Category: Tax Free Benefits

There are five conditions that need to be met to get the tax benefits of a pool car.

When is a car a pool car?

Rather than allocating specific cars to particular employees, some employers find it preferable to operate a carpool and have a number of cars available for use by employees when they need to undertake a business journey. From a tax perspective, provided that certain conditions are met, no benefit in kind tax charge will arise where an employee makes use of a pool car.

The conditions

There are five conditions that must be met for a car to be treated as a pool car for tax purposes.

  1. The car is made available to, and actually is used by, more than one employee.
  2. In each case, it is made available by reason of the employee’s employment.
  3. The car is not ordinarily used by one employee to the exclusion of the others.
  4. In each case, any private use by the employee is merely incidental to the employee’s business use of the car.
  5. The car is not normally kept overnight on or in the vicinity of any of the residential premises where any of the employees was residing (subject to an exception if kept overnight on premises occupied by the person making the cars available).

The tax exemption only applies if all five conditions are met.

When private use is ‘merely incidental’

To meet the definition of a pool car, the car should only be available for genuine business use. However, in deciding whether this test is met, private use is disregarded as long as that private use is ‘merely incidental’ to the employee’s business use of the car.

HMRC regard the test as being a qualitative rather than a quantitative test. It does not refer to the actual private mileage, rather the private element in the context of the journey as a whole. For example, if an employee is required to make a long business journey and takes the car home the previous evening in order to get an early start, the private use comprising the journey from work to home the previous evening would be regarded as ‘merely incidental’. The car is taken home to facilitate the business journey the following day.

Kept overnight at employee’s homes – the 60% test

For a car to meet the definition of a pool car, it must not normally be kept overnight at employees’ homes. In deciding whether this test is met, HMRC apply a rule of thumb – as long as the total number of nights on which a car is taken home by employees, for whatever reason, is less than 60% of the total number of nights in the period, HMRC accept that the condition is met.

When a benefit in kind tax charge arises

If the car does not meet the definition of a pool car and is made available for the employee’s private use, a tax charge will arise under the company car tax rules.

Partner note: ITEPA 2003, s. 167.

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Is the summer party tax-free?

A statutory exemption exists, which allows employers to meet the cost of certain social events for staff without triggering a liability to tax or NICs, providing certain conditions are met.

The legislation refers to ‘an annual party or similar annual function’. Although HMRC do not seem to interpret this to mean that the same event must be held every year, it may be prudent to check the issue in advance where a one-off event is planned.

Conditions

A staff event will qualify as a tax-free benefit if the following conditions are satisfied:

  • the total cost must not exceed £150 per head, per year
  • the event must be primarily for entertaining staff
  • the event must be open to employees generally, or to those at a particular location, if the employer has numerous branches or departments

The ‘cost per head’ of an event is the total cost (including VAT) of providing:

  1. the event, and
  2. any transport or accommodation incidentally provided for persons attending it (whether or not they are the employer’s employees), divided by the number of those persons.

Provided the £150 limit is not exceeded, any number of parties or events may be held during the tax year, for example, there could be three parties held at various times, each costing £50 per head.

The £150 is a limit, not an allowance – if the limit is exceeded by just £1, the whole amount must be reported to HMRC.

If there are two parties, for example, where the combined cost of each exceeds £150, the £150 limit is offset against the most expensive one, leaving the other one as a fully taxable benefit.

Example

ABC Ltd pays for an annual Christmas party costing £150 per head and a summer barbecue costing £75 per head. The Christmas party would be covered by the exemption, but employees would be taxed on summer barbecue costs, as a benefit-in-kind.

Tax treatment for employers

The cost of staff events is tax deductible for the business. The legislation provides a let-out clause, which means that entertaining staff is not treated for tax in the same way as customer entertaining. The expenses will be shown separately in the business accounts – usually as ‘staff welfare’ costs or similar.

There is no monetary limit on the amount that an employer can spend on an annual function. If a staff party costs more than £150 per head, the cost will still be an allowable deduction, but the employees will have a liability to pay tax and National Insurance Contributions (NICs) arising on the benefit-in-kind.

