18 October 2000
Tax Bulletin - It's Official
Extracts from the Revenue's forty-ninth Tax Bulletin.
Schedule E benefits in kind and apportionments
Since the start of the Schedule E benefits legislation in 1948, there has been an exemption for the benefit:
'in premises occupied by the employer... of accommodation, supplies and services used by the employee solely in performing the duties of the employment.'
Extracts from the Revenue's forty-ninth Tax Bulletin.
Schedule E benefits in kind and apportionments
Since the start of the Schedule E benefits legislation in 1948, there has been an exemption for the benefit:
'in premises occupied by the employer... of accommodation, supplies and services used by the employee solely in performing the duties of the employment.'
Tax Bulletin - It's Official
Extracts from the Revenue's forty-ninth Tax Bulletin.
Schedule E benefits in kind and apportionments
Since the start of the Schedule E benefits legislation in 1948, there has been an exemption for the benefit:
'in premises occupied by the employer... of accommodation, supplies and services used by the employee solely in performing the duties of the employment.'
This year's Finance Act extends the exemption to situations where 'any use of (the benefit) for private purposes by the employee... is not significant' (new section 155ZA, Taxes Act 1988). Exemption is also allowed for benefits provided other than on the employer's premises provided that private use is not significant and 'the sole purpose of providing the benefit is to enable the employee to perform the duties of his employment'.
These changes recognise that employers face practical difficulty in policing the 'solely' test, and that working practices have changed since 1948. It is now relatively common for office equipment to be supplied for work use other than on the employer's premises.
'Not significant' private use has not been statutorily defined. It will depend on all the circumstances of the case, but an important factor will be the employer's policy for allowing employees to make occasional private use of work items. Employers will not be expected to keep detailed records of every instance of actual use in order to substantiate a claim for exemption. If the employer's policy is:
clearly stated to the employees and sets out the circumstances in which occasional private use may be made;
any policy of the employer not to recover the costs of such private use is a commercial decision because the administrative costs of doing so would exceed the amounts involved, rather than a desire to reward the employee; and
there are reasonable checks to ensure that the policy is actually followed in practice;
then provided that the amount of private use is small compared to work use, the Revenue will accept that the test is met.
Some benefits are excluded from the possibility of exemption. These are motor vehicles, boats, aeroplanes and benefits which involve improvements to living accommodation or any structure on land adjacent to and enjoyed with such accommodation. Such benefits must continue to be reported on form P11D whatever the extent of business use of the benefit by the recipient. A deduction from the reportable amount, in respect of the use of the benefit by the employee in performing his duties, may be due.
Telephones
An employer may pay for or provide a telephone line in an employee's home so that the employee may make outgoing and receive incoming calls for work purposes.
If the employer pays a cash allowance towards, or reimburses the employee's telephone costs, then the amount paid or reimbursed is chargeable to tax and the employee may get a deduction under the expenses rules for the actual cost of calls made in the course of the duties of the employment. Class 1 National Insurance contributions are payable on the amount paid by the employer towards the cost of the rental and all private calls.
If the benefit to the employee of the employer providing the telephone is not exempt from income tax, then the employee is chargeable to tax on the expense incurred by the employer (the cost of the line rental and the cost of all calls), less any sum that the employee may make good to the employer for, say, private use of the telephone. The employee may get a deduction under the expenses rules for the actual cost of calls made in the course of the duties of the employment. Class 1A National Insurance contributions are payable by the employer on the cost of the line rental, and, unless the cost of private calls are made good by the employee, the cost of the calls.
The benefit of the telephone line will be exempt from tax, and from Class 1A National Insurance contributions if:
the employer's sole purpose in providing the telephone is to enable the employee to perform his duties, and
the employee's private use of the benefit of the telephone is not significant.
The exemption will apply where:
there is a clear business need for the employer to provide the employee with a telephone;
the employer has internal controls to monitor, control and minimise the cost to him of private use; and
the employer has no intention to reward the employee.
Examples where the exemption is likely to apply include cases where an employer provides a telephone line so that employee may make or receive calls which are a vital and central part of the duties of the employment, such as:
ministers of religion, where there is an imperative need for contact with their parishioners and congregations 24 hours a day;
teleworkers, where a telephone line at home is provided for remote computer working or telephone business;
employees such as care workers in residential homes for the elderly, or disabled, or hospices, whose daily duties may require contact with the emergency services or contacting relatives of those they care for.
