Clause 206: Cost of the benefit: transfer of used or depreciated asset

817.     This clause derives from section 156(3), (4) and (9)(b) of ICTA. Under the normal rules for determining the cash equivalent for the purposes of this Chapter, the cost of the asset would be used. This clause provides that market value at the time of transfer may be used instead of cost.

818.     Subsections (1) and (2) provide for the alternative of market value to be used. They derive from section 156(3) and the opening words of section 156(4).

819.     Subsections (3) to (5) derive from section 156(4) and (9)(b). As the relief provided by subsections (1) and (2) of this clause could be abused by providing an asset for use, and subsequently transferring it when the market value was very small, the relief is limited. This provision applies only to assets within clause 205. In the case of an asset provided before this Bill comes in force the transitional provision in paragraph 32 of Schedule 7 to this Bill will apply.

820.     Subsection (5) is derived from section 156(4)(a) and (b).

Clause 207: Meaning of "annual rental value"

821.     This clause derives from section 156(6) and part of section 837 of ICTA. It provides the definition of annual rental value for land. Schedule 1 to the Interpretation Act 1978 defines "land" as including "buildings and other structures". Chapter 5 of this Part applies to living accommodation, so this Chapter applies only to accommodation which is not living accommodation.

822.     Subsection (1) defines "annual rental value". Section 837(1) refers to "rates and taxes" on the premises. This clause includes a fuller and more updated description of domestic property charges: "taxes, rates or charges". See Change 24 in Annex 1.

823.     Subsections (2) and (3) set out the adjustments to make in order to arrive at the rent to be used for land. They derive from section 23 of the General Rate Act 1967 which was repealed in 1988. As a consequence of that repeal the reference to section 837(2) has not been included here. Instead the rules been rewritten here. See Change 23 in Annex 1.

824.     Subsection (2) applies in relation to subsection (1). It ensures that the annual value does not include the cost of anything provided which is not provided in the case of unfurnished property. This is important in cases where the only available comparisons are rent of fully furnished and serviced properties, such as a villa in Spain. As the practice of using gross rateable values will continue, this will apply only to properties in respect of which it is not possible to apply the practice.

825.     Subsection (3) operates in the same way to exclude from the actual rent paid and used in calculating the cash equivalent the cost of anything provided which is not provided in the case of rented land. It also operates to define rent as an element of the amount made good. Anything which is in respect of provided services will be an amount made good if Chapter 10 of Part 3 applies.

826.     Subsection (4) makes it clear that the excluded services are those which are not normally met by a landlord in the provision of land.

Clause 208: Meaning of "market value".

827.     This clause derives from section 168(7) of ICTA and defines market value.

Clause 209: Meaning of "persons providing benefit"

828.     This clause derives from section 154(3) of ICTA and establishes who the person providing the benefit is.

Clause 210: Power to exempt minor benefits

829.     This clause derives from section 155ZB of ICTA, which allows regulations to be used to introduce minor exemptions from section 154 of ICTA where the benefits in question are generally available to all employees on similar terms. Before this provision was introduced by FA 2000, all exemptions from section 154 had to be introduced through a Finance Act.

Special rules for scholarships

Overview

830.     This group of clauses derives from section 165 of ICTA.

Clause 211: Special rules for scholarships: introduction

831.     This is mainly an introductory clause which explains the layout and provides the meaning of scholarship.

Clause 212: Scholarships provided under arrangements entered into by employer or connected person

832.     This clause extends the circumstances in which a scholarship is a benefit provided by reason of the employment.

833.     Subsection (1) derives from section 165(2) of ICTA. A scholarship is an employment-related benefit by virtue of clause 201 if it is provided by reason of the employment. This would not apply if the provision of the scholarship did not appear to be within the normal meaning of "by reason of the employment" because of the way in which it was provided. This clause extends the meaning of "by reason of the employment".

