Income Tax (Earnings and Pensions) Act 2003

Example 3

£150(Pe) – £50(E) = £100

The cost of providing the sickness benefits is £60, so D = £60.

Putting these values into the formula: £150(PE) – £60(D) = £90

£50(E) is substantially less than £90, so the voucher is not a cash voucher.

304. Subsection (3) defines “sickness benefits” for the purposes of the section.

Section 77: Apportionment of cost of provision of voucher

305. This section provides a rule for apportionment of the expense incurred by the provider where vouchers are provided for two or more employees. It derives from section 144(3) of ICTA.

306. As in section 75 of this Act, this section makes explicit that the “voucher” provided at the expense of the person bearing the cost includes a “stamp or similar document”. See Note 15 in Annex 2.

Section 78: Voucher made available to public generally

307. This section excepts a cash voucher from the application of this Chapter where the voucher is made available to the public generally and the employee (or family member) does not get it on preferential terms.

308. This exception is a minor change to the law. See Change 18 in Annex 1.

Section 79: Voucher issued under approved scheme

309. This section excepts a cash voucher from the application of this Chapter where an employee receives the voucher under an Inland Revenue approved scheme. Such an approved scheme provides for deduction of income tax under PAYE. The practical effect of approval of a scheme is that tax is deducted when the voucher is exchanged instead of when it is received. This section derives from section 143(5) of ICTA.

310. The section reflects existing administrative practice when it refers to approval by the “Inland Revenue” rather than “the Board”. This is a minor change in the law. See Change 158 in Annex 1.

Section 80: Vouchers where payment of sums exempt from tax

311. This section derives from section 143(3) of ICTA which provides that certain vouchers are not included in cash vouchers. This section prevents the application of any provisions of this Chapter to such vouchers. In paragraph (a) of this section the words in section 143(3)(a) which say the sum intended to be obtained is “mentioned in the document” have been omitted as unnecessary since, if it is “intended to enable the person to obtain”, it must be mentioned in the document.

Section 81: Benefit of cash voucher treated as earnings

312. This section provides the means of charging the benefit of the voucher to income tax. It derives from section 143(1) of ICTA.

313. Subsection (1) treats the cash equivalent of that benefit as earnings from the employment. Amounts treated as earnings under this Chapter are employment income charged under Part 2 of this Act. They are earnings for the tax year in which the voucher is received – see Note 7 in Annex 2. For the purposes of Chapters 4 and 5 of Part 2 they are treated as received in that year – see sections 19(2) and 32(2) of this Act.

314. Subsection (2) defines “cash equivalent” as the sum of money for which the voucher may be exchanged.

Section 82: Non-cash vouchers to which this Chapter applies

315. This section sets out the non-cash vouchers to which this Chapter applies. It derives from section 141 of ICTA.

316. If an employer who is an individual provides such a voucher for personal reasons, it is not regarded as provided by reason of the employment. The disregard of vouchers provided by an individual for personal reasons is a minor change to the law. See Change 18 in Annex 1.

Section 83: Provision for, or receipt by, member of employee’s family

317. This section extends provision for or receipt by the employee of a non-cash voucher to provision for or receipt by a member of the employee’s family. It derives from section 144(4) of ICTA.

Section 84: Meaning of “non-cash voucher”

318. This section defines “non-cash voucher” for the purposes of this Chapter. It derives from section 141(7) of ICTA.

319. Subsection (1) sets out the definition in terms of three types of voucher, but excludes a cash voucher.

320. Subsection (2) further clarifies what is a non-cash voucher for the purposes of this Chapter.

321. Subsection (3) defines “transport voucher”. The definition of a “transport voucher” reflects the fact that it may only have to be shown, rather than exchanged, to obtain services.

322. Subsection (4) defines “cheque voucher” as a cheque intended for use in payment for goods and services. It describes a particular type of cheque which is limited in its purpose. The distinction is made between that and non-cash vouchers to prevent any argument that the type of voucher which required completion of the amount, and perhaps a signature as well, did not fall within the definition of non-cash voucher. That definition of non-cash voucher is extended by the definition of cheque voucher to include such deviations from the norm.

Section 85: Non-cash voucher made available to public generally

323. This section excepts a non-cash voucher from the application of this Chapter where the voucher is made available to the public generally and the employee (or family member) does not get it on preferential terms.

324. This exception is a minor change to the law. See Change 18 in Annex 1.

Section 86: Transport vouchers under pre-26^th March 1982 arrangements

325. This section excepts a transport voucher from the application of this Chapter where it is provided, under arrangements in operation on 25 March 1982, to enable an employee (or family member) to obtain cheap or free travel provided by their employer or another passenger transport undertaking. It derives from section 141(6) of ICTA.

326. Where a transport voucher, such as a season ticket, is provided other than under such arrangements, the benefit of the voucher is chargeable to tax.

327. Paragraph 27 of Schedule 24 to F A 1994 provided for the exception to continue for employees of British Rail transferred to new rail franchises following privatisation. Paragraph 224 of Part 2 of Schedule 6 to this Act makes consequential amendments to those provisions.

Section 87: Benefit of non-cash voucher treated as earnings

328. The section provides the means of charging the benefit of the voucher to income tax. It derives from section 141 of ICTA.

329. Subsection (1) treats the cash equivalent of that benefit as earnings from the employment. Amounts treated as earnings under this Chapter are employment income charged under Part 2 of this Act. They are earnings for the tax year in which the voucher is received – see Note 7 in Annex 2. For the purposes of Chapters 4 and 5 of Part 2 they are treated as received in the tax year mentioned in section 88 of this Act - see sections 19(3) and 32(3) of this Act.

330. Subsection (2) defines “cash equivalent” as the net cost of provision after deducting the amount made good by the employee.

331. Subsections (3) and (4) define “cost of provision”.

332. Subsection (5) provides an apportionment rule.

Section 88: Year in which earnings treated as received

333. This section gives the timing rules for the receipt of the amount treated as earnings. It derives from section 141(1) and (2) of ICTA.

334. Subsection (1) deals with non-cash vouchers other than cheque vouchers. In most cases the cost of provision will have been incurred before the voucher is received. The earnings will therefore be treated as received in the year in which the employee receives the voucher. If that is not the case and the cost of provision is incurred at a later time, the amount will not be known. That may cause a particular problem if the amount cannot be ascertained until a tax year after the voucher is received. This section defines the receipt for the purposes of sections 19 and 32 of this Act as being at the time the cost is known.

335. Subsections (2) and (3) are provisions specific to cheque vouchers which provide a similar rule to that for other non-cash vouchers.

Section 89: Reduction for meal vouchers

336. This section excepts, subject to the conditions of the exception, 15 pence for each working day on which a meal voucher is provided to an employee. It derives from ESC A2 (“luncheon vouchers”), but adapts the ESC to meet the terms of this Chapter.

337. Subsection (3) excludes an overlap with the exemption in section 266(3) of this Act for a non-cash voucher, equivalent to the exemption for direct provision in section 317 of this Act (subsidised meals).

338. Legislating ESC A2 is a minor change to the law. See Change 19 in Annex 1.

Section 90: Credit-tokens to which this Chapter applies

339. This section sets out the credit-tokens to which this Chapter applies similarly to the provisions in section 73 of this Act for cash vouchers and in section 82 of this Act for non-cash vouchers. It derives from section 142(1) of ICTA.

340. Where an employer who is an individual gives such a credit-token for personal reasons, it is not regarded as provided by reason of the employment.

341. The disregard of credit-tokens provided by an individual for personal reasons is a minor change to the law. See Change 18 in Annex 1.

Section 91: Provision for, or use by, member of employee’s family

342. This section extends provision for or use of a credit-token by the employee, to provision for, or use by a member of the employee’s family. It derives from section 144(4) and (4A) of ICTA.

Section 92: Meaning of “credit-token”

343. This section defines “credit-token” for the purposes of this Chapter.

344. Subsection (1) provides the definition. It derives from section 142(4) of ICTA.

345. Subsections (2) and (3) amplify the definition for particular circumstances.

346. Subsection (4) excludes cash and non-cash vouchers from the definition.

Section 93: Credit-token made available to public generally

347. This section excepts a credit-token from the application of this Chapter where the credit-token is made available to the public generally and the employee (or family member) does not get it on preferential terms.

348. This exception is a minor change to the law. See Change 18 in Annex 1.

Section 94: Benefit of credit-token treated as earnings

349. This section provides the means of charging the benefit of the token to income tax. It derives from section 142(1) of ICTA.

350. Subsection (1) treats the cash equivalent of that benefit as earnings from the employment. Amounts treated as earnings under this Chapter are employment income charged under Part 2 of this Act. They are earnings for the tax year in which the credit-token is used – see Note 7 in Annex 2. For the purposes of Chapters 4 and 5 of Part 2 they are treated as received in that year – see sections 19(2) and 32(2) of this Act.

351. The timing rule for receipt of the cash equivalent of credit-tokens is different from that for non-cash vouchers. The focus is on when the token is used. This is because expense is incurred each time a credit-token is used, even if it is not paid at that time. Regardless of when the provider of the credit-token pays for the goods or services, the amounts treated as earnings for the tax year in which the credit-token is used are treated as received in that year.

352. Subsection (2) defines “cash equivalent” as the net cost of provision after deducting any amount made good by the employee.

353. Subsection (3) defines “cost of provision”.

354. Subsection (4) provides an apportionment rule equivalent to that in sections 77 and 87(6) of this Act.

355. Section 91 of this Act, along with this section, extends the charge to treat the benefit of use of a credit-token by a member of the employee’s family as earnings of the employee.

Section 95: Disregard for money, goods or services obtained

356. This section eliminates any charge on the money or money’s worth or cost of the goods or services received in exchange for vouchers, or through the use of a credit-token, where the cash equivalent of the benefit is treated as earnings under this Chapter (or would be, but for a dispensation under section 96) of this Act.

357. It derives from sections 141(1)(b), 142(1)(b) and 143(1)(b) of ICTA.

358. Subsection (1) sets out the circumstances in which this section operates. The addition of subsection (1)(b) prevents the goods and services obtained by use of the voucher being within Chapter 10 of Part 3 of this Act if a dispensation is given. This is a minor change to the law. See Change 20 in Annex 1.

359. Subsection (2) provides that the money, goods or services obtained are disregarded for the purposes of the Income Tax Acts.

360. That disregard extends to goods or services obtained through use of a cash voucher. Normally, a cash voucher is exchanged for a sum of money and tax is charged on that sum. If goods or services are provided, tax will not be charged on the value of those goods or services.

361. Extending that disregard to goods and services obtained by use of a cash voucher is a minor change to the law. See Change 20 in Annex 1.

362. The disregard has been extended to things obtained by the use of vouchers and tokens in certain cases where the benefit thus obtained itself is exempt and that exemption depends on the goods and services obtained by the use of the vouchers or tokens themselves being exempt if obtained direct. (The exemptions in question are those given by section 266(1)(a) or (e) of this Act (exemption of non-cash voucher where used to obtain parking provision or third party entertainment), section 267 of this Act where subsection (2)(a) or (f) of that section applies (exemption of credit-token where used to obtain parking provision or third party entertainment) and section 268 of this Act (exemption of non-cash voucher or credit-token where used for incidental overnight expenses)). It is simpler to extend the disregard in this way than to allow the things obtained by the use of these vouchers and tokens to fall into other charging provisions, only to be exempted by the exemptions that apply in those cases.

363. Subsection (3) ensures that deductions available under sections 362 and 363 of this Act (deductions where non-cash voucher or credit-token provided) are not affected by the disregard.

364. Subsection (4) clarifies the application of the disregard for transport vouchers.

Section 96: Dispensations relating to vouchers or credit-tokens

365. This section provides for the Inland Revenue to give a notice (commonly called a dispensation) where they are satisfied that no additional tax is payable under the provisions of this Chapter. The section also provides for such notices to be revoked and for the tax charge to apply accordingly.

366. This section derives from section 144(1) and (2) of ICTA.

367. Subsection (1) sets out when the section applies, which is when a person applies for a dispensation. The reference to the Inland Revenue replaces references to the inspector. See Change 158 in Annex 1.

368. Subsection (2) requires the Inland Revenue to give a dispensation if they are satisfied that no additional tax would arise in the particular circumstances from the application of this Chapter.

369. Subsection (3) defines “dispensation”. That term is the commonly used name for the written notification that the Inland Revenue gives the employer to authorise the application of the provisions in this section to the benefit of vouchers and credit-tokens. The section also characterises the dispensation as a notice which, by virtue of the definition of that word in section 832(1) of ICTA, means that it must be in writing. These two changes to formalise the common name for the authorisation given and to require that it must be in writing are minor changes to the law. See Change 16 in Annex 1.

370. Subsection (4) sets out the effect of a dispensation.

371. Subsections (5) to (8) authorise the Inland Revenue to revoke a dispensation “if in their opinion there is reason to do so”, and set out the consequences of such a revocation. The consequences depend on the date from which the revocation has effect (which may be as far back as the date the dispensation was given).