The employer may agree to settle any tax charge arising on behalf of the employees. This may be done using a HMRC PAYE Settlement Agreement (PSA), which means that the benefits do not need to be taxed under PAYE, or included on the employees’ forms P11D. The employer’s tax liability under the PSA must be paid to HMRC by 19 October following the end of the tax year to which the payment relates.

It should also be noted that whilst the £150 exemption is mirrored for Class 1 NIC purposes, (so that if the limit is not exceeded, no liability arises for the employees), Class 1B NICs at the current rate of 13.8%, will be payable by the employer on benefits-in-kind which are subject to a PSA.

The full cost of staff parties and/or events will be disallowed for tax if it is found that the entertainment of staff is in fact incidental to that of entertaining customers.

VAT-registered businesses can claim back input VAT on the costs, but this may be restricted where this includes entertaining customers.

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Employee Benefits, Tax free

More than 25 million working days are lost annually due to work-related ill health matters, including the two leading causes of workplace absence, namely back injuries and stress, depression or anxiety. There are however, several areas where employers can use tax breaks and exemptions to help promote health and fitness at work.

Gym facilities and memberships

In-house gym facilities may be offered to employees at a convenient location to fit in around work and there will be no tax or NIC liability arising if the following conditions are satisfied:

  • the facilities must be available for use by all employees, but not to the general public;
  • they must be used mainly by employees, former employees or members of employees’ families and households (employees of any companies grouped together with to provide the facilities also count);
  • the facilities must not be located in a private home, holiday or other overnight accommodation (including any associated sporting facilities); and
  • they must not involve use of a mechanically propelled vehicle (including road vehicles, boats and aircraft).

For employers who cannot practically provide in-house gym facilities, it may be possible to negotiate favourable membership rates with a local gym or leisure centre. Whilst this may lead to a tax liability for employees, the preferential rate can often be up to 20% – 30% cheaper than the normal price, so this is still an attractive offer for employees.  Depending on how the cost of the gym membership is funded, the fees will either be taxed as earnings or as a taxable benefit-in-kind. So, for example, if an employer gives the employee additional salary to pay for their gym membership, the money is taxed as earnings through PAYE. If the employer pays the gym membership direct, a taxable benefit-in-kind arises on the employee and should be reported to HMRC on form P11D, or through the payroll.

Where an employer pays for a gym membership and the employee contributes towards the cost from their net pay (after tax and NICs), this is referred to as ‘making good’. The amount of the benefit (cost of gym membership) is reduced by the amount of the contribution.

Health-screening, check-ups and recommended treatments

A tax and NIC-free exemption allows employers to fund one health-screening assessment and/or one medical check-up per year per employee.

Subject to an annual cap of £500 per employee, employer expenditure on medical treatments recommended by employer-arranged occupational health services may be exempt for tax and NICs. ‘Medical treatment’ means all procedures for diagnosing or treating any physical or mental illness, infirmity or defect. Broadly, in order for the exemption to apply, the employee must have either:

  • been assessed by a health care professional as unfit for work (or will be unfit for work) because of injury or ill health for at least 28 consecutive days;
  • been absent from work because of injury or ill health for at least 28 consecutive days.

Employer-funded eye, eyesight test, and ‘special corrective appliances’ (i.e. glasses or contact lenses) may also be exempt for ta and NICs, providing certain conditions are satisfied.

Many employees struggle to fit physical activity into their busy working days but research shows that being active for just one hour can offset the potential harm of being inactive. As fitness and health issues become increasingly popular, anything an employer can do to help is likely to be most welcomed by employees.

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Importance of registering for child benefit even if the High-Income Child Benefit charge applies

Parents affected by the High-Income Child Benefit charge (HICBC) can be forgiven for thinking that there is no point is registering for child benefit if they are only going to have to give back everything they receive in the form of the tax.

