Taxation of Employment Benefits – HMRC makes changes to guidance in the Employment Income ManualMonday, August 18th, 2008
Manual. The Manual is published on HMRC’s website and is thus publicly available. When changes are made periodically to some of the Manual’s pages, the details are announced, allowing anyone interested enough to pore over the details to see how HMRC’s application of the Benefits legislation has been adjusted.
The following changes and clarifications, which have not previously been discussed in a newsletter, are included in the latest list of changed pages.
Previous HMRC guidance has, rather confusingly, attempted to distinguish between non-contractual payments in lieu of notice by using the descriptions “automatic” and “habitual”.
- Payments were made “automatically” if they were always made when the employer did not give notice of termination was given, perhaps using a set formula. Although not contractual, they are nevertheless an expression of the employer/employee relationship and are therefore taxable under section 62 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA), meaning that they are taxable in full under PAYE.
- Payments were made “habitually” if they were made consistently by the employer as damages for breach of contract, in each case after making a “critical assessment” of the circumstances and, in most cases, reducing the payment by (1) the tax and NICs that would otherwise have been paid, and (2) an amount to reflect the employee’s duty to mitigate the loss. In that situation, the payments are damages for breach of contract and are not an expression of the employment relationship. They are taxable under the provision of section 403 of ITEPA, meaning that they are taxable to the extent that, together with all other qualifying payments, they exceed £30,000.
The revised text in the Manual takes a different approach. It no longer uses the terms “automatic” and “habitual”, principally it seems because an employer who always pays damages when notice is not worked can also be said to be making such payments automatically. However, it is clear that HMRC is still unable to find suitable words to explain the difference. In the following summary of new approach, we have referred to payments being made “routinely”.
The Manual now draws a distinction between
- payments made routinely as a normal part of the employment relationship, and
- payments that are made only after the employer has made a “critical assessment” of the circumstances.
Payments made as a normal part of the employment relationship
If there is no contractual term providing for payment in lieu of notice, the payment may still be chargeable under Section 62 if the employer always makes a payment for any notice period that is not worked. Various terms may be used to describe this practice, such as “custom”, “habit”, “practice” or “expectation”, but it is the nature of the payment that is important. It may be the employer’s “custom or practice” never to pay in lieu of notice and always to pay damages for breach of contract, but that does not make the payment taxable under Section 62.
If the payment is not damages, the issue is whether it is a normal part of the employment relationship. Whether any particular employer is aware that the employer has the practice of paying in lieu of notice is not, in itself, significant. What is more important is whether, in the workplace, such routine payments are perceived as a normal part of the employer-employee relationship rather than as an individual response to each termination.
So, custom and practice, or employee expectation, would be a good indicator that payments in lieu of notice are a normal part of the employment relationship. And a long period of time would not necessarily be important; if is clear that the employer intends to make such payments routinely in future, that would make them taxable in full under Section 62.
Payments that are made after a critical assessment
Routine payment, especially where a standard formula is being applied to the amount of the payment, suggests that the payment is part of the employer/employee relationship and therefore fully taxable under Section 62. On the other hand, if the employer considers carefully the payment that will be made in each specific case using an internal written procedure, especially where the amount of the payment varies according to the employer’s assessment of the ability of each employee to mitigate loss, such payments represent damages because the employee cannot be certain that the payment will be equal to the salary due for the period of notice and may be forced to sue the employer for compensation. The payment cannot, therefore, be part of the normal employment relationship and is taxable under Section 403, i.e. to the extent that, with any other qualifying payments, it exceeds £30,000.
(1) A car benefit charge cannot be avoided by the employee leasing the car from the employer and making payments that cover in full the employer’s costs in providing the car. The car is still the property of the employer so the car benefit conditions are still met. Only capital contributions and private use payments serve to reduce the car benefit charge.
(2) Where employees are provided with cars for private use and the cars are changed very frequently, employers may apply an averaging arrangement. This situation arises principally for
- employees in the retail motor trade
- employees in the motor leasing and hiring trades
- other employees in the motor trade who have very frequent changes of cars.
It does not, however, apply if the allocated car is provided for exclusive use for a predictable period of time, such as a employee whose car is changed monthly.
The arrangement is intended solely to simplify the calculation of the car benefit charge, not to provide a lower tax charge overall than that which would otherwise apply. Employers may agree with their tax inspector
- the price of a notional car, and
- the CO2 emissions figure for the notional car.
Those figures are then used to calculate the car benefit charge reported on form P11D.
From 2009/10, HMRC intends to replace this local arrangement with a new, national arrangement. Detailed guidance will be provided when discussions with the various trade bodies are complete.
Working Rule Agreements
New lodging or overnight subsistence allowances and travel allowance apply under the Construction Industry Joint Council from 30 June 2008
New lodging or overnight subsistence allowances apply in the Plant Hire industry for tax year 2008/09.
Recent updates to the Employment Income Manual
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