372. A notice revoking a dispensation is “given” rather than “served”. This is in line with current practice and consistent with the usage for notices in CAA 2001. This is a minor change to the law. See Change 16 in Annex 1.

Chapter 5: Taxable benefits: living accommodation

Overview

373. This Chapter deals with the benefit which arises from the provision of living accommodation. It begins by defining in what circumstances the Chapter applies. It then sets out the circumstances in which it does not apply, so that anyone who falls within the exceptions does not need to go any further. The Chapter then deals with the method of calculating the cash equivalent of the benefit. It derives from sections 145, 146 and 146A of ICTA.

Section 97: Living accommodation to which this Chapter applies

374. This section sets out the general statement to indicate that when living accommodation is provided for an employee this Chapter applies.

375. Subsection (2) prevents a charge arising on family and household members living at home who are employed by the home-owner who is an individual. It also covers the case where the living accommodation is not the family home, and the employer is providing the accommodation in a capacity other than as employer.

376. This section derives from sections 145(1), (6), (7), 146(1)(a) and (10) of ICTA.

Section 98: Accommodation provided by local authority

377. This section provides for an exception to prevent a charge where a local authority employee is provided with accommodation and the conditions are met.

378. It derives from sections 145(7)(b) and 146(10) of ICTA.

Section 99: Accommodation provided for performance of duties

379. This section sets out two exemptions from the charge on provided living accommodation. The exemptions derive from sections 145(4)(a) and (b) of ICTA.

380. These exemptions apply to directors only if the conditions set out in subsections (3) to (5) are met. This rider to the exemptions derives from section 145(5) and (8) of ICTA.

381. When the exemptions in this section or that in section 98 of this Act apply, there are further exemptions which may be available by virtue of sections 314 and 315 in Part 4 of this Act.

Section 100: Accommodation provided as result of security threat

382. This section ensures that living accommodation provided because of a special threat to an employee does not give rise to a charge to tax. It derives from section 145(4)(c) of ICTA.

Section 101: Chevening House

383. This section provides an exemption from a charge to tax on provided living accommodation for a nominated person occupying Chevening House. It derives from section 147 of ICTA.

Section 102: Benefit of living accommodation treated as earnings

384. This section makes the cash equivalent of the benefit of the living accommodation chargeable to tax, by treating it as earnings. It derives from sections 145(1) and 146(1) of ICTA.

385. Subsection (1) sets out the year for which the cash equivalent is to be treated as earnings. See Note 7 in Annex 2.

386. The period for which the cash equivalent is calculated is given the label “the taxable period”. See Note 16 in Annex 2.

Section 103: Method of calculating cash equivalent

387. This is a signpost section, introducing sections 104 to 106. It also sets out where to find the meaning of various terms used throughout this Chapter. It is new.

Section 104: General rule for calculating cost of providing accommodation

388. This section sets out the method for determining whether the cost of providing the accommodation exceeds £75,000. It contains material deriving from section 146(4), (5) and (11) of ICTA.

Section 105: Cash equivalent: cost of accommodation not over £75,000

389. This section sets out how to calculate the cash equivalent of the benefit of provided living accommodation costing no more than £75,000. It derives from section 145(1) and (2) of ICTA.

Section 106: Cash equivalent: cost of accommodation over £75,000

390. This section sets out how to calculate the cash equivalent of the benefit of provided living accommodation costing more than £75,000 by means of a method statement as set out in subsection (2). It derives from section 146(1) to (5) and (11) of ICTA.

391. Step 1 calculates the basic charge under section 105 of this Act. This includes taking into account any sums made good by the employee, as provided for in section 105(5).

392. Step 2 calculates the additional yearly rent of the accommodation based on the extent to which the cost of providing the property exceeds £75,000.

393. Step 3 reduces the additional yearly rent to that for “the taxable period”.

394. Step 4 brings together the results of Steps 1 and 3 and also allows any excess of rent paid to be brought into account.

395. Subsection (3) defines excess rent and sets out the circumstances in which it can be taken into account at Step 4.

Section 107: Special rule for calculating cost of providing accommodation

396. If a property has been owned for some time before the year in which the benefit of provided living accommodation arises, the value of the property may have risen significantly. This section substitutes market value for cost in certain circumstances. It derives from section 146(4) to (6) and (11) of ICTA.

397. This rule applies only for the purposes of the calculation in section 106 of this Act, and does not have any application to accommodation within section 105 of this Act.

398. Subsection (3) sets out how to calculate the cost of providing the accommodation. Consultation leading up to this Act has resulted in the addition in paragraph (a) to the definition of P in respect of payments made. See Change 21 in Annex 1.

399. Section 146(8) of ICTA provides that section 146(6) does not apply if the employee first occupied the property before 1983. Due to the length of time since that date the provision is now in paragraph 21(1) of Schedule 7 to this Act.

Section 108: Cash equivalent: accommodation provided for more than one employee

400. This section allows an apportionment of the cash equivalent when the accommodation is provided for more than one employee. It derives from ESC A91A. See Change 22 in Annex 1.

Section 109: Priority of this Chapter over Chapter 1 of this Part

401. This section applies in the event that there is a possibility of a charge both under Chapter 1 and under this Chapter in respect of the same living accommodation.

402. This section ensures that the charge under this Chapter takes precedence. If the amount of earnings that would be chargeable by virtue of section 62 of this Act is less than the amount of the cash equivalent under this Chapter, then the cash equivalent applies. If the earnings exceed the cash equivalent, only the excess is treated as earnings. The section derives from section 146A of ICTA.

Section 110: Meaning of “annual value”

403. This section defines “annual value” for the purposes of this Chapter. It derives from section 837 of ICTA which in turn draws on section 23 of the General Rate Act 1967 (although that Act was repealed in 1988).

404. This section does not affect the Inland Revenue practice of using the gross rateable value as a proxy for “annual value”. That practice will continue. The main use of this section is to provide guidance on how to arrive at the annual value of properties for which rent is not paid and in practice is only needed in cases where no gross rateable value can be found.

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

406. The following subsections set out the adjustments to make in order to arrive at the rent to be used for living accommodation. 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 that Act in section 837(2) has not been included in this section. Instead the general thrust of the rules has been rewritten here. See Change 23 in Annex 1.

407. Subsection (2) applies in relation to subsection (1). It ensures that the annual value does not include the cost of anything which is not provided in the case of unfurnished property. This is important in cases where the only available comparisons are rents paid for fully furnished and serviced properties. If, in considering what the rent of the accommodation would be, the nearest comparison is rent for a property for which services are provided at an inclusive rent, in order to reduce the rent to that for unfurnished, non-serviced accommodation the cost of the services provided are deducted. This means that if there is a profit element in the provision of the services it is treated as rent in arriving at the annual value.

408. Subsections (3) and (4) extend the process of comparison and adjustment. They follow the thrust of section 23(3) and (4) of General Rate Act 1967 which ensured that when a property is valued by reference to comparative rents of similar properties the value was not distorted by the existence (in the comparative case) of separate payments for services in addition to what one might call the basic rent. In particular it added the separate payments to the rental payments and allowed for certain deductions to be made. It did not allow any deduction in computing the value based on a comparative rent for amounts paid in respect of repairs, insurance or maintenance of other property belonging to or occupied by the landlord. In the case of payments for other types of services only the cost element of them was deducted. These subsections follow that method of comparison and adjustment.

409. Subsection (5) has the effect that the services whose cost of provision may be deducted are those which are not normally met by a landlord in the provision of unfurnished property. Again, the wording is not derived directly from section 23 of the General Rate Act 1967 but follows the general thrust of provisions of that section.

410. This section does not affect the limited exemption in section 315 which applies to the amount of earnings or the amount treated as earnings based on the cost of certain services

Section 111: Disputes as to annual value

411. This section sets out the procedure for resolution of disputes about the annual value of accommodation for the purposes of this Chapter. It derives from section 837(3) of ICTA.

Section 112: Meaning of “person involved in providing the accommodation”

412. This definition makes it clear that it is necessary to look beyond the employer and the apparent owner of an interest in the accommodation. This is anti-avoidance legislation to counter schemes which depress the cost to the employer by using intermediate owners of interests. It derives from section 146(7) of ICTA.

Section 113: Meaning of “the property”

413. This section simply confirms that “the property” means the living accommodation in question. It derives from section 146(11) of ICTA.

Chapter 6: Taxable benefits: cars, vans and related benefits

Overview

414. Employees may be taxable on the benefit of the availability for private use of a car or van, or car fuel that their employers provide. If so, the cash equivalent of the benefit is taxed as the employee’s earnings.

415. This Chapter contains the rules to calculate the cash equivalent of that benefit.

416. Sections 114 to 119 set out the basic principles of the car, car fuel and van benefit rules.

417. Sections 120 and 121 provide for the cash equivalent of the car benefit to be taxed as earnings and the method for calculating that cash equivalent.

418. Sections 122 to 148 give detailed rules in support of the calculation of the cash equivalent of the car benefit.

419. Sections 149 to 153 deal likewise with car fuel benefits.

420. Sections 154 to 166 deal likewise with van benefits.

421. Sections 167 and 168 give special rules that apply to pool vehicles.

422. Section 169 deals with situations where the same employer employs more than one member of a family or household.

423. Section 170 provides for the Treasury to make orders relating to provisions in this Chapter.

424. Sections 171 and 172 give definitions.

Section 114: Cars, vans and related benefits

425. This section sets out the scope of this Chapter and gives signposts to the groups of provisions dealing with the various aspects of the car, car fuel and van benefit rules. The section derives from sections 157(1) and 159AA(1) of ICTA.

426. Subsection (1) states when this Chapter applies.

427. Subsection (1)(b) avoids the use of the phrase “the employee’s employment”. Section 66(2)(a) of this Act identifies for this (and for other sections) the employee to whose employment the legislation applies.

428. Subsection (2) gives signposts to the groups of provisions applying to car, fuel and van benefits.

429. Subsection (3) prevents a double tax charge arising on car, car fuel or van benefits.

430. Subsection (4) gives signposts to provisions providing exceptions to the main rules.

Section 115: Meaning of “car” and “van”

431. This section defines “car” and “van” and related terms for the purposes of this Chapter. The section derives from parts of sections 168(5) and 168(5A) of ICTA.

432. Subsection (1) defines “car” and “van”.

433. Subsection (2) defines terms relevant only to the definitions of “car” and “van”, so that all such terms are located together.

Section 116: Meaning of when car or van is available to employee

434. It is the availability to an employee of a car or van for private use that may give rise to a tax charge. This section explains what a car or van being available to an employee means. The section derives from sections 168A(12), 168AA(4), 168B(8), 168C(3) and 168F(10), paragraph 10 of Schedule 6 and paragraph 12 of Schedule 6A to ICTA.

435. Subsection (1) extends the meaning of a car or van being available to an employee to include its being made available to members of the employee’s family or household.

436. Subsection (2) defines when such cars first became available at all and when they are last available in the year.

437. Subsection (3) provides that this section does not apply to section 138 of this Act. That section therefore applies only to an employee who is disabled and not to members of that employee’s family or household as well.

Section 117: Meaning of car or van made available by reason of employment

438. To give rise to a tax charge, the car or van must be made available to the employee by reason of the employment. This section provides that a car or van made available by an employer is regarded as made available by reason of the employment unless the circumstances in paragraphs (a) and (b) apply. The section derives from part of section 168(6) of ICTA.

Section 118: Availability for private use

439. This section explains what is meant by availability for private use of a car or van. The section derives from parts of section 168(5), 168(5A), and 168(6) of ICTA.

440. Subsection (1) provides that the car or van is regarded as available for private use unless the circumstances in paragraphs (a) and (b) apply.

441. Subsection (2) defines “private use”.

Section 119: Where alternative to benefit of car offered

442. This section identifies the relationship between this Chapter and the provisions in Chapter 1 of Part 3 of this Act. The section derives from section 157A of ICTA.

Section 120: Benefit of car treated as earnings

443. This section provides that the cash equivalent of the benefit arising from the provision of a car is treated as an employee’s earnings. The section derives from part of section 157(1) of ICTA.

444. Subsection (1) brings the cash equivalent of the car benefit into charge as part of the employee’s earnings. The rewrite of the source legislation has clarified the timing of the charge. See Note 7 in Annex 2.

445. Subsection (2) allows concise expression in this Chapter of the link between the employee and the taxable benefit.

Section 121: Method of calculating the cash equivalent of the benefit of a car

446. This section states how to calculate the cash equivalent of the car benefit. The section derives from sections 157(2) and 168G(1) and paragraph 1 of Schedule 6 to ICTA.

447. Subsection (1) sets out the steps involved in the calculation by using a method statement.

448. Subsection (2) gives signposts to two special cases when the calculation is modified.

449. Subsection (3) gives a signpost to the reduction that may be made when employees share a car.

Section 122: The price of the car

450. This section states what is meant by “the price of the car” and, in particular, introduces the concept of “the notional price” for the case where a car has no list price. It links to other provisions for the calculation of the cash equivalent of the car benefit. The section derives from part of section 168A(1) of ICTA.