834.     Subsection (2) derives from the closing words of section 165(2) of ICTA. It prevents claims that the scholarship is not within subsection (2)(b) because no cost to the employer or connected person is involved.

835.     Subsection (3) is a minor change to the law. It is possible that the extended meaning of "by reason of the employment" could result in arrangements made by individuals to provide for the education of members of their family or household being employment-related benefits because of the terms of subsection (1) of this clause. An example would be an educational trust set up by a grandparent and the parent of someone who benefited from the trust was an employee in the grandparent's business. See Change 39 in Annex 1.

836.     Subsection (4) prevents subsection (2) from disapplying the opening words of clause 201(3).

Clause 213: Exception for certain scholarships under trusts or schemes

837.     This clause, which derives from section 165(3) of ICTA, provides an exception for certain full-time scholarships. This may apply where the scholar is a member of the employee's family or household but where the scholarship has been awarded on merit and is one which satisfies the conditions of section 331 of ICTA.

838.     Subsection (1) derives from the opening words of section 165(3) of ICTA.

839.     Subsection (2) derives from section 165(3)(c). It provides one of the conditions which must be met for the exception to apply. That condition is that if the opening words of clause 201(3) were disregarded, or the extension to the usual definition of "by reason of the employment" in clause 212 were disregarded, the scholarship would not be an employment-related benefit.

840.     Subsection (3) derives from section 165(3)(b) and provides the terms to satisfy the condition.

841.     Subsection (4) derives from section 165(3)(a). The exception can apply only to scholarships provided from a trust fund or scheme.

842.     Subsection (5) derives from the closing words of section 165(3). It ensures that for the exception to apply only a limited amount of the total amount paid out is on scholarships for members of the household or family of employees. The scholarships included are those provided by reason of any employee's employment. For this purpose subsection (6) explains the meaning of employment.

843.     Subsection (6) derives from section 165(6)(b). "Employment" for the purposes of condition D has a special meaning. It includes all employments even if the employee is not resident and not ordinarily resident in the United Kingdom and performs the duties of the employment outside the United Kingdom. It also includes scholarships which are payable by reason of lower-paid employments.

844.     Subsection (7) provides definitions of terms used in the clause.

Clause 214: Scholarships: cost of the benefit

845.     This clause derives from SE 30003 in the Inland Revenue Schedule E Manual. It provides a special rule for determining the cost of the benefit of an employment-related scholarship which is provided from a trust fund. It is a minor change to the law. See Change 40 in Annex 1. The application of the normal rule for the cost of the benefit in clause 204 could result in the whole of the amount of capital paid into such a trust fund being taken into account. This clause prevents that and provides that the cost of the benefit is to be the total payments made to the scholar.

Clause 215: Limitation of exemption for scholarship income in section 331 of ICTA

846.     This clause derives from section 165(1) of ICTA. Section 331 of ICTA gives exemption from income tax for scholarship income where the holder of the scholarship is in full-time education. The cases of Wicks v Firth and Johnson v Firth (1982) 56 TC 318 in the House of Lords decided that scholarship income was exempt from all income tax charges if it fulfilled the conditions in section 331. This clause prevents section 331 from applying to a scholarship which is an employment-related benefit within clause 212.

Chapter 11: Taxable benefits: exclusion of lower-paid employments from parts of benefits code

Introduction

847.     Most of the provisions that form part of the benefits code derive from Chapter II of Part V of ICTA. Those provisions do not apply to all Schedule E taxpayers. Until changes introduced by the FA 1989, Chapter II was entitled "Supplementary charging provisions applicable to directors and higher-paid employees and office holders". This title reflected the origins of the legislation but the threshold for the application of these provisions certainly had not kept pace with inflation. By 1989 it had become difficult to contend that all the employees within the scope of Chapter II were necessarily "higher-paid". Thus, in 1989, the title of the Chapter was changed to "Employees earning £8,500 or more and directors.".

