Clause 54: Calculation of deemed employment payment

215.     Subsection (1) sets out a method statement to show how to calculate the deemed employment payment. It derives from paragraph 7.

216.     Steps 1 and 2 contain a cross-reference to clause 55, so that readers know where to find out what amount should be taken into account in respect of any benefits.

217.     After Step 2, all the remaining steps deduct various amounts. Step 3 contains a statement to the effect that if the result of that, or any later step, is nil or a negative amount, then there is no deemed employment payment.

218.     Step 3 also contains a cross-reference to the deductions provisions in Chapters 1 to 5 of Part 5 so that the reader can see where to look to find out what kind of expenses may be deducted.

219.     Step 8 of the method statement explains the operations involved in deducting the notional national insurance contributions.

220.     The method statement concludes with a statement that the result represents the deemed employment payment.

221.     Subsection (2) explains what to include in Step 1 of the calculation of the deemed payment if the intermediary has received amounts under deduction of tax because of the operation of section 559 of ICTA (sub-contractors in the construction industry). It is drawn from paragraph 8.

222.     Subsection (3) provides that amounts deducted at Step 3 of the method statement may include certain reimbursed expenses. This derives from clause 38(2) of Finance Act 2002.

223.     Subsection (4) and (5) provide that mileage allowance relief may be included in amounts deducted at Step 3 of the method statement. This derives from clause 38(2) of Finance Act 2002.

224.     Subsection (6) is new. It applies for the purposes of working out the amount to be deducted at Step 3 of the method statement in respect of travel expenses. Entitlement to travel expenses depends on whether or not a workplace is "temporary" and where the worker is based over the course of the employment. Subsection (6) allows such travel expenses to be deducted at Step 3 as would have been available during the combined period of all the relevant engagements as if that combined period was a continuous employment with the intermediary. This new rule is a minor change to the law. See Change 13 in Annex 1.

225.     Subsection (7) allows for mileage allowance payments or passenger payments to be deducted at Step 7 of the method statement. This derives from paragraph 7B as introduced by section 38(2) FA 2002.

226.     It is quite likely that the intermediary will receive payments from the client to cover the services of more than one worker or to cover the services of a worker and other things (such as materials, reimbursed fees to third parties etc). Subsection (8) sets out that in such a case any apportionment required to arrive at the amount attributable to the services of a single worker should be on a just and reasonable basis. It derives from paragraph 9.

Clause 55: Application of rules relating to earnings from employment

227.     This clause explains how to arrive at the amounts to be used in the various steps of the method statement outlined in clause 54(1). It derives from paragraph 10. Broadly it specifies that the normal rules for computing employment income should apply working out the amounts to go into the method statement.

228.     One place where paragraph 10 departs slightly from the normal rule for employment income is in sub-paragraph (5), which deals with the time that a payment or benefit should be treated as received. This reads:

(5) A payment or benefit is treated as received-

(a) in the case of a payment or cash benefit, when payment is made of or account of the payment or benefit;

in the case of a non-cash benefit, when it is used or enjoyed.

229.     Subsection (5) of this clause provides a more detailed explanation of when a non-cash benefit should be treated as received. This is a minor change to the law. See Change 14 in Annex 1.

Clause 56: Application of Income Tax Acts in relation to deemed employment

230.     This clause ensures that the deemed employment payment is treated in exactly the same manner as if it were an actual payment of salary made by the intermediary, as employer, to the worker as employee. It derives from paragraph 11.

Clause 57: Earlier date of deemed employment payment in certain cases

231.     As set out in clause 50(3) the basic timing rule for the deemed payment is that it is treated as being made at the end of the tax year in question. This clause sets out what earlier date should be taken for payment of the deemed payment if there is a break in the worker-intermediary relationship during the tax year in question. It derives from paragraph 12, as amended by section 38(3) FA 2002.

232.     Subsection (1) sets the scene and says that where there is such a break (relevant event), then the deemed payment is treated as being made immediately before it, or before the first of them if there are more than one.

233.     Subsection (2) lists the kinds of break in the worker-intermediary relationship that count as relevant events if the intermediary is a company. Subsections (3) and (4) list the kinds of break in the worker-intermediary relationship that count as relevant events where the intermediary is a partnership and where the intermediary is an individual.

234.     Subsection (5) emphasises that this clause only affects the time at which the deemed payment is treated as being made. It does not affect the calculation of the deemed payment, which is still based on amounts received in the tax year.

Clause 58: Relief in case of distributions by intermediary

235.     Where the intermediary is a company, it may pay distributions to the worker if the worker is a shareholder in the company. Since April 1999, UK companies have not had to pay ACT on distributions made. But the recipient of any distributions is taxable on them under Schedule F. So there is a possibility of double taxation in that the worker might have to pay tax under Schedule E on the deemed payment as well as on the actual amount of any distributions received. This clause allows an intermediary that is a company to make a claim for relief to remove the possibility of double taxation. It derives from paragraph 13.