The HICBC applies where the parent claiming child benefit or their partner has income of more than £50,000 a year. The charge is set at 1% of the child benefit received for each £100 by which income exceeds £50,000. So, for example, if income is £57,000, the charge is equal to 70% of the child benefit received (((£57,000 – £50,000)/£100) x 1%). Once income reaches £60,000, the charge is equal to 100% of the child benefit received. The amount of child benefit received depends on the number of children – it is payable at a rate of £20.70 per week for the first child and £13.70 per week for each subsequent child. Where both partners have income in excess of £50,000, the charge is levied on the partner with the higher income; this is often not the person who received the benefit.

Child benefit also confers state pension rights. Parents registered for child benefit in respect of a child under 12 automatically receive Class 3 National Insurance credits. Class 3 credits have the effect of making a year a qualifying year for state pension (but not contributory benefit) purposes. Thus, each year that a parent is registered for child benefit for a child under 12 provides one qualifying year for state benefit purposes. A person needs 35 qualifying years for the full single-tier state pension and at least ten to receive a reduced state pension.

Failing to register for child benefit can mean missing out on an automatic entitlement to at least 12 qualifying years; this is particularly important if the claimant is a stay-at-home parent or works part time but does not pay sufficient Class 1 or 2 contributions to make the year a qualifying year.

If receiving the money and having to pay it back is a worry, it needn’t be. It is possible to register for child benefit and to elect not to receive it. This can be done online or by contacting HMRC’s child benefit office. Parents can restart the payment of child benefit if circumstances change and the full HICBC no longer applies (for example if income dips below £60,000). Where income is between £50,000 and £60,000 it is worth claiming the benefit as the HICBC will be less than the benefit received. Ring-fencing the amount needed to pay the charge in a separate account will remove some of the worry over having the funds available to pay the tax.

As claims for child benefit can only be backdated three months, parents affected by the HICBC who have opted not to claim child benefit should do so without delay. Registering for child benefit will also ensure that the child receives a National Insurance number on reaching age 16.

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Which childcare scheme is best for your family?

Employees who joined their employer’s childcare voucher or employer-supported childcare scheme before 4 October 2018 can remain in that scheme and benefit from the associated tax relief for as long as the employer continues to offer it. However, this may not always be the best option for the employee – depending on their circumstances they may be better signing up to the Government’s top-up scheme instead.

Tax relief for employer-provided vouchers

Employees who joined an employer childcare voucher scheme or directly contracted childcare scheme prior to 4 October 2018 can continue to receive the associated tax relief. Vouchers or directly-contracted childcare are tax and National Insurance free up to the exempt amount. This depends on when the employee joined the scheme and, where the employee joined the scheme on or after 6 April 2011, the rate at which they pay tax.

The exempt amount is set at £55 per week where the employee joined prior to 6 April 2011; for employees joining after that date, the exempt amounts are £55 for basic rate taxpayers, £28 per week for higher rate taxpayers and £25 per week for additional rate taxpayers (ensuring the relief is worth £11 per week to all taxpayers).

Each employee is only entitled to one exempt amount to cover childcare vouchers and directly-contracted care, and regardless of how many children they have. However, each parent can benefit from their own exempt amount.

Childcare vouchers and directly-contracted care can be provided via a salary sacrifice or other optional remuneration arrangement without triggering the alternative valuation rules. This means that the tax exemption is preserved where provision is made in this way.

Government scheme

Under the Government scheme, parents can open an online account and receive a tax-free top up of 20p for every 80p that they deposit into the account. The maximum top up is £2,000 per child per tax-year. The Government scheme cannot be used in conjunction with universal credit or tax credits.

Which scheme is best?

Parents cannot benefit from both the employer scheme and the Government scheme, so must choose which is best for them.

Where the employee joined the employer scheme on or after 6 April 2011, the tax relief from employer scheme is worth £11 per week (£583 per year (based on 53 weeks) if one parent receives the vouchers and £1166 if two parents do.

Under the Government scheme, the parents would need to contribute £2332 to receive a top-up of £583 and £4664 to receive a top up of £1166. To benefit from the maximum £2,000 top-up, the parents would need to contribute £8,000.

There is no substitute for crunching the numbers – parents should consider both options and decide what is best for them.