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Income Tax (Earnings and Pensions) Act 2003

Chapter 5: Exemptions: recreational benefits
Recreational facilities

1060.The first three sections in this Chapter deal with the exemption where an employer provides certain sporting or recreational facilities for employees. These sections derive from section 197G of ICTA. The final two sections cover annual parties and functions and third party entertainment, the first deriving from an ESC and the second from section 155(7) of ICTA.

1061.The material in section 197G of ICTA has been reordered. The first section sets out the benefits to which the exemption applies, and the conditions that must be met for the exemption to apply to those benefits and the second the benefits to which the exemption does not apply. The third section notes how Treasury powers can apply or not apply these rules.

1062.In these three sections “facilities” in the plural has replaced “facility”, used in section 197G(3)(c) to (f) and in the opening words to and in section 197G(4)(b) of ICTA, to denote that it is the tangible facilities which are meant and not the opportunity to use them.

Section 261: Exemption of recreational benefits

1063.Subsection (1) provides for the exemption from income tax. Subsection (2) makes it clear that both the use of the facilities and the right or opportunity to use them are within the exemption. The availability and use of the facilities must meet the conditions set out in subsections (3) to (5) for the benefit to be exempt.

1064.The simplest case where this exemption can apply is that of a single employer. If all the conditions in subsections (3) to (5) are met, the exemption applies. In that case “the employer in question”, (subsection (3)), is the single employer.

1065.Two or more employers may provide facilities jointly. In such a case each employer is looked at separately. The condition in subsection (3) requires that the facilities must be available generally to the employees of that employer, the “employer in question”. If one employer restricts the availability to certain employees, none of the employees of that employer can claim the exemption.

1066.The use of the words “members of the public generally” in subsection (4), is to indicate that the exemption cannot apply to facilities available for public use, whether these are public facilities or in-house facilities made available to the “public generally”. However, in-house facilities made available for use to a particular sector of “the public”, meaning people other than employees, such as a local school allowed to have swimming lessons, does not prevent the exemption from applying, provided the condition in subsection (5) is met.

1067.The test at subsection (5) looks at actual use of the facilities rather than the people to whom they are made available. There are several different things taken into account here. To simplify this, subsection (5) uses the expression “employment-related” and subsection (6) then defines what that means.

1068.Under subsections (6) and (7), use by former employees and their families is included, provided the employer has made the facilities available generally to the employees.

1069.The words in brackets in subsection (5) indicate that where there is provision for the employees of more than one employer, all users must be considered. If an employer has restricted use, so that the test at subsection (5) fails for that employer, it does not prevent the use test being satisfied for other employers. Provided the restricting employer has only small numbers actually using the facilities, the “mainly” test is satisfied. This can best be explained using an example.

1070.Example. Suppose a facility is:

  • available to a few of A’s employees; and

  • available to all of B’s employees; but

  • not available to the public generally.

The exemption does not apply to A’s employees because the condition in subsection (3) is not satisfied. Subsection (3) is satisfied for B’s employees.

The opportunity to use the facilities may be employment-related for B’s employees but not for A’s. If B’s employees who use the facilities substantially outnumber the employees of A, who use them, they will be used mainly by employees whose opportunity to use them is employment-related. The condition in subsection (5) is then satisfied for B’s employees, and the exemption will apply for them.

1071.An employer may provide a non-cash voucher, which the employee must present to use the facilities provided. If the facilities meet the conditions set out, and the voucher can only be used for that purpose, section 266(3) provides that there is no liability to income tax on the cost of provision of the voucher.

Section 262: Benefits not exempted by section 261

1072.Subsection (1) sets out the benefits that are not within the exemption and subsection (2) explains some of the terms in subsection (1).

Section 263: Power to alter benefits to which section 261 applies

1073.This section gives the Treasury the power to limit or extend the scope of the exemption. The administrative procedure is contained in section 828(3) of ICTA.

Section 264: Annual parties and functions

1074.This section derives from, and gives statutory effect to, ESC A70B (Staff Christmas parties). That concession operates to exempt the employee from any income tax liability on specified office parties. See Change 56 in Annex 1. The section covers office-holders as well as employees although the concession does not expressly do so. See section 5(2).

1075.Although the heading to the concession is “Staff Christmas Parties”, the extension of the original concession to other parties indicates that it refers to annual functions in general. This is reflected in the less specific heading to this section: “Annual parties and functions”.

1076.Subsection (1) provides that the section applies to functions available to employees generally. In accordance with how the ESC was understood, it is made clear that there is scope for parties to be held in different locations.

1077.Subsections (2) to (5) show how the monetary limit is applied. Subsection (4)(b), read together with the whole section, makes it clear that the exemption effectively applies to persons attending as guests of the employees.

1078.When an ESC contains monetary limits, changes in those limits are made by press release or by republishing the ESC with different amounts. This is not possible for legislation. There are a number of exemptions in current legislation for which the Treasury fixes an amount. This Act adopts the same approach for rewritten concessions and includes a general power for the Treasury to increase the amounts in section 716. This provision is listed there.

1079.The equivalent exemption for the provision by way of a non-cash voucher (for example, a ticket for entry to a function is a voucher) is included in section 266(3) rather than within this section.

Section 265: Third party entertainment

1080.This section derives from the exemption in section 155(7) of ICTA. If the provision of the benefit in this case is “by reason of the employment” it would be within the terms of section 201 without the exemption in subsection (1).

1081.The conditions in subsections (2) to (5) make it clear that the reason for the entertainment must be gratuitous, and not in any way a reward for past or future services, nor from anyone connected with the employer. If these conditions are not met, there is no exemption.

1082.The exemption is expressed as there being “no liability to income tax”. This is wider than section 155(7) of ICTA which is expressed as an exemption from section 154 of ICTA, the general charging provision for benefits in kind. See Change 57 in Annex 1.

1083.If the provision of the entertainment is by way of a non-cash voucher or a credit-token, there are corresponding exemptions in sections 266 and 267. In ICTA these exemptions are in sections 141(6B) and 142(3B).

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