Section 123: The list price of a car

451. This section deals with the most common case where there is a published list price for a car. The section derives from section 168A(2) and part of section 168A(9) of ICTA.

452. Subsection (1) defines “list price” by referring to the characteristics of an ordinary retail sale.

453. The phrase “(as the case may be)”, from section 168A(2), is retained as the simplest way of determining whose list price is to be taken. The user looks first to the manufacturer, secondly to the importer and thirdly to the distributor to find a list price.

454. Subsection (2) makes it clear that “list price” includes delivery charges and taxes.

Section 124: The notional price of a car with no list price

455. This section deals with the less common case where there is no published list price within section 123. The legislation then falls back on the concept of the “notional price”. The section derives from section 168A(8) and part of section 168A(9) of ICTA.

456. Subsection (1) defines the “notional price” of a car and the assumptions to be made in determining it. Those assumptions reflect the circumstances listed in section 123(1) where there is an actual list price.

457. Subsection (2) makes it clear that a notional price must, like a list price, include delivery charges and taxes.

Section 125: Meaning of “accessory” and related terms

458. This section defines “accessory”. The section derives from parts of sections 168A(9), (10) and (11), 168AB(1) and (4), 168B(8), 168C(3), 168D(5) and 168F(9) of ICTA.

459. Subsection (1) defines “qualifying accessory”.

460. Subsection (2) lists certain items that are not treated as accessories.

461. Subsection (3) states an exception to one item in subsection (2).

462. Subsection (4) distinguishes between a “standard accessory” and a “non-standard accessory”. The term “equivalent to” in the definition of “standard accessory” does not mean “identical to”. It accommodates slight changes to the specification of particular models of cars, which manufacturers may make from time to time but which do not result in changes to their published prices.

Section 126: Amounts taken into account in respect of accessories

463. This section identifies the types of accessories for which the prices are added at Step 2 of the calculation in section 121(1) of this Act. The section derives from parts of sections 168A(1), (4), (5), (6) and (7), 168B(1), (2) and (3), and 168C(1), (2) and (4) of ICTA.

464. Section 168A(3) of ICTA (which deals with a car to which only standard accessories were fitted at the time it was first made available to the employee) has not been rewritten. It seems unnecessary given that standard accessories (as defined in section 168A(9)(c)) are necessarily taken into account when ascertaining the list price of the car under section 168A(2). The structure of the new method statement in section 121 is such that, having ascertained the list price of the car under Step 1, Step 2 is only concerned with adding on the price of accessories not included in that price.

465. Subsection (1) states the basic rule and introduces the terms “initial extra accessory” and “later accessory”.

466. Subsection (2) defines “initial extra accessory”.

467. Subsection (3) defines “later accessory”.

468. Subsection (4) identifies the price of the accessory as the list price or, if there is no list price, a notional price. This follows the same approach as for the car in section 122 of this Act.

469. Subsection (5) gives a signpost to a modifying rule that applies when accessories are replaced.

Section 127: The list price of an accessory

470. This section defines the list price of an accessory. The section derives from parts of sections 168A(4), (5), (6) and (7), 168B(2) and 168C(2) of ICTA.

471. Subsection (1) gives the rule when the accessory is an “initial extra accessory”. The list price is the published price of either the manufacturer, importer or distributor of the car or, when there is no such published price, the published price of the manufacturer, importer or distributor of the accessory in a normal, retail sale.

472. Subsection (2) gives the rule when the accessory is a “later accessory”. The list price is the published price of the manufacturer, importer or distributor of the accessory.

Section 128: Accessory: published price of the car manufacturer etc.

473. This section states how to arrive at the price of an accessory, when it is derived from the published price of the manufacturer, importer or distributor of the car. The section derives from parts of section 168A(4) and (9) of ICTA.

474. Subsection (1) gives the main definition. As in section 123 of this Act (see paragraph 453) the phrase “(as the case may be)” from the source legislation is retained.

475. Subsection (2) defines “inclusive price”. Car tax is excluded from the “relevant taxes” to be taken into account in arriving at the price of the accessory in subsection (2)(b). That is because it is clear from the context of section 168A that, when applied to an accessory, the reference in section 168A(9) to “any car tax” is irrelevant when considering the “inclusive price” of the accessory as defined in section 168A(9)(a).

Section 129: Accessory: published price of the accessory manufacturer etc.

476. This section states how to arrive at the price of an accessory when it is derived from the published price of the manufacturer, importer or distributor of the accessory. The section derives from parts of section 168B(4), (6) and (7) and section 168C(4) of ICTA.

477. Subsection (1) defines the “published price of the manufacturer, importer or distributor of the accessory”. As in section 123 of this Act (see paragraph 453), the phrase “(as the case may be)” from the source legislation is retained.

478. Subsection (2) defines “inclusive price”. Car tax is excluded from the “relevant taxes” to be taken into account in arriving at the price of the accessory in subsection (2)(b). That reproduces the effect of section 168B(7)(b), which differs from section 168A(9) in that respect.

479. Subsection (2)(c) contrasts with section 128(2)(c) in identifying the person by whom the fitting charge is made. That reflects section 168B(6).

480. Subsection (3) states an interpretation rule for this section about timing. The reference to “time” here (and in subsection (1)(e) to which it relates) contrasts with the reference to “day” in section 128(1)(e). That reflects the distinction between section 168A(9)(b), which refers to “day” and section 168B(4), which refers to “time”. A brand new car is generally on sale prior to its first registration. The act of registration often results in an immediate loss in value. This is equally true of an optional accessory provided with the car by the car manufacturer. The legislation adopts the price of such an accessory in relation to the day immediately before first registration as it does for the car itself (see section 123(1)(e) of this Act). In the case of an accessory that is made by someone other than the car manufacturer that may not be appropriate. That is because the accessory might be attached to the car only on the first day the accessory goes on sale. So this section refers to a particular time rather than a particular day.

Section 130: The notional price of an accessory

481. This section defines the “notional price” of an accessory. It applies when an accessory does not have a list price. The section derives from section 168B(5), (6) and (7) and section 168C(4) of ICTA.

482. Subsection (1) defines the notional price of the accessory by setting out the assumptions to be made in determining it. Those assumptions reflect the circumstances listed in section 129(1) where there is an actual list price.

483. Subsection (2) defines “inclusive price” to reflect what is referred to in section 129(2) when there is an actual list price.

484. Subsection (2)(c) follows section 129(2)(c) in identifying the person by whom the fitting charge is made. That reflects section 168B(6).

485. Subsection (3) follows the timing rule in section 129(3).

Section 131: Replacement accessories

486. This section sets out the rules for calculating the cash equivalent of a replacement accessory. The section derives from the Income Tax (Car Benefits) (Replacement Accessories) Regulations 1994 (SI 1994 No 777). Those Regulations were made under powers provided by section 168E of ICTA. As there is no longer any reason to retain those powers, section 168E has not been rewritten.

487. Subsection (1) states when the section applies.

488. Subsection (2) applies when the new accessory is not superior to the old accessory.

489. Subsection (3) applies when the new accessory is superior to the old accessory and the conditions in subsection (4) are met.

490. Subsection (4) states the conditions referred to in subsection (3).

491. Subsection (5) states what is meant by “superior” in this section.

492. Subsection (6) states what is meant by the “price of an accessory” in this section.

Section 132: Capital contributions by employee

493. This section provides for the deduction that can be made at Step 3 of section 121(1) of this Act in calculating the cash equivalent of the car benefit. The section derives from section 168D(1), (2), (3) and (4) of ICTA.

494. Subsection (1) states when the section applies. That is when the employee contributes to the capital cost of the car or its qualifying accessories.

495. Subsection (2) states for which tax years the deduction can be made.

496. Subsection (3) states the maximum deduction that can be made under this section for any tax year.

Section 133: How to determine the “appropriate percentage”

497. This section is the first of a group of ten defining “the appropriate percentage” to be used in Step 6 of section 121(1) of this Act to calculate the cash equivalent of the car benefit. The “appropriate percentage” depends on the type of car involved, when it was first registered, what fuel or fuels it uses and whether it has a CO2 emissions figure. The section derives from paragraph 2 of Schedule 6 to ICTA.

498. Subsection (1) identifies the date of the car’s first registration as the initial governing factor.

499. Subsection (2) applies different provisions to cars first registered after 31 December 1997, depending on whether or not they have a CO2 emissions figure and/or whether they are diesels. It gives signposts to the relevant provisions in each case.

500. Subsection (3) gives a signpost to the provision that applies if the car was first registered before 1 January 1998.

Section 134: Meaning of car with or without a CO2 emissions figure

501. This section determines whether a car is a car with or without a CO2 emissions figure for the purposes of these provisions. The section derives from parts of paragraphs 3(1) and (2), 5 and 5C(1) of Schedule 6 to ICTA.

502. Subsection (1) defines a “car with a CO2 emissions figure” by reference to its date of first registration and other sections that specify a CO2 emissions figure for the particular combination of car type and date of first registration.

503. Subsection (2) defines a “car without a CO2 emissions figure” by reference to its date of first registration, not being a car within subsection (1).

Section 135: Car with a CO2 emissions figure: pre-October 1999 registration

504. This section gives a rule to determine the CO2 emissions figure for certain cars first registered after 31 December 1997 and before 1 October 1999. The section derives from parts of paragraph 3(1) and (2) of Schedule 6 to ICTA.

505. Subsections (1) and (2) define a CO2 emissions figure by reference to the appropriate European or United Kingdom certification schemes that were in place at the time of a first registration that occurred on or after 1 January 1998 and before 1 October 1999.

506. Subsection (3) makes this section subject to a further rule that applies to the provision of an automatic car for an employee who is disabled.

Section 136: Car with a CO2 emissions figure: post-September 1999 registration

507. This section gives a rule to determine the CO2 emissions figure for certain cars first registered after 30 September 1999. The section derives from parts of paragraph 3(1) and (2) of Schedule 6 to ICTA.

508. Subsections (1) and (2) define the CO2 emissions figure by reference to the appropriate European or United Kingdom certification schemes that were in place at the time of a first registration on or after 1 October 1999.

509. Subsection (3) makes this section subject to further rules that apply to the provision of a car capable of running on more than one type of fuel or of an automatic car for an employee who is disabled.

Section 137: Car with a CO2 emissions figure: bi-fuel cars

510. This section gives a CO2 emissions figure for bi-fuel cars (cars capable of running on more than one type of fuel) first registered after 31 December 1999. Such cars will have at least two CO2 emissions figures. The section derives from paragraph 5 of Schedule 6 to ICTA.

511. Subsection (1) refers to the CO2 emissions figures of a bi-fuel car by reference to the appropriate European or United Kingdom certification schemes that were in place at the time of a first registration after 31 December 1999.

512. Subsection (2) determines which figure must be used.

513. Subsection (3) makes this section subject to a further rule that applies to the provision of an automatic car for an employee who is disabled.

Section 138: Car with a CO2 emissions figure: automatic car for a disabled employee

514. This section gives a special rule for identifying the CO2 emissions figure for an automatic car provided for a disabled employee. The section derives from paragraph 5A(1), (2), (3) and (4) of Schedule 6 to ICTA.

515. The CO2 emissions figure for an automatic car is generally higher than for its manual equivalent. So as not to penalise a disabled employee whose disablement means that the car he or she drives must have an automatic gearbox, this section provides that the CO2 emissions figure to be used is that of the nearest equivalent manual version of the car.

516. Subsection (1) states when the section applies. This subsection refers to the employee as “E” to avoid repeated use of the word “employee”.

517. Subsection (2) provides for the substitution of the CO2 emissions figure of the manual equivalent of the automatic car if it is lower.

518. Subsection (3) defines “equivalent manual car”.

519. Subsection (4) defines a car with automatic transmission. This subsection incorporates a suggestion made during the process of consultation leading up to this Act. The definition turns on the central idea that an automatic car is a car that does not have a clutch needing to be operated by some physical action by the driver.

520. Subsection (5) avoids the use of the phrase “the employee’s employment”. This provision contrasts with section 116(1) of this Act in that it only applies to a car made available to the employee personally and not to members of the employee’s family or household.

Section 139: Car with a CO2 emissions figure: the appropriate percentage

521. This section identifies the “appropriate percentage” to be used at Step 6 in section 121(1) of this Act to calculate the cash equivalent for a car that has a CO2 emissions figure. The section derives from paragraphs 3(3), (4) and (5), and 4(1) and (3) of Schedule 6 to ICTA.

522. Subsection (1) states the starting point for arriving at the appropriate percentage, which is the car’s CO2 emissions figure.

523. Subsection (2) gives the appropriate percentage if the car’s CO2 emissions figure is no higher than “the lower threshold”. This is the “basic percentage”, initially set at 15%.