In practice, the Revenue has allowed relief for a proportion of telephone line rental in certain defined circumstances set out in the old Schedule E Manual at paragraph SE4331. In view of the introduction of new section 155ZA, the Revenue is to discontinue the practice at paragraph SE4331 from 5 April 2001. Relief will still be available for the actual cost of business calls.
(Editorial note: Hence it will be more sensible to provide a mobile phone, which benefits from full tax exemption under section 155AA.)
Mixed use benefits
The House of Lords decision in Pepper v Hart 65 TC 420 (that the expense of providing a benefit was the marginal additional expense of its provision) was based on the opening words of what is now section 156(2) 'the amount of any expense in or in connection with' the provision of a benefit. The Revenue's view is that the decision also applies to the similar words in section 156(5)(b) (relating to assets placed at employee's disposal). So if the employer's sole motive for the purchase and continued ownership of an asset is for use it in its business, other than by provision as a benefit to an employee or employees, and the exemption in new section 155ZA does not apply for any reason, the Pepper v Hart marginal additional cost principle will apply to 'running' expenses within section 156(5)(b). The chargeable cash equivalent of the benefit for an employee to whom the asset is provided will therefore be a proper proportion of its annual value plus the marginal additional running expenses relating to its provision as a benefit. This is the amount that the employer should report on form P11D.
New criminal offence for tax fraud
Section 144, Finance Act 2000 introduces a specific criminal offence aimed at tax fraud and punishable by up to seven years in prison.
The new offence is to be 'knowingly concerned in the fraudulent evasion of income tax'.
It applies to offences committed from the beginning of 2001; participants in the informal economy are therefore given the opportunity to regularise their affairs under current law and practice.
The new offence does not criminalise conduct which is not already an offence under current law. Case law suggests that the ambit of the new offence is similar to that of the existing common law offence in England and Wales of cheating the public revenue, an offence used for the prosecution of many existing income tax frauds. (But, as Lord Grabiner noted, 'cheat' cannot be tried summarily, unlike other offences which often go hand in hand with tax and contribution frauds.)
Dishonesty is a necessary feature of conduct which can amount to an offence under a number of provisions relevant to fraud in the widest sense. But dishonesty is the very essence of 'cheat' and will be for the new offence. The criminal courts have never sought to define as such the conduct which counts as dishonest but they have provided guidance which is likely to apply in this context (see Ghosh [1982] QB 1053). Conduct is dishonest if:
by the ordinary standards of reasonable and honest people it is dishonest; and
the person whose conduct is under consideration must have realised that the conduct was dishonest by those standards.
A positive act of deception (such as completing a tax return known to be false) is not a necessary element either of 'cheat' or of the new offence. Deliberately refraining from notifying chargeability to tax or from submitting tax returns, in circumstances where the person concerned must have known tax should be paid, may well in itself amount to dishonest conduct and therefore to either offence.
The new offence, unlike 'cheat', applies to offences committed in Scotland as well as elsewhere in the United Kingdom. Under current Scottish law, however, there is no precise equivalent of 'cheat'. The nearest, the Scottish common law offence of 'fraud', requires some positive act of deception. So the new offence does entail an extension in the conduct which counts as criminal north of the border.
During the debate in the Finance Bill Standing Committee, the Paymaster General was asked in what circumstances a customer of a business could become 'knowingly concerned' in a fraud by that business. She said that the test was one requiring both knowledge (rather than mere suspicion) of an offence and also actual involvement in it. Simply paying for services in cash was unlikely to satisfy this test.
In the same debate at least one committee member raised the subject of the impact of the new offence on tax advisers, especially those involved in advising on arrangements which could be characterised as tax avoidance. The Revenue does not consider that the new offence has led to any change in the law in this area.
Where a scheme labelled as 'avoidance' by its participants and their advisers admittedly fails, the key issue as a matter of criminal law would be whether they have been dishonest in the unsuccessful effort to reduce the relevant tax liability. It would be for the courts to decide as a question of fact whether that is the case.
Concern has been expressed in some quarters that, as a result, the decision will not normally be taken by those with professional experience of tax matters and, given the highly technical nature of much tax law, that state of affairs may lead to injustice. That is an issue well beyond the scope of this article, but it may be helpful to remember that possible dishonesty becomes a consideration in this context only in certain circumstances. That is where there is some suggestion that the participants in an avoidance scheme are not merely relying on the intrinsic technical soundness of the arrangements actually put in place to reduce the liability, but also on concealment of the true facts from the inspector. If so, then, if the scheme fails, it is perfectly possible that the criminal courts may find there has been an offence. But, conversely, where there is no trace of any concealment of the true facts of arrangements for which there is a respectable technical case, it is hard to imagine how a criminal offence can have been committed.