236.     Subsection (2) describes how a claim to relief under this clause should be made. It includes a statement of the time limit for such a claim. There is no specified time limit for making the claim in Schedule 12. This means the default time limit for claims (in section 43 TMA 1970) applies, so that the claim must be made not more than five years following the 31 January following the tax year during which the distribution is made. That time limit is reproduced here to save users having to refer to another Act.

237.     Subsection (3) describes the method of delivery of the relief claimed. It allows the Inland Revenue to direct that the relief be given by whatever means appears appropriate.

238.     Subsection (4) makes it clear that in a case where there is a distribution and a deemed employment payment, it is the distribution that is reduced, by setting the employment income payment against it.

Clause 59: Provisions applicable to multiple intermediaries

239.     There may be a chain of intermediaries between the worker and the client.

240.     Subsections (2) and (3) contain provisions derived from paragraph 16 concerning the intermediaries' responsibility to operate PAYE on deemed payments made to the worker. Subsection (2) makes all the relevant intermediaries involved in the same relevant engagement jointly and severally liable for amounts due as a result of the operation of PAYE on the deemed payment in respect of the engagement common to all the intermediaries, plus (if applicable) any other relevant engagements. Subsection (3) provides a get-out for any intermediaries who have not received any payments or benefits in respect of the common relevant engagement or any other relevant engagement.

241.     Subsections (4) and (5) prevent any double counting of amounts when calculating the deemed payments of the intermediaries where there is more than one intermediary. It applies where there has been some kind of payment (or benefit provided) from one relevant intermediary to another in respect of a relevant engagement. In such a case, a reduction is made in the amount to be taken into account at Steps 1 and 2 of the deemed payment calculation. This material derives from paragraph 15.

242.     Subsection (6) says that, subject to subsections (2) to (5), the Chapter applies to each intermediary separately. Subsection (7) explains the label "relevant intermediary", used in this clause. These two subsections derive from paragraph 14.

Clause 60: Meaning of "associate"

243.     This clause deals with the meaning of "associate". This term is used in clauses 50(1)(b), (3)(a) & (b) and 52(2)(b)(ii). It derives from paragraph 19.

244.     The definition of an employee benefit trust now appears in Chapter 11 of Part 7.

Clause 61: Interpretation

245.     This interpretative clause derives from paragraph 21.

246.     Subsection (1) points out where the various terms used in the Chapter are defined.

247.     Subsection (2) ensures that any payments or benefits received or receivable from a partnership or unincorporated association include any that a person is or may be entitled to receive in his capacity as a member of that partnership or association.

248.     Subsection (3) treats anything done by or in relation to an associate of an intermediary as if it were done by or in relation to the intermediary. It also treats anything provided to an individual's family or household as if it were provided to the individual.

249.     Subsection (4) treats (for the purposes of this Chapter) a man and a woman who live together as husband and wife as if they were married to each other. This extends into the definition of "associate" (defined in clause 60(1) as having the same meaning as in section 417(3) and (4) of ICTA).

Part 3: Employment income: earnings and benefits etc. treated as earnings

Chapter 1: Earnings

Clause 62: Earnings

250.     This clause sets out what constitutes the primary ingredient of employment income: earnings. It derives from section 131 of ICTA. The "money's worth" principle incorporated in subsection (2) derives from long-established case law. See Note 13 in Annex 2.

251.     The definition of earnings incorporates several suggestions received during the consultation process leading up to this Bill to bring the language more up to date. In particular "emolument" does not now appear until subsection (2)(c).

Chapter 2: Taxable benefits: the benefits code

Introduction

252.     Before 1948 there was no legislation specific to benefits. Benefits were only chargeable to tax if they fell within the definition of emoluments, that is if they were "perquisites and profits whatsoever".

253.     It was established by case law in Tennant v Smith (1892) 3 TC 158 that a non-cash benefit given by an employer to an employee because of the employment would only be a chargeable emolument if it was "money's worth".

254.     Finance Act 1948 brought in the first charge based on the cost of provision of benefits. Over the years that followed many additional provisions were introduced dealing with specific benefits, plus a number of ESCs and statements of practice. Many of the benefits provisions apply only to those with annual earnings of £8,500 or more.

255.     The benefits code, set out in Chapters 2 to 11 of this Part, provides a coherent structure for all those provisions. There is now only a minority of employees earning less than £8,500. Accordingly, it seems more logical to apply the rules to everyone and then to exclude the "lower-paid".

