Chapter 11: Taxable benefits: exclusion of lower-paid employments from parts of benefits code
Introduction
846.Most of the provisions that form part of the benefits code derive from Chapter 2 of Part 5 of ICTA. Those provisions do not apply to all Schedule E taxpayers. Until changes introduced by the FA 1989, Chapter 2 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 2 were necessarily “higher-paid”. Thus, in 1989, the title of the Chapter was changed to “Employees earning £8,500 or more and directors”.
847.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.
848.The purpose of this Chapter is to identify those employees who are not within the scope of certain of the benefits provisions.
849.This change of approach is described in full in Note 26 in Annex 2.
Section 216: Provisions not applicable to lower-paid employments
850.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.
851.Subsection (2) sets out condition A – that the employee is not a director.
852.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.
853.These special rules for certain directors in condition B derive from section 167(1) and (5) of ICTA.
854.Subsection (4) lists the Chapters that do not apply to the lower-paid. These are the charging provisions that derive from Chapter 2 of Part 5 of ICTA.
855.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.
856.Subsection (6) provides signposts to provisions elsewhere that affect the operation of subsection (1).
Section 217: Meaning of “lower-paid employment”
857.This section defines the concept of “lower-paid employment” that was introduced in the previous section. It introduces the concept of an earnings rate for the employment for the year of less than £8,500.
858.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 section 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.
859.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.
860.This section derives from section 167(1)(b), as expanded upon by Inland Revenue practice set out in the Schedule E Manual at SE 20110 in particular.
Section 218: Calculation of earnings rate for a tax year
861.Subsection (1) of this section 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.
862.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 section 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.
863.Step 2 adds in any extra amount required under the special rules relating to the provision of a car, set out in full in section 219.
864.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.
865.Subsection (2) makes sure that section 216(1) is disregarded for the purposes of Step 1 of the method statement.
866.Subsection (3) draws attention to special rules that apply if the benefits in question are the provision of living accommodation.
867.Subsection (4) lists the “authorised deductions” that may be subtracted at Step 3 of the method statement. The list reflects SE 20104 of the Schedule E Manual.
868.There follows a flow diagram that demonstrates the decisions that must be made in the process of determining whether an employment is lower-paid.
Section 219: Extra amounts to be added in connection with a car
869.This section sets out the special rules applicable to Step 2 in section 218 and deals with the treatment of car benefit. It derives from section 167(2)(a), (2B), (2C) and (2D) of ICTA.
870.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.
871.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.
872.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 sections 239 or 269. This derives from the effect of disapplying section 157(3) in section 167(2)(a) and from 167(2D).
873.Subsection (7) makes sure that section 216(1) is disregarded for the purposes of computing any extra amounts to be added in connection with a car.
Section 220: Related employments
874.Subsection (1) explains that this section applies if a person has two or more related employments.
875.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 section 216(1).
876.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).
877.This section derives from section 167(3) and (4).
878.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. Section 220(3)(b)(ii) reproduces this effect without having to look first at employees of A and then at employees of C separately.