The foregoing are extracts from longer articles published in the Tax Bulletin which is Crown Copyright and to which reference should be made for details for the full text. Information regarding subscription can be obtained from Miss F Chowdhury, Room 439, 22 Kingsway, London WC2B 6NR, tel: 020 7438 7812. It is also available free of charge from the Revenue's website.
Extracts from the Revenue's forty-ninth Tax Bulletin.
Schedule E benefits in kind and apportionments
Since the start of the Schedule E benefits legislation in 1948, there has been an exemption for the benefit:
'in premises occupied by the employer... of accommodation, supplies and services used by the employee solely in performing the duties of the employment.'
This year's Finance Act extends the exemption to situations where 'any use of (the benefit) for private purposes by the employee... is not significant' (new section 155ZA, Taxes Act 1988). Exemption is also allowed for benefits provided other than on the employer's premises provided that private use is not significant and 'the sole purpose of providing the benefit is to enable the employee to perform the duties of his employment'.
These changes recognise that employers face practical difficulty in policing the 'solely' test, and that working practices have changed since 1948. It is now relatively common for office equipment to be supplied for work use other than on the employer's premises.
'Not significant' private use has not been statutorily defined. It will depend on all the circumstances of the case, but an important factor will be the employer's policy for allowing employees to make occasional private use of work items. Employers will not be expected to keep detailed records of every instance of actual use in order to substantiate a claim for exemption. If the employer's policy is:
clearly stated to the employees and sets out the circumstances in which occasional private use may be made;
any policy of the employer not to recover the costs of such private use is a commercial decision because the administrative costs of doing so would exceed the amounts involved, rather than a desire to reward the employee; and
there are reasonable checks to ensure that the policy is actually followed in practice;
then provided that the amount of private use is small compared to work use, the Revenue will accept that the test is met.
Some benefits are excluded from the possibility of exemption. These are motor vehicles, boats, aeroplanes and benefits which involve improvements to living accommodation or any structure on land adjacent to and enjoyed with such accommodation. Such benefits must continue to be reported on form P11D whatever the extent of business use of the benefit by the recipient. A deduction from the reportable amount, in respect of the use of the benefit by the employee in performing his duties, may be due.
Telephones
An employer may pay for or provide a telephone line in an employee's home so that the employee may make outgoing and receive incoming calls for work purposes.
If the employer pays a cash allowance towards, or reimburses the employee's telephone costs, then the amount paid or reimbursed is chargeable to tax and the employee may get a deduction under the expenses rules for the actual cost of calls made in the course of the duties of the employment. Class 1 National Insurance contributions are payable on the amount paid by the employer towards the cost of the rental and all private calls.
If the benefit to the employee of the employer providing the telephone is not exempt from income tax, then the employee is chargeable to tax on the expense incurred by the employer (the cost of the line rental and the cost of all calls), less any sum that the employee may make good to the employer for, say, private use of the telephone. The employee may get a deduction under the expenses rules for the actual cost of calls made in the course of the duties of the employment. Class 1A National Insurance contributions are payable by the employer on the cost of the line rental, and, unless the cost of private calls are made good by the employee, the cost of the calls.
The benefit of the telephone line will be exempt from tax, and from Class 1A National Insurance contributions if:
the employer's sole purpose in providing the telephone is to enable the employee to perform his duties, and
the employee's private use of the benefit of the telephone is not significant.
The exemption will apply where:
there is a clear business need for the employer to provide the employee with a telephone;
the employer has internal controls to monitor, control and minimise the cost to him of private use; and
the employer has no intention to reward the employee.
Examples where the exemption is likely to apply include cases where an employer provides a telephone line so that employee may make or receive calls which are a vital and central part of the duties of the employment, such as:
ministers of religion, where there is an imperative need for contact with their parishioners and congregations 24 hours a day;
teleworkers, where a telephone line at home is provided for remote computer working or telephone business;
employees such as care workers in residential homes for the elderly, or disabled, or hospices, whose daily duties may require contact with the emergency services or contacting relatives of those they care for.
In practice, the Revenue has allowed relief for a proportion of telephone line rental in certain defined circumstances set out in the old Schedule E Manual at paragraph SE4331. In view of the introduction of new section 155ZA, the Revenue is to discontinue the practice at paragraph SE4331 from 5 April 2001. Relief will still be available for the actual cost of business calls.
(Editorial note: Hence it will be more sensible to provide a mobile phone, which benefits from full tax exemption under section 155AA.)