524. Subsection (3) gives the appropriate percentage if the car’s CO2 emissions figure is higher than “the lower threshold”. The basic percentage is increased by one percentage point for each additional (full) five grams per kilometre of CO2 emitted, up to a maximum appropriate percentage of 35%. The reference in paragraph 3(4) to “the basic percentage increased by 1%” is rewritten as “the basic percentage increased by one percentage point”. That makes the intention of the legislation clearer, as it avoids any suggestion that the “minimum percentage” must be increased by 1% of itself (to 15.15%).

525. Subsection (4) states what is “the lower threshold” for different tax years.

526. Subsection (5) provides for the rounding down of the car’s CO2 emissions figure to the nearest multiple of five. Its effect is that the basic percentage is increased under subsection (3)(a) by one percentage point only for every additional full five grams per kilometre of CO2 emitted.

527. Subsection (6) makes the section subject to other provisions relating to diesel cars and to Treasury powers to amend the amounts involved.

Section 140: Car without a CO2 emissions figure: the appropriate percentage

528. This section gives the “appropriate percentage” to be used at Step 6 in section 121(1) of this Act to calculate the cash equivalent for a car first registered after 31 December 1997 that does not, for whatever reason, have a CO2 emissions figure. The section derives from paragraphs 5C(2), (3) and (4) and 5G of Schedule 6 to ICTA.

529. Subsection (1) applies the section to determine the appropriate percentage for cars without a CO2 emissions figure. They include, for example, electrically propelled cars and cars with an internal combustion engine that does not have one reciprocating piston or more.

530. Subsection (2) applies to cars with an internal combustion engine that does have one reciprocating piston or more. The appropriate percentage increases with engine size.

531. Subsection (3) gives the appropriate percentage for cars not within subsection (2).

532. Subsection (4) defines an “electrically propelled vehicle” for the purposes of this section.

533. Subsection (5) makes the section subject to other provisions relating to diesel cars and to any regulations made under Treasury powers to amend the amounts involved.

Section 141: Diesel cars: the appropriate percentage

534. This section gives the “appropriate percentage” to be used at Step 6 in section 121(1) to calculate the cash equivalent for a diesel car. The section derives from paragraph 5D(1), (2) and (4) of Schedule 6 to ICTA.

535. Subsection (1) states to which cars the section applies, namely diesel cars first registered after 31 December 1997.

536. Subsection (2) uses a method statement to set out the steps in the calculation of the appropriate percentage.

537. Subsection (3) defines “diesel car” for the purposes of this section.

538. Subsection (4) makes the section subject to any regulations made under Treasury powers to amend the amounts involved.

Section 142: Car first registered before 1st January 1998: the appropriate percentage

539. This section gives the “appropriate percentage” to be used at Step 6 in section 121(1) of this Act to calculate the cash equivalent for a car registered before 1 January 1998. Such cars are less likely to have a recognised CO2 emissions figure, so a different and consistent basis is used for all such cars. The section derives from paragraphs 5F(1), (2) and (3) and 5G of Schedule 6 to ICTA.

540. Subsection (1) states to which cars the section applies, namely those first registered before 1 January 1998.

541. Subsection (2) applies to cars with an internal combustion engine that has one reciprocating piston or more. The appropriate percentage increases with engine size. For cars driven by an internal combustion engine with one reciprocating piston or more the “appropriate percentage” is the same, irrespective of the fuel used.

542. Subsection (3) gives the appropriate percentage for cars not within subsection (2).

543. Subsection (4) defines an “electrically propelled vehicle” for the purposes of this section.

Section 143: Deduction for periods when car unavailable

544. This section quantifies a deduction that can be made at Step 7 of section 121(1) of this Act in calculating the cash equivalent, because a car is not available at some time during the tax year. The section derives from part of paragraph 6 and paragraph 9 of Schedule 6 to ICTA.

545. Subsection (1) provides for the deduction.

546. Subsection (2) defines the periods of non-availability. They cover the period from the beginning of the tax year involved to the date on which the car first became available and the period from the date when the car ceased permanently to be available to the end of the tax year. There can also be one or more periods of temporary non-availability for each period of continuous non-availability of 30 days or more. Such periods can span two tax years, ie the 30 days or more do not have to fall wholly within one tax year.

547. Subsection (3) gives a formula to calculate the appropriate deduction.

548. Subsection (4) makes this section subject to a further provision that applies if the car is temporarily replaced.

Section 144: Deduction for payments for private use

549. This section provides for a deduction to be made in calculating the cash equivalent at Step 8 of section 121(1) of this Act, to take account of the employee having paid for private use of the car. The section derives from paragraph 7 of Schedule 6 to ICTA.

550. Subsection (1) states when the section applies. That is when, as a condition of the car being made available for private use, the employee is required to pay, and does pay, for that private use.

551. The words “(whether by way of deduction from earnings or otherwise)” have been retained as they remove a potential area of doubt about whether a deduction from earnings can amount to a payment. The same approach is used in sections 159(1)(a) and 165(1)(a) of this Act.

552. Subsections (2) and (3) provide for the deduction of the appropriate amount at Step 8 of the calculation in section 121(1).

553. Subsection (4) extends the section to private use of a car by a member of the employee’s family or household.

554. Subsection (5) makes this section subject to a further provision that applies if the car is temporarily replaced.

Section 145: Modification of provisions where car temporarily replaced

555. This section modifies the effect of the two previous sections if a car is temporarily replaced. The section derives from the Income Tax (Replacement Cars) Regulations 1994 (SI 1994 No 778). Those Regulations were made under powers provided by paragraph 8 of Schedule 6 to ICTA. As there is no longer any reason to retain those powers, that paragraph has not been rewritten.

556. Subsections (1) to (3) deal with the conditions to be met for the section to apply. Condition A in subsection (2) relates to the quality of the replacement car as compared with the car it replaces. This Act uses a slightly different form of wording from the source legislation. See Change 25 in Annex 1.

557. Subsection (4) makes the necessary modifications to sections 143 and 144 of this Act when this section applies.

558. Subsection (5) defines “materially better”. The possible introduction of a numerical measure of improvement (a maximum percentage increase above the interim sum, for example) to remove the inherent uncertainty of “materially” was considered but rejected. That approach might produce “hard cases”. It is better to retain the flexibility that a common sense interpretation of “materially” allows.

Section 146: Cars that run on road fuel gas

559. This section provides for a deduction to be made from the price of the car at Step 1 of the calculation of the cash equivalent in section 121(1) of this Act if the car has been manufactured to run on road fuel gas and is not a bi-fuel car. The deduction that can be made is the amount that is reasonably attributable to the car being manufactured to run on road fuel gas, rather than only on petrol. The section derives from section 168AB(2) and (4) of ICTA.

560. Subsection (1) states when the section applies.

561. Subsection (2) provides for the appropriate deduction from the price arrived at after Step 1 of the calculation in section 121(1). This is a slight variation on the calculation used in the source legislation. See Change 26 in Annex 1.

Section 147: Classic cars: 15 years of age or more

562. This section provides for modifications to the calculation of the cash equivalent of the car benefit in section 121(1) of this Act if the car is a classic car. The section derives from section 168F(1) to (8) of ICTA.

563. The section heading emphasises that the provision applies to modern classics as well as to vintage or veteran cars.

564. Subsection (1) states when the section applies by reference to the age and market value of the car. A car that is 15 or more years old, with a market value of £15,000 or more and in excess of the amount carried forward from Step 3 of the “normal” calculation in section 121(1) falls within this provision.

565. Subsection (2) applies the modification provided for in this section to the calculation in section 121(1). This is the substitution of the market value (after adjustment for any capital contributions by the employee) of the car on the last day of the tax year involved (or the last day the car is available to the employee in that year, if earlier) for the amount arrived at after Step 3 under the normal calculation method.

566. Subsections (3) and (4) define the market value of the car.

567. Subsections (5) to (7) provide for a deduction (limited to £5,000 in any tax year) from the market value to reflect any capital contributions by the employee.

Section 148: Reduction of cash equivalent where car is shared

568. This section provides for a reduction of the cash equivalent of the benefit of a car where that car is shared by at least two employees who are chargeable to tax in respect of its availability. This section derives from paragraph 3 of ESC A71.

569. The concession was couched in terms of the apportionment of “a single car benefit charge”. This Act adopts a different approach by providing for a reduction of the relevant cash equivalent for each employee to whom the section applies. See item B of Change 27 in Annex 1.

570. This section, by virtue of the provisions in section 5, applies to office-holders as well as employees. See item D of Change 27 in Annex 1.

571. Subsection (1) states when the section applies. That is when two or more employees are chargeable to tax in respect of the provision of the car (of which they each have shared private use) by their employer. No reduction will be necessary if the car is shared between one such an employee and another employee who is not chargeable in respect of the provision of the car. That is because there will be only one cash equivalent arising from the provision of the car.

572. Converting the concession to legislation has produced a subtle change to how section 218 of this Act (which determines whether an employee is lower-paid) will apply, compared with how the source legislation in section 167(2) of ICTA worked with the concession. See item C of Change 27 in Annex 1.

573. Subsection (2) provides for the reduction of each employee’s cash equivalent of the car benefit, initially calculated ignoring the fact that the car is shared, on a just and reasonable basis. See item B in Change 27 in Annex 1.

574. Subsection (3) modifies how subsection (2) is to be interpreted.

575. Subsection (4) extends the section to cover private use of a car by a member of the employee’s family or household.

Section 149: Benefit of car fuel treated as earnings

576. This section brings into charge, as an employee’s earnings, the cash equivalent of the benefit arising from the provision of fuel for a car to which section 120 of this Act applies. The section derives from section 158(1), (9) and part of (3) of ICTA.

577. Subsection (1) states the main principle, which is that any fuel benefit associated with a car benefit is taxed as earnings. The rewrite of the source legislation has clarified the timing of the charge. See Note 7 in Annex 2.

578. Subsection (1)(b) now refers to “that person”, rather than “the employee” to avoid a repetitive reference to “the employee” that might have been regarded as indicating that the car must have been made available by reason of the same employment as that providing the car fuel. There is no such stipulation on the face of section 158(1) of ICTA.

579. Subsection (2) applies the provisions that determine how the cash equivalent of the fuel benefit is calculated.

580. Subsection (3) gives examples of what constitutes the provision of fuel. The definitions of “non-cash voucher” and “credit-token” used in subsection (3)(b) and (3)(c) are listed in Schedule 1 to this Act.

581. Subsection (4) excludes the provision of electrical energy from the benefit charge.

Section 150: Car fuel: calculating the cash equivalent

582. This section defines the cash equivalent of the benefit of the provision of car fuel. The section derives from section 158(2) of ICTA.

583. Subsection (1) gives the basis of calculation, which is to take the “appropriate percentage” of £14,400.

584. Subsection (2) states the meaning of “appropriate percentage” in this section. That is the same percentage as is used to calculate the cash equivalent of the car for which the fuel is provided.

585. Subsection (3) gives signposts to three sections that modify the cash equivalent in particular circumstances.

Section 151: Car fuel: nil cash equivalent

586. This section prevents a benefits charge when there is no private use of fuel or the employee pays for the private use. The section derives from section 158(6) of ICTA.

587. Subsection (1) provides that the cash equivalent will be nil if either of the conditions defined in subsections (2) or (3) is met.

588. Subsection (2) applies to cases where the employee is required to pay for, and does pay for, all fuel for private use.

589. Subsection (3) applies when fuel is provided only for business travel.

Section 152: Car fuel: proportionate reduction of cash equivalent

590. This section provides for a proportionate reduction in the cash equivalent of the fuel benefit for particular circumstances, which may apply during part of a tax year. This section derives from section 158(5), (6A), (6B), and (8) of ICTA.

591. Subsection (1) applies when the car for which the fuel is provided is unavailable.

592. Subsection (2) covers circumstances where the fuel is not available for private use or its cost has to be and is reimbursed by the employee.

593. Subsection (3) is to prevent unintended advantage being obtained from the legislation by repeated changes in the circumstances that apply to the provision of the fuel.

594. Subsection (4) gives a formula to calculate the reduced cash equivalent. The formula uses “Y”, defined as “the number of days in the tax year in question”, instead of the fixed figure of “365” in the source legislation. That copes automatically with leap years. See item A of Change 28 in Annex 1.

Section 153: Car fuel: reduction of cash equivalent

595. This section provides for a reduction of the cash equivalent of the fuel benefit in certain circumstances when a car is shared. The section is new. It is an extension of the change referred to in paragraph 569. See items B and D of Change 27 in Annex 1.

Section 154: Benefit of van treated as earnings

596. This section states the principle that the cash equivalent of the benefit arising from the provision of a van is treated as the employee’s earnings from the employment. The section reflects the approach in section 120 of this Act, the corresponding section for cars. The section derives from section 159AA(1) of ICTA. The rewrite of the source legislation has clarified the timing of the charge. See Note 7 in Annex 2. See also item A of Change 2 in Annex 1 in relation to when the earnings are treated as received.

