According to the standards table the assessable benefit in kind is ₤1,700. Therefore the Class 1A contribution payable by Stephan’s employer is 12.2% of ₤1,700 = ₤207,4.
Class 2 NIC’s are payable by self employeed people at a flat rate of ₤2.00 per week. A self-employed person whose earnings from self employment in a tax year are less than the “small earnings exemption limit” (₤3,825) is not required to pay Class 2 NIC’s for that year but may do so voluntarily in order to maintain a full contributions record.