Mixed use benefits
The House of Lords decision in Pepper v Hart 65 TC 420 (that the expense of providing a benefit was the marginal additional expense of its provision) was based on the opening words of what is now section 156(2) 'the amount of any expense in or in connection with' the provision of a benefit. The Revenue's view is that the decision also applies to the similar words in section 156(5)(b) (relating to assets placed at employee's disposal). So if the employer's sole motive for the purchase and continued ownership of an asset is for use it in its business, other than by provision as a benefit to an employee or employees, and the exemption in new section 155ZA does not apply for any reason, the Pepper v Hart marginal additional cost principle will apply to 'running' expenses within section 156(5)(b). The chargeable cash equivalent of the benefit for an employee to whom the asset is provided will therefore be a proper proportion of its annual value plus the marginal additional running expenses relating to its provision as a benefit. This is the amount that the employer should report on form P11D.
New criminal offence for tax fraud
Section 144, Finance Act 2000 introduces a specific criminal offence aimed at tax fraud and punishable by up to seven years in prison.
The new offence is to be 'knowingly concerned in the fraudulent evasion of income tax'.
It applies to offences committed from the beginning of 2001; participants in the informal economy are therefore given the opportunity to regularise their affairs under current law and practice.
The new offence does not criminalise conduct which is not already an offence under current law. Case law suggests that the ambit of the new offence is similar to that of the existing common law offence in England and Wales of cheating the public revenue, an offence used for the prosecution of many existing income tax frauds. (But, as Lord Grabiner noted, 'cheat' cannot be tried summarily, unlike other offences which often go hand in hand with tax and contribution frauds.)
Dishonesty is a necessary feature of conduct which can amount to an offence under a number of provisions relevant to fraud in the widest sense. But dishonesty is the very essence of 'cheat' and will be for the new offence. The criminal courts have never sought to define as such the conduct which counts as dishonest but they have provided guidance which is likely to apply in this context (see Ghosh [1982] QB 1053). Conduct is dishonest if:
by the ordinary standards of reasonable and honest people it is dishonest; and
the person whose conduct is under consideration must have realised that the conduct was dishonest by those standards.
A positive act of deception (such as completing a tax return known to be false) is not a necessary element either of 'cheat' or of the new offence. Deliberately refraining from notifying chargeability to tax or from submitting tax returns, in circumstances where the person concerned must have known tax should be paid, may well in itself amount to dishonest conduct and therefore to either offence.
The new offence, unlike 'cheat', applies to offences committed in Scotland as well as elsewhere in the United Kingdom. Under current Scottish law, however, there is no precise equivalent of 'cheat'. The nearest, the Scottish common law offence of 'fraud', requires some positive act of deception. So the new offence does entail an extension in the conduct which counts as criminal north of the border.
During the debate in the Finance Bill Standing Committee, the Paymaster General was asked in what circumstances a customer of a business could become 'knowingly concerned' in a fraud by that business. She said that the test was one requiring both knowledge (rather than mere suspicion) of an offence and also actual involvement in it. Simply paying for services in cash was unlikely to satisfy this test.
In the same debate at least one committee member raised the subject of the impact of the new offence on tax advisers, especially those involved in advising on arrangements which could be characterised as tax avoidance. The Revenue does not consider that the new offence has led to any change in the law in this area.
Where a scheme labelled as 'avoidance' by its participants and their advisers admittedly fails, the key issue as a matter of criminal law would be whether they have been dishonest in the unsuccessful effort to reduce the relevant tax liability. It would be for the courts to decide as a question of fact whether that is the case.
Concern has been expressed in some quarters that, as a result, the decision will not normally be taken by those with professional experience of tax matters and, given the highly technical nature of much tax law, that state of affairs may lead to injustice. That is an issue well beyond the scope of this article, but it may be helpful to remember that possible dishonesty becomes a consideration in this context only in certain circumstances. That is where there is some suggestion that the participants in an avoidance scheme are not merely relying on the intrinsic technical soundness of the arrangements actually put in place to reduce the liability, but also on concealment of the true facts from the inspector. If so, then, if the scheme fails, it is perfectly possible that the criminal courts may find there has been an offence. But, conversely, where there is no trace of any concealment of the true facts of arrangements for which there is a respectable technical case, it is hard to imagine how a criminal offence can have been committed.
The foregoing are extracts from longer articles published in the Tax Bulletin which is Crown Copyright and to which reference should be made for details for the full text. Information regarding subscription can be obtained from Miss F Chowdhury, Room 439, 22 Kingsway, London WC2B 6NR, tel: 020 7438 7812. It is also available free of charge from the Revenue's website.