Section 155: Method of calculating the cash equivalent of the benefit of a van

597. This section states the principles involved in calculating the cash equivalent of the benefit of a van. The section derives from paragraphs 1(1), 4(1) and 5(6) and (10) of Schedule 6A to ICTA.

598. Subsection (1) states the starting point of the calculation. That is whether or not the van is shared at any time in the tax year.

599. Subsection (2) identifies the provision that contains the basis of calculation that applies if the van was not a shared van, as defined in section 156 of this Act, for any period in the tax year.

600. Subsection (3) identifies the provision that contains the basis of calculation that applies if the van was a shared van, as defined in section 156, for the whole of the tax year.

601. Subsection (4) applies when the van is shared for only part of the year, and simplifies the proposition set out in the source legislation. See item C of Note 17 in Annex 2.

602. Subsections (5) and (6) make it clear which vans are counted in the calculation of the value of shared availability under, respectively, the normal and alternative methods of calculation.

603. Subsection (7) states the rule for calculating the total value of shared availability when an employee shares more than one van.

604. Subsection (8) gives a signpost to a section that imposes an overall limit on the cash equivalent of the benefit arising from the provision of a van or vans.

Section 156: Meaning of “shared van”

605. This section defines the term “shared van”. The section derives from paragraph 4(2), (3), (4) and (5) of Schedule 6A to ICTA.

606. Subsections (1) to (3) determine, for the purposes of sections 155 to 165 of this Act, whether a van is a “shared van”. Subsection (3)(a) emphasises, by its reference to “different employees”, that it denotes a group of employees that may vary over the period.

607. Subsection (4) provides that if a van is available to only one employee for a period of 30 days or more the van will not count as a “shared van” for that period.

608. Subsection (5) requires shared use for any part of a day to be counted as shared use for that day.

Section 157: Value of exclusive availability

609. This section gives the value of the benefit of a van that is available to only one employee. It sets out the steps involved in the calculation using a method statement. The section derives from paragraph 1(2) and parts of paragraphs 2(1) and 3(1) of Schedule 6A to ICTA.

Section 158: Deduction for periods of unavailability or shared use

610. This section provides for an adjustment of the value calculated under section 157 if the van is not available or is shared for any period in the tax year. The section derives from parts of paragraph 2(1) and from paragraph 2(2) and (3) of Schedule 6A to ICTA.

611. Subsection (1) provides for a deduction to be made from the value calculated at Step 2 of section 157 when there are “excluded days” in relation to the van.

612. Subsection (2) defines “excluded days” as days when the van is unavailable or shared.

613. Subsection (3) gives a formula to calculate the deduction. The formula uses “Y” for the number of days in the year instead of “365” in the source legislation. This is the same change in principle as that described in paragraph 594. See item A of Change 28 in Annex 1.

614. Subsection (4) defines the periods of non-availability. Apart from periods relating to the van first being available or ceasing finally to be available, such periods must last for a continuous period of at least 30 days. They can run from the beginning of the tax year involved to the date on which the van first became available or from the date when the van ceased permanently to be available to the end of that tax year. There can also be one or more periods of temporary non-availability for each continuous period of 30 days or more. Such periods can span two tax years, ie the period of 30 days or more does not have to fall wholly within one tax year.

Section 159: Deduction for payments for private use

615. This section provides for adjustment of the value calculated under section 157 of this Act for payments made by the employee for private use of a van. The section derives from paragraph 3(1), (2) and (3) of Schedule 6A to ICTA.

616. Subsection (1) states when the section applies. That is when, as a condition of the van being made available for private use, the employee is required to pay for, and does pay for, that use. The words “(whether by way of deduction from earnings or otherwise)” avoid any doubt about whether a deduction from earnings can amount to a payment. The same approach is used in sections 144(1)(a) and 165(1)(a) of this Act.

617. Subsections (2) and (3) provide for the deduction of the appropriate amount at Step 4 of the calculation in section 157.

618. Subsection (4) specifies that for cases where the van is shared for part of the tax year, the deduction relates to the period(s) when it is not shared.

619. Subsection (5) extends the section to private use of a van by a member of the employee’s family or household.

Section 160: Value of shared availability

620. This section introduces the two methods of calculating the value of shared availability, the second of which has to be claimed by the employee. This section is new.

Section 161: Value of shared availability: normal calculation

621. This section gives the normal rule used to calculate the value of the shared availability of one or more vans. The section derives from paragraphs 5(1), (4) and (5), 7 and part of paragraph 9(1) of Schedule 6A to ICTA.

622. Subsection (1) sets out the steps involved in the calculation using a method statement. This is the calculation that applies if the employee does not claim the alternative calculation under section 164 of this Act.

623. The words in parentheses in Step 1 make it clear that “made available by the same employer” means made available to any of the participating employees, whether or not including the one whose liability is being calculated.

624. The second sentence at the end of Step 2 states explicitly what was formerly implicit. See item B of Note 17 in Annex 2.

625. Subsection (2) focuses primarily on the employee whose tax liability is being calculated, rather than on all the shared vans and all the participating employees in relation to those vans. See item A of Note 17 in Annex 2.

Section 162: Shared van: meaning of “participating employee”

626. This section defines the term “participating employee”, which is used in section 161. The section derives from paragraph 5(2) and (3) of Schedule 6A to ICTA.

627. Subsection (1) applies when only one van is involved.

628. Subsection (2) applies when more than one van is involved.

629. Subsection (3)(a) and (b) extends the section to private use of a van by a member of the employee’s family or household.

Section 163: Shared van: basic value

630. This section provides for the calculation of the basic value of a shared van. The section derives from paragraph 6(1), (2), (3) and (4) of Schedule 6A to ICTA.

631. Subsection (1) sets out the steps involved in the calculation using a method statement. The value that is calculated is applied at Step 4 of section 161 of this Act.

632. In subsection (1) the formula at Step 3 provides for adjustments to the basic value for periods when the van was not a shared van and for any period of 30 days or more when it was incapable of use. The formula uses “Y” for the number of days in the year instead of “365” in the source legislation. This is the same change in principle as that described in paragraph 594. See item A of Change 28 in Annex 1.

633. Subsections (2) and (3) identify the days that must be excluded at Step 3.

Section 164: Value of shared availability: alternative calculation

634. This section provides for an alternative way to calculate the value of the shared availability of a van. The section derives from paragraph 8(2), (3) and (4) and parts of paragraph 8(1) and 9(1) of Schedule 6A to ICTA. Paragraph 8(1)(a) of Schedule 6A to ICTA has not been rewritten, as it is no longer necessary.

635. Subsection (1) applies the section only when an employee makes a claim for it to apply instead of section 161 of this Act (value of shared availability: normal calculation).

636. Subsection (2) sets out the steps involved in the calculation using a method statement. Step 1 (b) excludes vans other than vans made available to the employee and the employee’s family or household. That is because subsection (3)(b) defines relevant days, an essential part of the calculation, by reference only to vans made use of privately by the employee or a member of the employee’s family or household.

637. Subsection (3) identifies the days that must be counted in the formula at Step 3 of subsection (2).

638. Subsection (4) provides that a claim under this section is treated under section 95 of TMA 1970 as a claim for relief. Section 42 of TMA 1970 applies to this claim.

Section 165: Deduction for payments for private use

639. This section provides for an adjustment to the value of the shared van availability to take account of payments the employee makes for the private use of a shared van. The section derives from paragraph 9(2) and (3) and part of paragraph 9(1) of Schedule 6A to ICTA.

640. Subsection (1) provides that a deduction is to be made in the calculations in section 161 or section 164 of this Act if the employee is required to pay, and does pay, for private use. The words “(whether by way of deduction from earnings or otherwise)” avoid any doubt about whether a deduction from earnings can amount to a payment. This follows the approach that is used in sections 144(1)(a) and 159(1)(a) of this Act.

641. Subsections (2) to (4) state how to calculate the deduction. The wording of these subsections closely follows that of the source legislation. The possible argument that subsection (4) operates to prevent any deduction at all where a global sum is paid for private use of any of the vans was considered. Such a restrictive interpretation would be unreasonable. It is better not to complicate further these already complex provisions by seeking to address this subtle point. It can be dealt with using the “care and management” provisions in section 1 of TMA 1970.

642. Subsection (5) extends the section to private use by a member of the employee’s family or household.

Section 166: Vans: limit of cash equivalent

643. This section sets a maximum cash equivalent on an employee’s van benefit for a tax year, in particular circumstances. The section derives from paragraph 11 of Schedule 6A to ICTA.

644. The limit applies only if no more than one van is available, for private use, to the employee or the employee’s family or household at any one time in the tax year.

Section 167: Pooled cars

645. This section determines how pooled cars are treated under the benefits provisions. The section derives from section 159(1), (2) and (3) of ICTA.

646. Subsection (1) applies the provisions to a car that is a pooled car.

647. Subsection (2) treats pooled cars as not having been available for private use of any of the employees concerned. It also prevents them from being treated as an employment-related benefit for the purposes of Chapter 10 of Part 3 of this Act. See Note 18 in Annex 2.

648. Subsection (3) sets out the conditions for a car to be treated as a pooled car.

649. Subsection (3)(b) uses the term “the employee’s employment”. Generally use of that term has been avoided but here it helps clarity.

Section 168: Pooled vans

650. This section determines how pooled vans are treated under the benefits provisions. This section works in relation to vans as section 167 works in relation to cars. This section derives from section 159AB of ICTA.

651. Subsection (1) applies the provisions to a van that is a pooled van.

652. Subsection (2) treats pooled vans as not having been available for private use of any of the employees concerned. It also prevents them from being treated as an employment-related benefit for the purposes of Chapter 10 of Part 3 of this Act. See Note 18 in Annex 2.

653. Subsection (3) sets out the conditions for a van to be treated as a pooled van.

654. Subsection (3)(b) uses the term “the employee’s employment”. Generally use of that term has been avoided but here it helps clarity.

Section 169: Car available to more than one member of family or household employed by same employer

655. This section removes a car or car fuel benefit charge on an employee who would otherwise be taxed on the car benefits relating to a member of his or her family or household. The section derives from paragraphs 1 and 2 of ESC A71. See items A and D of Change 27 in Annex 1.

656. Subsection (1) states the circumstances in which the section can apply.

657. Subsection (2) removes the tax charge on the employee in two specified cases.

658. Subsection (2)(a) specifies the first case, which is when the family or household member is chargeable on the benefit in his or her own right.

659. Subsections (2)(b), (3) and (4) specify the second case, which is when the family or household member is not chargeable on the benefit in his or her own right and the car is provided for reasons that do not arise out of the family or household relationship.

Section 170: Orders etc. relating to this Chapter

660. This section provides the Treasury with powers to make regulations affecting the legislation in this Chapter. It brings together various provisions from various individual sections dealing with different aspects of car and van benefit charges in the source legislation. The section derives from sections 158(4), 168C(5), 168D(6), 168F(11) and 168G(2) of ICTA and from paragraphs 4(2) and 5E of Schedule 6 to ICTA.

661. The wording of subsection (2) has not been aligned with subsection (6). The section accurately reproduces the legislation from which it derives and further internal alignment could, in certain cases, work against the taxpayer’s interests, as for example in section 132(3)(b) and section 147(1)(b) of this Act.

Section 171: Minor definitions: general

662. This section gives definitions of terms that are used widely in this Chapter. The section derives from parts of sections 168(5) and (5A), 168A(9), 168AA(3), and 168AB(3) of ICTA and from paragraphs 5A(5), 5B and 5D(3) of Schedule 6 to ICTA.

Section 172: Minor definitions: equipment to enable a disabled person to use a car

663. This section brings together the definitions that relate specifically to a car available for use by a disabled person. The section derives from section 168AA(1) and (2) of ICTA.

Chapter 7: Taxable Benefits: Loans

Overview

664. This Chapter deals with the benefits that may arise from loans obtained by reason of an employee’s employment. These benefits may be due to a low rate of interest charged on the loan, or the writing off of a loan. The cash equivalent of the benefit of a loan is treated as earnings of the employee’s employment.

Section 173: Loans to which this Chapter applies

665. This section describes the loans to which the Chapter applies. It derives from section 160 of ICTA.

666. Subsection (1) applies this Chapter to loans if they are employment-related.

667. Subsection (2) defines “loan” and sets out what is meant by making a loan.

668. Subsection (3) is a reminder that sections 288 and 289 of this Act (limited exemption for certain bridging loans connected with employment moves) may mitigate the charge under these provisions.

Section 174: Employment-related loans

669. This section sets out the basis on which a loan comes within the provisions of this Chapter. It derives from sections 160 and 161 of and paragraphs 1 and 2 of Schedule 7 to ICTA.

670. Subsection (1) describes loans which are employment-related. The fact that the loan is made to “an employee or a relative of an employee” indicates that at the time the loan is made there must be an employment.

671. Subsection (2) defines “employment-related loans” and the working of this subsection is illustrated by the flow diagram on page 76.