• Chapter 2 provides the introduction to the benefits code

• Chapters 3 to 9 contain the provisions that identify a specific type of benefit and explain how to calculate the appropriate taxable amount.

• Chapter 10 is a "sweep-up" provision, bringing in anything not in Chapters 3 to 9.

• Chapter 11 identifies employees who count as "lower-paid" and explains which chapters do not apply to them.

256.     The introduction of a coherent benefits code, applying to all except the "lower-paid" is new.

257.     The sections of ICTA which treat amounts as emoluments and from which Chapters 3 - 10 and clauses 222 and 223 derive make no mention of the year "for" which they are so treated other than in section 162(5) and section 162(6). Instead a variety of terms are used. In Chapter 2 of Part 5 of ICTA the term is "treated as an emolument and accordingly chargeable to income tax under Schedule E". In those sections which are not in Chapter 2 of Part 5 the terms used are "treated as having received an emolument" - sections 141 and 142, "assessable to income tax under Schedule E" - section 144A and "treated for the purposes of Schedule E as being in receipt of an emolument" - sections 145 and 146.

258.     All of these terms provide the route into the Cases of Schedule E, so that either the receipts or remittance basis applies to the emoluments. The structure of Chapter 3 of Part 2 of this Bill requires identification of what are general earnings for a tax year so that the provisions of Chapter 4 or 5 of Part 2 can be used to find the tax year in which the earnings are received or remitted.

259.     What is implicit in the relevant sections of ICTA has been made explicit by stating for which year the amounts are treated as earnings in the following provisions:-

     Clause 72 (Sums in respect of expenses treated as earnings)

     Clause 81 (Benefit of cash voucher treated as earnings)

     Clause 87 (Benefit of non-cash voucher treated as earnings)

     Clause 94 (Benefit of credit-token treated as earnings)

     Clause 102 (Benefit of living accommodation treated as earnings)

     Clause 120 (Benefit of car treated as earnings)

     Clause 149 (Benefit of car fuel treated as earnings)

     Clause 154 (Benefit of van treated as earnings)

     Clause 175 (Benefit of taxable cheap loan treated as earnings)

     Clause 188 (Release or writing off of loan treated as earnings)

     Clause 193 (Application of clause 175 to notional loan)

     Clause 203 (Cash equivalent of benefit treated as earnings)

     Clause 222 (Payments by employer on account of tax)

     Clause 223 (Payments on account of director's tax)

260.     This change in approach is described more fully in Note 7 in Annex 2.

Clause 63: The benefits code

261.     This clause explains which chapters of this Part come together to form the benefits code. It is new.

Clause 64: Relationship between earnings and benefits code

262.     This clause provides a rule for the case where two amounts would otherwise be treated as earnings in respect of the same benefit, one under clause 62(earnings) and the other under the benefits code.

263.     Subsections (1) and (2) derive from Inland Revenue practice, as set out in SE 21640. See Change 15 in Annex 1.

264.     Subsections (3) to (5) deal with the exceptions to the rule in subsections (1) and (2), giving the provisions which apply within the relevant chapters of the benefits code.

Clause 65: Dispensations relating to benefits within provisions not applicable to lower-paid employment

265.     This clause, in defined circumstances and subject to certain conditions being met, disapplies the provisions of the benefits code for specified payments, benefits or facilities provided for employees. That reduces the administrative burden on the person responsible for dealing with the payroll aspects of the employee's employment and on the Inland Revenue. It also means that less information needs to be included in the employee's self-assessment return. The clause derives from section 166 of ICTA.

266.     The clause is in Chapter 2 of Part 3, which is headed "Taxable benefits: the benefits code". That is an appropriate location because a dispensation is closely linked with the benefits code and is only applicable to an employee who is not lower-paid.

267.     In subsection (1) the reference to "the inspector" in the source legislation has been replaced by the reference to "the Inland Revenue". See Change 158 in Annex 1.

268.     Subsection (1)(a) has the words "to or" inserted before "for", in relation to payments made to employees. That reflects how the Inland Revenue apply the source legislation, even though it is not quite so worded.

269.     Subsection (4) uses the term "dispensation" for the notice that the Inland Revenue gives to the person who has sought it, to authorise the application of this clause to the specified payments, benefits or facilities. The clause also characterises the dispensation as a notice, which, by virtue of the definition of that word in section 832(1) of ICTA, means that it must be in writing. Taken together these two changes formalise the common name for the authorisation given and confirm the current practice that it must be in writing. See Change 16 in Annex 1.

270.     Subsection (6) has a minor change to the process for the revocation of a dispensation that has been given. Instead of requiring notice of the change to be "served" on the person to whom the dispensation was given the provision now requires it to be "given". See Change 16 in Annex 1.