848.     However, the basic concept of the Chapter remained unchanged. It began from the position that no-one was within the scope of the Chapter and then brought in those employees who met its criteria. But it is now the case that by far the majority of employees do earn over £8,500. The benefits code therefore reverses the basic concept so that the benefits provisions apply to all employees, unless they fall within the class of excluded employees.

849.     The purpose of this Chapter is to identify those employees who are not within the scope of certain of the benefits provisions.

850.     This change of approach is described in full in Note 26 in Annex 2.

Clause 216: Provisions not applicable to lower-paid employments

851.     Subsection (1) is the legislative statement of the new approach that is being made in the benefits code, reproducing the effect of section 167(1) of ICTA, although by a different route. The code applies to all employees (including office holders) except that the provisions specified in subsection (4) do not apply to any employee in lower-paid employment who also meets one of conditions A or B.

852.     Subsection (2) sets out condition A - that the employee is not a director.

853.     Subsection (3) sets out condition B which applies to employees who are directors, and is satisfied if

• they have no material interest in the company; and

• either the employment is as a full-time working director; or

• the company is non-profit making or is established for charitable purposes only.

854.     These special rules for certain directors in condition B derive from section 167(1) and (5) of ICTA.

855.     Subsection (4) lists the Chapters that do not apply to the lower-paid. These are the charging provisions that derive from Chapter II of Part V of ICTA.

856.     Subsection (5) limits the meaning of "employee" in the Chapters listed in subsection (4) to exclude any employees satisfying the tests in subsection (1). It is new.

857.     Subsection (6) provides signposts to provisions elsewhere that affect the operation of subsection (1).

Clause 217: Meaning of "lower-paid employment"

858.     This clause defines the concept of "lower-paid employment" that was introduced in the previous clause. It introduces the concept of an earnings rate for the employment for the year of less than £8,500.

859.     The concept of the "earnings rate" enables Inland Revenue practice as set out in the Schedule E Manual at SE 20101 to SE 20111 to be more easily incorporated in the calculation set out in clause 218. By focusing on the "earnings rate" for a particular year it is clear that it is entitlement for the year that is relevant rather than actual receipts. There is no necessary correlation between the amounts included in the calculation of the £8,500 and the amount actually charged to tax in that year. The latter computation is on a receipts basis.

860.     This wording makes it clear that there can be only one earnings rate for any employment for any one year. A single tax year cannot be apportioned into separate periods counting as lower-paid and not lower-paid for the same employment.

861.     This clause derives from section 167(1)(b), as expanded upon by Inland Revenue practice set out in SE 20110 in particular.

Clause 218: Calculation of earnings rate for a tax year

862.     Subsection (1) of this clause contains a method statement that sets out what is taken into account when calculating the annual rate. It derives from section 167(2) of ICTA. Further guidance on the interpretation of the method of calculation is available in the Schedule E Manual at SE 20101 to SE 20111.

863.     Paragraph (b) in Step 1 of the statement makes clear that one must assume, for the purposes of the calculation, that the employment is not lower-paid so that the cash equivalents of any of the benefits specified in clause 216(4) are included in the calculation. The cash equivalent of any benefits that are chargeable on the lower-paid are also included in the calculation.

864.     Step 2 adds in any extra amount required under the special rules relating to the provision of a car, set out in full in clause 219.

865.     Step 3 subtracts any authorised deductions. It derives from section 167(2)(b), but it seems more sensible to list what deductions may be allowed, rather than just listing prohibited deductions as in section 167(2)(b). In the Schedule E Manual SE 20104 makes clear what deductions can be made in calculating the earnings rate for the year. This change in approach is described in detail in Note 26 in Annex 2.

866.     Subsection (2) makes sure that clause 216(1) is disregarded for the purposes of Step 1 of the method statement.

867.     Subsection (3) draws attention to special rules that apply if the benefits in question are the provision of living accommodation.