672. Subsection (3) provides that if a loan is made to an employee in anticipation of the employment commencing it is an employment-related loan, provided the employment is taken up. It derives from paragraph 2 of Schedule 7 to ICTA.

673. Subsection (4) provides that loans made by a person who was not the original lender or who facilitates the continuation of an existing loan fall within the section.

674. Subsection (5) excludes from the charge certain loans of a personal or domestic nature.

675. Subsection (6) defines what is meant by a “relative” for the purposes of the section.

Section 175: Benefit of taxable cheap loan treated as earnings

676. This section brings within the charge to tax the benefit arising on certain employment-related loans (each of which is referred to as a “taxable cheap loan”) on which no interest is paid or interest is paid at a low rate.

677. Subsections (1) and (2) provide that the cash equivalent of the benefit of a taxable cheap loan is treated as earnings from an employment. They also describe the circumstances in which an employment-related loan is a “taxable cheap loan”. They derive from section 160(1) of ICTA. Subsection (1) sets out for which year the cash equivalent is to be treated as earnings. See Note 7 in Annex 2.

678. Subsection (3) gives the broad rule for computing the cash equivalent of the benefit. Subsection (4) provides that in considering whether a loan falls within this Chapter it must be looked at separately from any other loan. They derive from section 160(4) and paragraph 3(1) of Schedule 7 to ICTA.

679. Subsection (5) is a signpost to section 180 of this Act (threshold for benefit of loan to be treated as earnings) which sets out the £5,000 threshold and to section 186 of this Act (replacement loans) which makes an exception to subsection (4).

Section 176: Exception for loans on ordinary commercial terms

680. This section deals with employers whose business includes the lending of money by preventing loans made on ordinary commercial terms from being taxable cheap loans. It derives from section 161B of, and Schedule 7A to, ICTA.

681. Subsection (1) provides that a loan on commercial terms is not a taxable cheap loan.

682. Subsection (2) provides a definition of “loan on ordinary commercial terms” which includes three conditions.

683. Subsections (3) to (7) set out those conditions and define terms used in them.

684. Subsection (8) provides that certain incidental expenses are to be ignored in determining, for the three conditions in subsection (2), whether loans are made or exercisable on the same terms or conditions.

685. Subsection (9) requires that certain amounts arising from variation of a loan are ignored for the purposes of ascertaining, for the second and third conditions, whether loans are held or exercised on the same terms.

686. Subsection (10) defines “member of the public” for the purposes of this section.

Section 177: Exceptions for loans at fixed rate of interest

687. This section exempts certain types of fixed interest loan. It derives from section 161(2) and (3) of ICTA.

688. Subsection (1) applies to loans made on or after 6 April 1978 at fixed rates for fixed periods. It applies when there is an increase in the official rate of interest for a year subsequent to that in which the loan was made. When that happens a calculation under section 182 or section 183 of this Act might show that the interest paid on the loan was less than what would have been paid if the official rate of interest had applied to the loan. In such a case, provided nothing other than the official rate of interest has changed, and provided the condition in subsection (2) is met, the loan is not to be regarded as a taxable cheap loan.

689. Subsection (2) provides as a condition for subsection (1) that the interest paid on the loan for the year in which it was made was not less than what would have been paid at the official rate for that year.

690. Subsection (3) exempts fixed rate loans from being taxable cheap loans if they were made before 6 April 1978, when there was no official rate of interest, and the condition in subsection (4) applies.

691. Subsection (4) sets out the condition for subsection (3), that the interest should be at an arm’s length rate when the loan was made.

692. Subsection (5) defines “fixed rate loan”.

Section 178: Exceptions for loans where interest qualifies for tax relief

693. This section provides that loans which would qualify for tax relief in a tax year if interest were paid on them are not taxable cheap loans for that year. Paragraphs (a) to (d) set out the types of interest. It derives from section 161A(2) of ICTA.

Section 179: Exception for certain advances for necessary expenses

694. This section provides that, where certain conditions are met, small temporary advances of expenses by an employer to an employee for necessary expenditure are not taxable cheap loans. It derives from Inland Revenue Statement of Practice 7/79. It is a minor change to law. See Change 29 in Annex 1.

695. Subsection (1) provides that advances by an employer to an employee for necessary or incidental overnight expenses are not taxable cheap loans where certain conditions are met. Subsection (2) sets out those conditions.

696. Subsections (3) and (4) provide that the limits for two of the conditions can be extended.

697. Subsections (5) to (7) define terms used.

Section 180: Threshold for benefit of loan to be treated as earnings

698. This section prevents a tax charge on small amounts by providing a £5,000 threshold which applies in two circumstances. It derives from sections 161 and 161A(1) of ICTA.

699. Subsection (1) sets out the circumstances in which the cash equivalent is not treated as earnings.

700. Subsection (2) provides that all taxable cheap loans are aggregated to find whether the normal £5,000 threshold is exceeded for the purposes of subsection (1)(a).

701. Subsection (3) describes how the alternative threshold in subsection (1)(b) is calculated. This applies when the loan is a non-qualifying loan and total taxable cheap loans exceed the threshold. If qualifying loans are deducted and the total is then less than £5,000 the cash equivalent of the non-qualifying loans is not treated as earnings. That reflects the Inland Revenue practice of ignoring excepted loans and is a minor change to the law. See Change 30 in Annex 1.

702. Subsections (4) and (5) define “non-qualifying loan” and “qualifying loan”.

Section 181: The official rate of interest

703. This section provides for the setting of the official rate of interest under section 178 of FA 1989 and allows special rates to be used for foreign currency loans. It derives from section 160(5) of ICTA.

704. Subsection (1) defines “the official rate of interest”.

705. Subsection (2) allows regulations made under section 178 of FA 1989 to specify a different official rate in the case of loans in another currency. “Normally lives” and “has lived at some time” are not defined in section 160(5) of ICTA. They therefore take their normal meaning. SE 26105 in the Inland Revenue Schedule E Manual provides guidance on this.

706. Subsection (3) provides that the power given under subsection (2) does not affect the general power under section 178 of FA 1989 to make different provisions.

Section 182: Normal method of calculation: averaging

707. This section sets out the normal method for calculating the amount of interest that would be payable at the “official rate for a tax year” by the averaging method. It derives from paragraph 4(1) of Schedule 7 to ICTA.

708. This method of calculation does not explicitly apply in deciding whether a loan is within sections 160(1) or 161(2) of ICTA, although it is applied for those purposes in practice. Stating that the methods of calculation are used for all purposes of this Chapter legislates that practice. This is a minor change to the law. See Change 31 in Annex 1.

709. A method statement sets out how to do the calculation, which applies the average official rate for the period to the average amount outstanding to arrive at the notional interest for that period.

Section 183: Alternative method of calculation

710. This section allows the use of a more precise method of calculating the interest at the official rate on a loan than the method given in section 182. It derives from paragraphs 5 and 5A of Schedule 7 to ICTA.

711. Subsection (1) allows either the Inland Revenue or the employee to choose this method of calculation. This is for the purposes of the Chapter and is not confined to the calculation of the cash equivalent. See Change 31 in Annex 1. For the reference to the Inland Revenue see Change 158 in Annex 1.

712. Subsection (2) sets out the time limit for making the election. This is different from the way the limit is expressed in paragraph 5(2) of Schedule 7 to ICTA which provides that the election must be made “before” the end of the period of 12 months beginning with 31 January following the end of the tax year. This subsection allows it to be made “on or before” that date. This is a minor change to the law. See Change 32 in Annex 1.

713. Subsection (3) shows the calculation as a method statement. This arrives at the precise amount of interest on a day-to-day basis using the exact amount of the loan outstanding for each day. In paragraph 5(3)(c) of Schedule 7 to ICTA the total is divided by 365 days. As in a leap year the daily total would be based on 366 days, this subsection divides the total by the number of days in the tax year. This is a minor change to the law. See Change 28 in Annex 1.

714. Subsection (4) requires that the alternative method should apply in certain circumstances where the cash equivalent of the benefit on the same loan is treated as the earnings of two or more employees.

Section 184: Interest treated as paid

715. This section treats the cash equivalent of an employment-related loan as if it were interest paid so that tax relief can be given where the loan is for a qualifying purpose. It derives from parts of section 160(1) and section 160(1A) of ICTA.

716. Subsection (1) sets out the circumstances in which the section applies.

717. Subsection (2) treats the employee as having paid interest equal to the cash equivalent of the benefit.

718. Subsection (3) prevents a claim that the interest should be treated as paid and so qualify as a deduction from the amounts treated as earnings by another chapter of the benefits code.

719. Subsection (4) provides the mechanism for allocating to a tax year the cash equivalent to be treated as interest.

720. Subsection (5) makes it clear that, although the cash equivalent is treated as if it were interest paid by the employee, it is not treated as interest received by the lender.

Section 185: Apportionment of cash equivalent in case of joint loan etc.

721. This section allows the apportionment of the cash equivalent of a loan between two or more employees who are chargeable under this Chapter in respect of the same loan. It derives from paragraph 5A(1) of Schedule 7 to ICTA.

Section 186: Replacement loans

722. This section prevents manipulation of the averaging method in section 182 of this Act where a loan which is later replaced is repaid part way through the month. So that complete months are included in the calculation the section treats the replacement loan as the original loan. It derives from paragraph 4(2) to (4) of Schedule 7 to ICTA.

723. Subsection (1) sets out the circumstances in which the provisions apply and deals with both the replacement by a further employment-related loan and the insertion of a loan which is not employment-related between two that are.

724. Subsection (2) treats all loans falling within subsection (1) as if they were one continuous loan.

725. Subsection (3) follows the practice of applying the treatment of one continuous loan not just to the calculation of the official rate of interest which would be paid for the year but also to any interest paid on the loans for the purpose of calculating the cash equivalent. This is a minor change to the law. See Change 33 in Annex 1.

726. Subsection (4) defines “further employment-related loan”.

Section 187: Aggregation of loans by close company to director

727. This section provides for the aggregation of certain loans on an election where the borrower is a director of a close company which is the lender. It derives from section 160(1B) and (1BA) of ICTA.

728. Subsection (1) sets out the circumstances when the section applies.

729. Subsection (2) allows the lender to elect for aggregation for a tax year to apply to the borrower.

730. Subsection (3) explains the effect of the election.

731. Subsection (4) places a restriction on which loans may be aggregated.

732. Subsection (5) says by whom and how and within what time limit the election may be made. See Change 158 in Annex 1 regarding the reference to “the Inland Revenue”.

Section 188: Loan released or written off: amount treated as earnings

733. This section treats employment-related loans which are released or written off as earnings. It derives from section 160 of ICTA.

734. Subsection (1) applies in the case of a continuing employment and treats the amounts written off as earnings for the year in which the loan is released or written off. It derives from section 160(2) but that section does not specify the tax year. See Note 7 in Annex 2.

735. Subsection (2) applies subsection (1) where an employment-related loan is released or written off after the employment has ceased or at a time when the employee is lower-paid in accordance with Chapter 11 of Part 3 of this Act. If the employment has ceased there is no taxable employment and the section would not apply. Deeming that the employment has not ceased allows the section to apply in the case of a release or writing off for the year in which the event occurs. It is also necessary for the employment to be one which is not an “excluded employment”; otherwise the section would not apply. Where the employment has become an “excluded employment” this subsection deems it not to be “excluded”. This derives from section 160(3) of ICTA.

736. Subsection (3) preserves chargeability where subsection (2) applies and a loan replaces the employment-related loan. It derives from section 160(3A) of ICTA.

Section 189: Exception where double charge

737. This section ensures that where the release or writing off of a loan might be chargeable to tax under other provisions there is only one charge to tax. It derives from section 161(5) of ICTA.

738. Subsection (1) provides the general rule that if another provision in the Income Tax Acts applies this section does not.

739. This clarifies the position that there will be no double charge if a loan made to a participator in a close company is written off and section 421 of ICTA applies. It is a minor change to the law. See Change 34 in Annex 1.

740. Subsections (2) and (3) provide exceptions to subsection (1). In both cases it is made explicit which provision takes precedence when there is a possible double charge. This change in approach is described more fully in Note 19 in Annex 2.

Section 190: Exclusion of charge after death of employee

741. This section provides a general exemption from the provisions of the Chapter if the employee dies. It derives from section 161 of ICTA.

742. Subsection (1) removes the charge on a taxable cheap loan for the period from the date of death where the employee has died but the loan is not repaid. It provides that the loan is treated as no longer outstanding as from the date of death for the purposes of calculating the cash equivalent. This change in approach is described more fully in Note 20 in Annex 2.

743. Subsection (2) removes the charge if the loan is released or written off on or after the death of the employee.

Section 191: Claim for relief to take account of event after assessment

744. This section allows adjustments to the figures in cases where subsequent events affect the amount chargeable. It derives in part from section 160(4A) of ICTA.

745. Subsection (1) introduces the claim.

746. Subsection (2) allows for the fact that interest may be paid after the tax liability for the year has been determined.

747. Subsection (3) allows for repayment of a loan that has been released or written off. Allowing a claim for a loan that has been released or written off is a minor change to the law. See Change 35 in Annex 1.