Clause 66: Meaning of "employment" and related expressions

271.     This clause sets out the meaning of "employment" and related expressions for the purposes of the benefits code. It derives from section 168(2) of ICTA.

Clause 67: Meaning of "director" and "full-time working director"

272.     This clause provides definitions of "director" and "full-time working director" for the purposes of the benefits code. It derives from section 168(8) to (10) of ICTA.

Clause 68: Meaning of "material interest" in a company

273.     This clause provides the definition of "material interest" in a company for the purposes of the benefits code. It derives from section 168(11) of ICTA.

Clause 69: Extended meaning of "control"

274.     This clause provides the definition of "control" for the purposes of the benefits code. It derives from section 168(12) of ICTA.

Chapter 3: Taxable benefits: expenses payments

Overview

275.     This Chapter deals the charge to tax on expenses as taxable benefits. The Chapter applies to any employee other than those excluded under Chapter 11 of Part 3.

Clause 70: Sums in respect of expenses

276.     This clause derives from section 153 of ICTA and gives the two occasions when the charge to tax on sums paid in respect of expenses applies.

277.     Subsection (1), which derives from section 153(1), deals with the first occasion. It states that the Chapter applies to a sum paid in respect of expenses to an employee in a tax year. The sum must be paid by reason of his employment. This expression is defined in clause 71.

278.     Subsection (2), which derives from section 153(3), deals with the second occasion. It states that the Chapter applies when a sum is "paid away" by an employee in a tax year where the conditions set out in paragraphs (a), (b) and (c) apply. The condition under (c) refers to the fact that the sum is paid away "in respect of expenses". See Change 17 in Annex 1.

279.     If all or part of the sum which is put at the disposal of the employee in respect of expenses is paid away, but not in respect of expenses, the tax charge may be as earnings in clause 62 or an amount treated as earnings by virtue of Chapter 10 of Part 3 (Taxable benefits: residual liability to charge).

280.     Subsections (3) and (4) apply for the purposes of sums paid under subsection (1) or paid away under subsection (2). They make it explicit that, if the employment is held at some time in the tax year in which the sum is paid to the employee or paid away by the employee, it is immaterial whether or not the employment is held at the time of payment. Subsection (4) further clarifies this proposition by stating that references to an employee may therefore include a former or a prospective employee. These provisions derive from and clarify the meaning of the words "where in any year a person is employed" found in section 153(1). See Note 14 in Annex 2.

281.     Subsection (5) derives from the words in section 153(1) "apart from this section, are not chargeable to tax as his income". The most likely charge will be as earnings - clause 62. An example of this is a round sum expenses allowance.

Clause 71: Meaning of paid or put at disposal by reason of the employment

282.     This clause derives from section 168(3) of ICTA. It provides a definition of the words "by reason of the employment" for the purposes of this Chapter.

Clause 72: Sums in respect of expenses treated as earnings

283.     This clause derives from section 153(1) and (2) of ICTA.

284.     Subsection (1) derives from part of section 153(1). In addition, the tax year for which the sums are treated as earnings is specified here. See Note 7 in Annex 2.

285.     Subsections (2) and (3) derive from section 153(2) and indicate that deductions allowed by the provisions listed in subsection (3) may be claimed in respect of the sums treated as earnings.

Chapter 4: Taxable benefits: vouchers and credit-tokens

Overview

286.     This Chapter sets out the amount charged on the benefit of certain cash vouchers, non-cash vouchers and credit-tokens which are provided by reason of an employee's employment. The cash equivalent of the benefit is treated as earnings from the employment.

287.     The clauses in this Chapter derive from sections 141 to 144 of ICTA.

288.     Chapter 6 of Part 4 contains a number of exemptions from the charge on the benefit of vouchers and credit-tokens.

289.     This Chapter is not listed in clause 216 (provisions not applicable to lower-paid employments). Lower-paid employees are therefore not excluded from the charge.

Clause 73: Cash vouchers to which this Chapter applies

290.     This clause derives from section 143(1).

291.     Subsection (1) sets out the circumstances in which the Chapter applies to a cash voucher.

292.     Subsection (2) sets out the factors that determine whether a cash voucher provided for an employee is provided "by reason of the employment". If a voucher is given for personal reasons by an employer who is an individual, it is not regarded as provided by reason of the employment. The disregard of vouchers provided by an individual for personal reasons is a minor change to the law. See Change 18 in Annex 1.

293.     Subsection (3) determines the time of receipt for a cash voucher appropriated to the employee. This is particularly relevant for the operation of PAYE.

Clause 74: Provision for, or receipt by, member of employee's family

294.     This clause extends provision for or receipt by the employee of a cash voucher to provision for or receipt by a member of the employee's family. It derives from section 144(4) of ICTA.

295.     "Members of the employee's family" is defined in clause 721(4).