868.     Subsection (4) lists the "authorised deductions" that may be subtracted at Step 3 of the method statement. The list derives from SE 20104 of the Schedule E Manual.

869.     There is a flow diagram on page 91 that demonstrates the decisions that must be made in the process of determining whether an employment is lower-paid.

Clause 219: Extra amounts to be added in connection with a car

870.     This clause sets out the special rules applicable to Step 2 in clause 218 and deals with the treatment of car benefit. It derives from section 167(2)(a), (2B), (2C) and (2D) of ICTA.

871.     Subsection (1) sets out that the extra amounts are to be added in connection with a car where a car is made available by reason of the employment in the tax year in question.

872.     Subsections (2) to (4) describe the first type of extra amount to be added. This is the higher of:

• the cash equivalents of the car benefit and of any fuel benefit (calculated in accordance with Chapter 6); and

• where an alternative to the benefit of the car is offered, the amount which might be chargeable to tax under Chapter 1.

873.     Subsections (5) and (6) set out the second kind of extra amount to be added. These are amounts which would come into charge under Chapters 3 and 4 if it were not for the effect of the exemptions in clauses 239 or 269. This derives from the effect of disapplying section 157(3) in section 167(2)(a) and from 167(2D).

874.     Subsection (7) makes sure that clause 216(1) is disregarded for the purposes of computing any extra amounts to be added in connection with a car.

Clause 220: Related employments

875.     Subsection (1) explains that this clause applies if a person has two or more related employments.

876.     Subsection (2) sets out that none of the related employments are lower-paid if when the earnings rates of all related employments are added together they total £8,500 or more, or if any of the related employments would not itself satisfy the conditions in clause 216(1).

877.     Subsection (3) sets out how to determine whether employments are "related". Broadly, where an employee has employments with separate entities that are under common control, the employments are treated as being with the same employer. The result reached by applying this subsection to the facts of a particular case can then be fed into subsection (2).

878.     This clause derives from section 167(3) and (4).

879.     Subsection (3)(b)(ii) reproduces the effect of section 167(4) of ICTA in a neater way. Section 167(4) applies to treat employees of a partnership or body ("A") over which an individual or another partnership or body ("B") has control as if the employment were with B. If B controls another body ("C"), and one applies section 167(4) to employees of C, they are also treated as if their employment is with B. Thus employees of both A and C (bodies under common control of B) are treated as if their employment is with B. Clause 220(3)(b)(ii) reproduces this effect without having to look first at employees of A and then at employees of C separately.

Chapter 12: Payments treated as earnings

Overview

880.     This Chapter deals with certain distinct types of payments that are treated as earnings. Thus the chargeable amounts to which these clauses give rise constitute "general earnings" within clause 7.

Clause 221: Payments where employee absent because of sickness or disability

881.     Sick pay paid to an employee by an employer under the contract of employment will usually be chargeable as earnings under Chapter 1 of Part 3. This clause derives from section 149 of ICTA and provides for payments in the nature of sick pay financed by employers through insurance policies and trust funds to be taxed in the same way. If the particular payment already falls within the scope of Chapter 1 of Part 3, this clause does not apply.

882.     At present it has to be inferred from section 149(1) of ICTA that a sickness payment is deemed to be earnings for the period of absence. Subsection (3) makes the position explicit.

883.     Subsection (4) derives from section 149(2) of ICTA and ensures that where both the employer and the employees contribute towards the cost of providing sick pay, the benefits paid to employees are taxed only to the extent that they are financed by the employer.

884.     Subsection (6) derives from section 149(1) and (3) of ICTA and ensures that payments to the sick employee's family or third parties on behalf of the employee (or his family) are also taxable. The source provision uses the term "family or household". In the rewritten clause the reference to "household" has been dropped because the term has a different meaning in the benefits code. The range of persons covered is instead included in the definition of a person's family in clause 721(4). This is a change of approach explained more fully in Note 27 in Annex 2.