748. Subsection (4) provides for the situation where tax payable has been decided on the basis that the condition in section 288(1)(b) of this Act in respect of bridging loans will not be met and that condition is in fact met. It derives from section 191B(13) of ICTA.

749. Subsection (5) allows the adjustment to be made.

Chapter 8: Taxable benefits: notional loans in respect of acquisitions of shares

Overview

750. This Chapter deals with a benefit which may arise on certain acquisitions of shares by employees. It derives from those parts of section 162 of ICTA which deal with acquisition of shares at undervalue. The legislation is included in the benefits code because the benefit is treated as a notional loan and, as such, some of the provisions in Chapter 7 of Part 3 apply to it.

Section 192: Application of this Chapter

751. This section sets out the subject of the legislation. It derives from section 162(1) and (9) and section 168(3)(b) of ICTA and also contains new material.

752. Subsection (1) describes the circumstances relating to an acquisition of shares which will bring it within the provisions of this Chapter.

753. Subsection (2) makes it clear that the shares can be in a company other than the employer.

754. Subsection (3). It derives from section 168(3)(b) of ICTA. It is now explicit that a right or opportunity to acquire shares, or an interest in shares, which is made available by an employer, is to be regarded – with certain exceptions – as being made available by reason of the employee’s employment. This change in approach is described more fully in Note 21 in Annex 2.

755. Subsection (4) defines the term “the acquisition” and gives shares acquired the label “employment-related shares”.

Section 193: Notional loan where acquisition for less than market value

756. This section is derived from parts of section 162(1), (2) and (9) of ICTA and contains new drafting material.

757. Subsection (1) outlines the circumstances in which a benefit arises. It also provides that payments made before the acquisition will be allowable. This is a minor change to the law. See Change 36 in Annex 1.

758. Subsection (1)(a) applies the section to employment-related shares for which no payment is made.

759. Subsection (1)(b) covers the situation in which some payment is made. The subsection prevents shares which are not fully paid at the time of issue (but which later become fully paid) from being valued as part-paid shares.

760. Subsection (3) provides that the benefit is treated, under Chapter 7 of Part 3, as an employment-related loan on which no interest is payable.

761. Subsection (4) lists the provisions in Chapter 7 of Part 3 which apply to the notional loan. This is a minor change to the law. See Change 37 in Annex 1.

762. The provisions listed include section 175 of this Act, which specifies the tax year for which the cash equivalent is treated as earnings. See Note 7 in Annex 2.

763. Subsection (5) lists the provisions of the Act which may exempt a person from liability to tax under this section.

Section 194: The amount of the notional loan

764. This section shows how the initial amount of the loan is calculated, and how the amount is reduced or subsequently varied in certain circumstances. It is derived from section 162(2), (3), (9) and (11) and section 185(8) of ICTA and includes new drafting material. See Note 22 in Annex 2.

765. The amount of the notional loan is used in the calculation of the cash equivalent of the benefit in accordance with section 182 or section 183 of this Act.

766. Subsection (1) sets out how to arrive at the initial amount of the loan. The value taken is that of fully paid up shares. The value is reduced by any “deductible amounts”.

767. Subsection (2) sets out what are the deductible amounts. Paragraph (a) allows the payment made for the acquisition as a “deductible amount”. A payment may be made before the shares are acquired and it has always been the practice to allow any advance payment of this sort as well as any payment made at the actual time of the acquisition. The words “or before” have been added to make this clear. This is a minor change to the law. See Change 36 in Annex 1.

768. Paragraphs (b), (c)(i) and (c)(ii) of subsection (2) derive from the words “so much of the undervalue on acquisition as is not chargeable to tax as an emolument of the employee” in section 162(3) of ICTA. This change in approach is explained in Note 22 in Annex 2.

769. Paragraph (c)(iii) of subsection (2) provides that an amount that counts as employment income under sections 476 or 477 of this Act is a deductible amount. This is a minor change to the law. See Change 38 in Annex 1.

770. Subsection (3) provides for the amount of the notional loan to be reduced where payments are made for the shares after the time they are acquired. The reduced amount is used in the calculation of the benefit in sections 182 or 183 of this Act, which entail ascertaining the maximum amount of the loan outstanding on a particular day.

Section 195: Discharge of notional loan: amount treated as earnings

771. This section covers the circumstances in which a notional loan is treated as discharged and the consequences of that treatment. It is derived from section 162(3), (4) and (5) of ICTA and contains new drafting material.

772. Subsection (1) sets out circumstances in which the notional loan is treated as discharged. The words “is released, transferred or adjusted” in section 162(4)(b) of ICTA have been left out on the grounds that they are unnecessary. There is no other way that the obligation could cease to bind the employee. The words “by surrender or otherwise” in section 162(4)(c) of ICTA have not been used in paragraph (c) because they are unnecessary.

773. Subsection (2) provides that the amount of a notional loan discharged in the circumstances described in subsection (1)(b) and (c) is treated as earnings.

774. Subsection (3) ensures that the amount in subsection (2) can be chargeable in a tax year after the year in which the employment has ended or has become an excluded employment as defined in section 63(4) of this Act. This derives from section 160(3) of ICTA, which is applied to the termination of a notional loan by section 162(5) of ICTA. If the employment has ceased there is no taxable employment and the section would not apply. Deeming the employment not to have ceased allows the section to apply in the case of the discharge of a notional loan for the year in which the event as a result of which it is discharged occurs. It is also necessary for the employment to be one which is not an “excluded employment” otherwise the section would not apply. Where the employment has become an “excluded employment” this subsection deems it not to be “excluded”.

Section 196: Effects on other income tax charges

775. This section derives from section 162(11) of ICTA which operates to give priority to any section by virtue of which an acquisition of shares results in an amount being chargeable to tax as emoluments.

776. Paragraph (b) of this section refers to sections 476 and 477 of this Act, which are derived from section 135 of ICTA. This is a minor change to the law. See Change 38 in Annex 1.

Section 197: Minor definitions

777. This section defines terms which are used in the sections and clarifies what counts as payment for shares.

778. The section is derived from section 162(1), (9) and (10) of ICTA and contains new drafting material.

779. Subsection (2) makes the meaning of “acquisition” very wide to discourage schemes intended to avoid chargeability under this Chapter. The meaning of “market value” is as in Part 8 of TCGA 1992.The wording of the definition has been changed to bring it into line with definitions of market value used elsewhere in this Act. See Note 23 in Annex 2.

780. Subsection (3) ensures that payment for shares made in kind or by any other means is included and that legal liability to make it is not needed for it to count as a payment.

Chapter 9: Taxable benefits: disposals of shares for more than market value

Overview

781. This Chapter deals with the benefits which may arise from certain disposals of shares. It derives from those parts of section 162 of ICTA which deal with the disposal of shares at a price greater than their market value.

Section 198: Shares to which this Chapter applies

782. This section sets out the subject of the legislation. It derives from parts of sections 162(1), (6) and (9) and 168(3) of ICTA.

783. Subsection (1) describes the circumstances which bring shares within the provisions of this Chapter.

784. Subsection (2) labels the shares “employment-related shares”.

785. Subsection (3) makes it clear that the employment-related shares can be in a company other than the employer. It derives from section 162(1)(a).

786. Subsection (4) applies to determine, in a similar way to the “provision” of other benefits, whether the right or opportunity to acquire shares made available by the employer is “by reason of the employment”. This change in approach is explained more fully in Note 21 in Annex 2. It derives from section 168(3)(b).

Section 199: Disposal for more than market value: amount treated as earnings

787. This section sets out the circumstances in which a benefit arises and how it is to be chargeable to tax. It derives from parts of section 162(6), (7), (8), and (9) of ICTA.

788. Subsection (1) applies the provisions of the section in the case of a disposal of the employment-related shares. The words in section 162(6)(a) of ICTA “by surrender or otherwise” have not been used as they are unnecessary.

789. Subsection (2) derives from section 162(8) of ICTA. It prevents chargeability when the disposal takes place after the death of the employee. In rewriting this the words “whether by his personal representatives or otherwise” have been left out. These words do not add anything and are unnecessary.

790. Subsection (3) provides a formula to arrive at the amount to be treated as earnings. If any part of that amount is earnings by virtue of section 62 of this Act any possible double charge is prevented by section 64(1) and (2) of this Act.

791. Subsection (4) derives partly from section 162(7) of ICTA. The references to the employment becoming excluded employment are new. Note 24 in Annex 2 explains why they are necessary.

792. Subsection (5) explains how to arrive at the market value of an interest in shares.

Section 200: Minor definitions

793. This section defines various terms used in this Chapter. It derives from section 162(1), (9) and (10) of ICTA.

794. The meaning of “market value” is defined. The wording of the definition has been changed to bring it into line with definitions of market value used elsewhere in this Act. See Note 23 in Annex 2.

Chapter 10: Taxable benefits: residual liability to charge

Overview

795. This Chapter derives from the provisions of sections 154 and 156 of ICTA, but has a very different structure. The structure of the benefits code is outlined in the overview of Chapter 2 Part 3 of this Act.

796. Sections 201 and 202 together identify the benefits which are within this Chapter.

797. Section 203 provides that the cash equivalent of the benefit is treated as earnings and gives details of how to calculate its amount.

798. Sections 204, 205 and 206 indicate how to calculate the cash equivalent for each different way of providing an employment-related benefit.

799. Sections 207, 208, 209 and 210 are the supplementary provisions.

800. Sections 212, 213, 214 and 215 provide that certain scholarships are benefits within this Chapter.

Section 201: Employment-related benefits

801. This section derives from parts of sections 154 and 168(3) of ICTA.

802. Subsections (1) and (2) derive from section 154(1) of ICTA and introduce the labels “employment-related benefit” and “excluded benefit”.

803. Subsection (3) derives from section 168(3) of ICTA.

804. Subsections (4) and (5) make it explicit that if the employment is held at some time in the tax year it is immaterial whether or not the employment is held at the time the benefit is provided. Subsection (4) further clarifies this proposition by stating that references to an employee may therefore include a former or a prospective employee. These provisions derive from and clarify the meaning of the words “where in any year a person is employed” in section 154(1) of ICTA. This change in approach is explained more fully in Note 14 in Annex 2.

Section 202: Excluded benefits

805. This section derives from section 154(1)(b) and part of section 154(2) of ICTA. It clarifies what is meant by “the cost of the benefit is not (apart from this section) chargeable to tax as his income.” Benefits which are within, or specifically excepted from, other chapters of the benefits code are not within this Chapter. This section does not exclude benefits which are earnings within section 62 of this Act. That is not necessary because section 64 of this Act applies to prevent any element of double charge. See Change 15 in Annex 1. The identification of excluded benefits is explained more fully in Note 25 in Annex 2. The benefit of certain transport vouchers in section 86 of this Act is not excluded from this Chapter because Chapter 4 of Part 3 provides an exemption only for the lower paid.

Section 203: Cash equivalent of benefit treated as earnings

806. This section establishes that the cash equivalent is to be treated as earnings, and provides guidance on how to work out the cash equivalent.

807. Subsection (1) derives from the closing words of section 154(1) of ICTA. It provides that the cash equivalent is the amount treated as earnings. The words “for the tax year in which it is provided” are not in section 154. This clarification of the timing rule is explained more fully in Note 7 in Annex 2.

808. Subsection (2) derives from section 156(1) of ICTA. It provides the basic rule that the cash equivalent is the cost of provision less amounts made good.

809. Subsection (3) derives from section 156(2) to (7) of ICTA and indicates which sections provide the rules for finding the cost of the benefit.

Section 204: Cost of the benefit: basic rule

810. This section derives from section 156(2) of ICTA. The benefits within this Chapter can be provided in different ways. The “cost of the benefit” is the basic amount and this section sets out what that is.

811. The words “(including a proper proportion of any expense relating partly to provision of the benefit and partly to other matters)” provide for apportionment of the cost of the benefit in appropriate circumstances. A case before the Special Commissioners reported recently has made that possibility clear.

Section 205: Cost of the benefit: asset made available without transfer

812. This section, which derives from section 156(5) to (7) and (9)(b) of ICTA, explains how to quantify the cost of the benefit when the ownership of the asset is not transferred to the employee.

813. Subsection (1) derives from the opening words of section 156(5) of ICTA. It establishes the circumstances in which the following provisions of this section will apply.

814. Subsections (2) to (5) derive from section 156(5)(a) and (b) to (7) of ICTA and provide the rules for determining the cost of the benefit.

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

815. This section 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 section provides that market value at the time of transfer may be used instead of cost.

816. 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).

817. Subsections (3) to (5) derive from section 156(4) and (9)(b). As the relief provided by subsections (1) and (2) of this section 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 section 205. In the case of an asset provided before this Act comes into force the transitional provision in paragraph 32 of Schedule 7 to this Act will apply.

