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Beneficial Tinkering - The rules relating to certain minor benefits in kind have been relaxed. Allison Plager reports.

21 February 2001 / Allison Plager
Issue: 3795 / Categories:

Beneficial Tinkering
The rules relating to certain minor benefits in kind have been relaxed. ALLISON PLAGER reports.

Beneficial Tinkering
The rules relating to certain minor benefits in kind have been relaxed. ALLISON PLAGER reports.
In the light of all the other burdens and regulations which employers are having thrust upon them, some small but useful changes to a number of benefits in kind enacted in the Finance Act 2000 may have gone unnoticed and unappreciated. Specifically, Schedule 10 to the Finance Act 2000 introduces sections 155ZA, 155ZB, 161A, 161B and Schedule 7A to the Taxes Act 1988, which bring in deregulatory relaxations from the tax charge on certain benefits, including small amounts of private use of assets and services, and beneficial loans which qualify for tax relief. The changes all took effect from 6 April 2000.
Private use
Generally, under section 154, Taxes Act 1988 all benefits provided to the employee and his family are assessable. In the past, section 155(2) gave an exemption for benefits and facilities provided at the employer's premises and used solely in performing the duties of the employment. This has now been repealed and replaced with a less stringent rule.
New section 155ZA, introduced by the Finance Act 2000, exempts accommodation, supplies and services used in the performance of the employee's duties from the charge, provided that a number of conditions are met.
Firstly, where the benefit is provided on the employer's premises, the only condition is that any private use of the benefit whether by the employee or members of his family is insignificant.
Where the benefit is provided elsewhere, the conditions are that:
the sole purpose of the benefit is to enable the employee to carry out his duties;
any private use is small;
it is not an excluded benefit.
Excluded benefits
The legislation at section 155ZA(4) gives the Treasury the power to make regulations regarding excluded benefits, and subsection (5) lists the following benefits as excluded:
motor vehicle, boat or aircraft;
a benefit involving the extension, conversion or alteration of living accommodation or to buildings related to that living accommodation.
The reason that these benefits have been excluded is because any amount of private use, no matter how small, could entail a substantial benefit. Relief for use related to the employment will continue to be given, however.
Private purposes
Crucial to these new exemptions is the definition of private use, since benefits will only be exempt if the private use is 'not significant'. Section 155ZA(6) attempts to define 'for private purposes' as 'any use that is not use in performing the duties of the employee's employment'. It further states that use that is simultaneously private and business 'counts as use for private purposes'. What the legislation fails to do is define 'not significant', so presumably this will be for the Inspector and employer to agree, and it is not difficult to envisage some problems in this area, although no doubt the Inspector will have some guidelines.
Other minor benefits
A number of other mostly unspecified minor benefits are exempted from tax where they are offered on similar terms to all employees (see section 155ZB). Welfare counselling is singled out as being one of these exempted benefits.
Beneficial loans
Until 6 April 2000, employers had to report beneficial loans where all interest qualified for relief as potential chargeable benefits for employees. The Finance Act 2000 has changed this. New section 161A provides an exemption for fully qualifying beneficial loans, replacing the provisions in section 160 which gave a deduction rather than complete exemption.
A qualifying loan is defined in section 161A(1) as one where all or part of any interest payable is or would be eligible for relief under section 353, or one that would be an allowable deduction under Schedule D, Case I or II, or under Schedule A. Section 161A(2) removes the charge where all the interest would qualify for tax relief.
Commercial terms
The rules have changed relating to beneficial loans made on ordinary commercial terms, and these are dealt with in the new Schedule 7A to the Taxes Act 1988. The change deals with the anomaly that the official rate of interest could produce a taxable benefit for the staff of banks and building societies, even though their staff mortgages were on identical terms to those on offer to the public. A loan on ordinary commercial terms is defined as a loan made by a person in the ordinary course of a business lending money or supplying goods or services on credit. In addition:
such loans must have been available to all employees;
a substantial proportion of comparable loans must have been available to the public;
the terms of those loans must have been broadly similar;
any difference in terms were as a result of the lender's business.
Paragraph 2(5) of the Schedule includes a provision whereby fees, commission and other incidental expenses of obtaining a loan must be omitted in deciding whether loans made before 1 June 1994 have been or are held on the same terms.
A loan which did not qualify as an ordinary commercial loan under the conditions of paragraph 2 when it was made, can be treated as satisfying these conditions if a variation in the terms occurred before 6 April 2000 (see paragraph 3).
However, for this to work, a substantial number of similar loans made to members of the public would have to have been so varied.
Loans to employees varied on or after 6 April 2000 can be regarded as ordinary commercial loans, and entitled to the exemption provided that they meet the requirements in paragraph 4 which are broadly similar to those in paragraph 2.
The Schedule helpfully defines a member of the public as 'a member of the public at large with whom the lender deals at arm's length'.
Simpler procedure
A by-product of the new rules is that employees will no longer have to redeem existing loans and take out a new loan to avoid a beneficial loans charge in order to take advantage of new terms and conditions offered to the public at large. This was the subject of a dispute (which the Revenue won) in West v Crossland (and related appeals) [1999] STC 147 when an employee of a building society requested that his beneficial loan be transferred to a fixed rate scheme available to the general public (see 'Not So Beneficial' in Taxation, 1 April 1999 at pages 18 to 19).
Small mercies
The idea of the changes to these minor benefits and beneficial loans is to make life simpler both for employees and employers, and therefore they are very welcome. However, because the changes are relatively insignificant, they may have passed unnoticed, so it is worth bringing them to the attention of any employer likely to be affected.

Issue: 3795 / Categories:
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