Clause 222: Payments by employer on account of tax where deduction not possible

885.     This clause derives from section 144A of ICTA which was part of a series of provisions intended to counter difficulties in the application of PAYE where an employee was "paid" in a readily convertible asset eg a gold bar. Many of the provisions made changes to the PAYE vires. Broadly the effect of the changes was to treat the employer as making a payment equal to the amount of income represented by the readily convertible asset. These deemed payments are known as "notional payments" and the PAYE rules apply to them as they do to straightforward cash payments.

886.     This particular clause deals with one of the consequences of imposing PAYE on "notional payments". It would not always be possible to "deduct" tax from such "notional payments" and PAYE tax may well be accounted for separately. In order to prevent the employee obtaining a tax advantage it is necessary to adjust the employee's tax liability. If the employee does not reimburse the employer in respect of that liability within 30 days the clause imposes an additional liability on the employee receiving the "notional payment". The basic conditions for the clause to apply are set out in subsection (1) which derives from section 144A(1) of ICTA. The PAYE clauses in Part 11 referred to in subsection (1)(a) omit those that are not about notional payments or contain only definitions.

887.     Subsection (2) specifies that the amount of income tax due in respect of the notional payment is treated as earnings from the employment. It therefore reflects the amendment to section 144A(1) of ICTA made by paragraph 4 of Schedule 6 to FA 2002.

888.     Subsection (3) derives from section 144A(2) of ICTA. The list of provisions referred to here matches those mentioned in subsections (1)(a) and (1)(b).

Clause 223: Payments on account of director's tax other than by the director

889.     This clause derives from section 164 of ICTA and denies a tax advantage to directors where their company pays their fees without deduction of PAYE and the company (or another person) then separately pays the PAYE due. If this were done, the cost to the company would be less than paying the equivalent gross fee subject to deduction of PAYE. The amount assessable on the director would be the amount actually received.

890.     The clause counters this device by treating the amount paid to the Board of Inland Revenue as earnings of the employment chargeable to income tax. It applies only to payments that fall within section 203 of ICTA. It does not apply to "notional payments" in respect of readily convertible assets that fall within clause 222. It is the different nature of the respective payments that provides the main borderline between this clause and clause 222. The reference to "the Board" has been retained here (rather than changing to "the Inland Revenue") so as to be consistent with the provisions dealing with the payment of tax.

891.     The clause applies only to directors. However the same device in the case of non-directors could fall within the scope of Chapter 10 of Part 3 (taxable benefits: residual liability to charge).

892.     Subsection (1) derives from section 164(1) of ICTA and sets out the basic conditions for the clause to apply. The source legislation says that the section applies where "the whole of that amount (the tax due) is not so deducted". This clause makes it clear that the provision is not restricted to cases where nothing is deducted, but also applies where not all of the amount is deducted. The fact that section 164 of ICTA applies to partial deductions is clear from the reference insection 164(1) to the amount "so deducted".

893.     Subsections (2) and (3) clarify how the words in section 164(1) of ICTA "where in any year" are interpreted. This change in approach is explained more fully Note 14 in Annex 2.

894.     Subsection (4), which also derives from section 164(1) of ICTA, makes the amount of tax accounted for to the Board of Inland Revenue count as earnings of the director. The year of charge is made explicit. See Note 7 in Annex 2. The amount charged is subject to possible reduction under subsection (6).

895.     Subsection (5) derives from the first proposition in section 164(3) of ICTA and provides a timing rule where the tax is accounted for in a year after the employment has ceased.

896.     Subsection (6) brings together the provisions regarding the amounts to be deducted in arriving at the net taxable amount. Two of the rules derive from the last part of section 164(1) of ICTA and the other rule from the second proposition in section 164(3) of ICTA.

897.     Subsection (7) derives from section 164(2) of ICTA.

898.     Subsection (8) derives from section 168 of ICTA. It is necessary to bring the definitions into this clause because this provision is not in the benefits code.