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

Section 207: Meaning of “annual rental value”

819. This section defines “annual rental value” for the purposes of this Chapter. It does not replace the use of gross rateable value, which will continue. It derives from section 156(6) and section 837 of ICTA which in turn draws on section 23 of the General Rate Act 1967 (although that Act was repealed in 1988).

820. This section does not affect the Inland Revenue practice of using the gross rateable value as a proxy for “annual value”. That practice will continue. The main use of this section is to provide guidance on how to arrive at the annual value of properties for which rent is not paid and in practice is only needed in cases where no gross rateable value can be found. 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 Part 3 of this Act applies to living accommodation, so this Chapter applies only to accommodation which is not living accommodation.

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

822. The following subsections 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 that Act in section 837(2) has not been included here. Instead the general thrust of the rules have been rewritten in this section. See Change 23 in Annex 1.

823. 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. If, in considering what the rent of the property would be, the nearest comparison is rent for a property for which services are provided at an inclusive rent, in order to reduce the rent to that for an unfurnished, non-serviced property the cost of the services provided are deducted. This means that if there is a profit element in the provision of the services it is treated as rent in arriving at the annual value.

824. Subsections (3) and (4) extend the process of comparison and adjustment. They follow the thrust of section 23(3) and (4) of General Rate Act 1967, which ensured that when a property was valued by looking at comparative rents of similar properties the value was not distorted by the existence (in the comparative case) of separate payments for services in addition to what one might call the basic rent. In particular it added the separate payments to the rental payments and allowed for certain deductions to be made. It did not allow any deduction in computing the value based on a comparative rent for amounts paid in respect of repairs, insurance or maintenance of other property belonging to or occupied by the landlord. In the case of payments for other types of services only the cost element of them was deducted. These subsections follow that method of comparison and adjustment.

825. Subsection (5) has the effect that the services whose cost of provision may be deducted are those which are not normally met by a landlord in the provision of unfurnished property. Again, the wording is not derived directly from section 23 of the General Rate Act 1967 but follows the general thrust of provisions of that section.

Section 208: Meaning of “market value”

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

Section 209: Meaning of “persons providing benefit”

827. This section derives from section 154(3) of ICTA and identifies the person providing the benefit.

Section 210: Power to exempt minor benefits

828. This section 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 FA 2000 introduced this provision all exemptions from a charge under section 154 had to be introduced through a Finance Act.

Special rules for scholarships

Overview

829. This group of sections derives from section 165 of ICTA.

Section 211: Special rules for scholarships: introduction

830. This is mainly an introductory section which explains the layout and provides the meaning of scholarship.

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

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

832. Subsection (1) derives from section 165(2) of ICTA. A scholarship is an employment-related benefit by virtue of section 201 of this Act if it is provided by reason of the employment. That would not be the case if the provision of the scholarship did not fall within the normal meaning of “by reason of the employment” because of the way in which it was provided. This section extends the meaning of “by reason of the employment”.

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

834. 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 section. 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.

835. Subsection (4) prevents subsection (1) from disapplying the opening words of section 201(3) of this Act.

Section 213: Exception for certain scholarships under trusts or schemes

836. This section, 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.

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

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

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

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

841. 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.

842. 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 “excluded” employments.

843. Subsection (7) provides definitions of terms used in the section.

Section 214: Scholarships: cost of the benefit

844. This section 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. Incorporating this practice 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 section 204 of this Act could result in the whole of the amount of capital paid into such a trust fund being taken into account. This section prevents that and provides that the cost of the benefit is to be the total of payments made to the scholar.

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

845. This section 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 section prevents section 331 from applying to a scholarship which is an employment-related benefit within section 212 if the scholar is not an employee.

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.

Chapter 12: Payments treated as earnings

Overview

879. This Chapter deals with certain distinct types of payments that are treated as earnings. Thus the chargeable amounts to which these sections give rise constitute “general earnings” within section 7 of this Act.

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

880. 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 section 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 section does not apply.

881. 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.

882. 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 the employer finances them.

883. 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 this section 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 section 721(4) of this Act. This is a change of approach explained more fully in Note 27 in Annex 2.

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

884. This section 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.

885. This particular section 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 section imposes an additional liability on the employee receiving the “notional payment”. The basic conditions for the section to apply are set out in subsection (1), which derives from section 144A(1) of ICTA. The PAYE provisions in Part 11 of this Act, as referred to in subsection (1)(a), omit those that are not about notional payments or contain only definitions.

886. 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.

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

Section 223: Payments on account of director’s tax other than by the director

888. This section 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.

889. The section 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 section 222 above. It is the different nature of the respective payments that provides the main borderline between this section and section 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.

890. The section 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 of this Act (taxable benefits: residual liability to charge).

891. Subsection (1) derives from section 164(1) of ICTA and sets out the basic conditions for the section to apply. The source legislation says that the section applies where “the whole of that amount is not so deducted” (“amount” there means the tax due). This section 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 in section 164(1) to the amount “so deducted”.

892. 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 in Note 14 in Annex 2.

893. 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).

894. 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.

895. 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.

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

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

Section 224: Payments to non-approved personal pension arrangements

898. This section provides that an employer’s payments under non-approved personal pension arrangements made by the employee are treated as earnings. It derives from section 648 of ICTA.

899. It contrasts with section 308 of this Act, which exempts from income tax as earnings an employer’s contributions under approved personal pension arrangements made by the employee.

900. Subsection (1) sets out that the payments are treated as earnings from the employment. In view of the content of Chapter 2 of Part 2, it is unnecessary to add (as in section 648 of ICTA) that the payments are so treated “for all the purposes of the Income Tax Acts”. The year of charge is made explicit. See Note 7 in Annex 2.

901. Subsection (2) provides that the employer’s payments are not treated as earnings under this section to the extent they are otherwise chargeable to income tax. For example, if contributions are so made that only a charge by virtue of section 62 of this Act (earnings) otherwise applies, section 224 will apply to the extent, if any, that section 62 does not apply.

902. Conversely, if a charge would only arise otherwise by virtue of section 203 of this Act (cash equivalent of benefit treated as earnings), but the payments are wholly or partly exempted from that charge by section 307 of this Act (death or retirement benefit provision), a charge under this section will apply on the amount so exempt.

903. Subsection (3) provides relevant definitions by cross-reference to section 630(1) of ICTA.

904. The Board of Inland Revenue may approve a personal pension scheme. The provisions for approval of a pension scheme are set out in section 631 of ICTA.

Section 225: Payments for restrictive undertakings

905. This section deals with the situation where a monetary payment is made in return for the giving of a restrictive undertaking. It derives from section 313(1), (2), (3) and (6)(a) of ICTA.

906. The sum described as “ … an emolument of the office or employment … ” in section 313(1) has become “ … earnings from the employment … ” in subsection (3). That reflects the general change in terminology in this Act.

907. The section has a timing provision of its own in subsection (3). If there is no employment at the time the payment is made the timing rule in whichever is appropriate of section 17 or 30 of this Act will operate.

908. Section 313(6)(a) restricts the application of section 313 to employments from which the income was or would have been chargeable under Case I or Case II of Schedule E.Subsections (6) and (7) reproduce that restriction for this and the following section.

Section 226: Valuable consideration given for restrictive undertakings

909. This section brings together the provisions that apply when the payment for the restrictive undertaking is in a non-monetary form. That is more logical and convenient than their present separation. It derives from section 313(4) and (6)(b) of ICTA.

910. The use of two sections emphasises the way the section relating to a non-monetary consideration operates through the preceding one.

Part 4: Employment income: exemptions

Chapter 1: Exemptions: general

Section 227: Scope of Part 4

911. This section introduces Part 4, setting out the effect of the exemptions within it. It is new.

912. Subsections (2) and (3) explain that there are two different kinds of exemption. An “earnings-only exemption” is an exemption that removes either any charge to tax under Part 2 as general earnings or a particular charge to tax as general earnings, for example, by removing a charge under a particular chapter of the benefits code.

913. An “employment income” exemption removes any charge to tax under Part 2.

914. There is considerable variety in the forms of words used to express exemptions in ICTA. However, not all the differences in wording signify an actual difference in the effect. Close examination of the various exemption provisions in ICTA shows that an exemption can only affect a possible charge to tax under Schedule E in three ways:

• it can remove a single type of charge; eg section 155(1A) of ICTA says

(1A)

Section 154 does not apply to a benefit consisting in the provision for the employee of a car parking space at or near his place of work.

• it can remove any charge as “emoluments” (rewritten in this Act as “general earnings”); eg section 200B(2) (work-related training provided by employers) says

(2)

Subject to section 200C, the emoluments of the employee from the office or employment shall not be taken to include….

• it can remove any charge to tax under Schedule E, eg section 197AD(1) of ICTA says

(1)

There is no charge to tax under Schedule E in respect of approved mileage allowance payments for a qualifying vehicle.

915. In this Act the effects described in the first two bullets only impact on general earnings, and exemptions which have those effects are described as “earnings-only” exemptions. The type of exemption that, in ICTA, removes any charge to tax under Schedule E is labelled an “employment income” exemption in this Act.

916. If a benefit is received in circumstances to which Chapter 3 of Part 6 (payments and benefits on termination of employment etc) could apply, any “earnings-only” exemptions are ignored in deciding whether or not the benefit is within that Chapter.

917. But if the benefit or income is the subject of an “employment income” exemption, there is no possibility of any charge to tax on that benefit or income under Chapter 3 of Part 6, nor under any other provision in this Act.

918. There are also some exemptions that have a wider effect and remove the possibility of any charge to tax at all. These are described in section 228(2).

Section 228: Effect of exemptions on liability under provisions outside Part 2

919. All of the exemptions in this Part operate to remove a charge to tax under Part 2 of this Act. Subsection (1) sets out the proposition that, in general, this is the only kind of charge to tax that these exemptions affect.

920. However, Part 4 includes a number of exemptions that have a wider effect. There are various phrases used in the exemption provisions in ICTA which make it clear that they operate to remove any charge to income tax. Examples are:

…shall not be regarded as income for any purpose of the Income Tax Acts – section 200(1) (expenses of Members of Parliament)

…shall be exempt from income tax – section 322(2) (consular officers and employees)

921. Some of the exemptions set out in ESCs are also worded so that they remove any charge to income tax on the income in question. Examples are:-

Income tax is not charged on…. – ESC A6 (Miners: free coal and allowances in lieu)

…the employee will not be charged to income tax….. – ESC A66 (Payments for employees’ journeys home: late night travel and breakdown in car-sharing arrangements).

922. Subsection (2) includes a list of all the exemptions in Part 4 that have this wider application and provides that they have effect to remove any charge to income tax.

923. The move to a common formulation, “no liability to income tax arises”, for all exemptions, including those listed in section 228(2), is explained in detail in Note 28 in Annex 2.

Chapter 2: Exemptions: mileage allowances and passenger payments

Overview

924. This Chapter rewrites the provisions for the exemption from tax as earnings of mileage allowance payments and passenger payments. Section 57 of FA 2001 introduced those provisions, which are effective from 2002-03 onwards. The Chapter also rewrites the provisions relating to mileage allowance relief that section 57 introduced. Given that those latter provisions mean that employees can get a deduction from their earnings if their circumstances permit, it might be thought that they should more properly appear among the travel-related expenses in Chapter 2 of Part 5 of this Act. The provisions for mileage allowance relief appear in this Chapter for the following reasons:

• The relief provided does not depend upon the employees having incurred any expenditure. It ensures that the employees receive the maximum relief that is approved for mileage allowance payments against their earnings, even if the mileage allowance payments made by the employer are less than that maximum amount. For that reason the relief would not sit comfortably in Chapter 2 of Part 5 of this Act, which is headed “Deductions for employee’s expenses”; and

• Keeping the payments and relief provisions together means that the terms or labels for these related provisions only have to be defined once. That has resulted in a considerable saving of length and a compactness of presentation.

925. The provisions that, by virtue of Part 1 of Schedule 12 to FA 2001, were introduced as Schedule 12AA to ICTA have been incorporated in the rewritten sections. That accords with the policy of avoiding the use of schedules, if possible.

926. The consequential amendments in Part 2 of Schedule 12 to FA 2001 have been incorporated into the rewritten sections as relevant.

Section 229: Mileage allowance payments

927. This section sets out the basic availability of the exemption for approved mileage allowance payments. The section derives from section 197AD of ICTA.

928. Subsection (1) has a reordered wording compared with the source legislation. When terms or labels first appear in this and subsequent subsections signposts to where they are defined accompany them.

929. Subsection (2) explains what are mileage allowance payments, in the process excluding passenger payments from them.

930. Subsection (3) explains what are approved mileage allowance payments.

931. Subsection (4) gives details of two circumstances in which the exemption does not apply.

Section 230: The approved amount for mileage allowance payments

932. This section gives details of the approved amount for mileage allowance payments. The several ideas contained in paragraph 4(2) of Schedule 12AA to ICTA now appear in separate subsections. The section derives from paragraph 4 of Schedule 12AA.

933. Subsection (1) gives a formula to calculate the approved amount for mileage allowance payments for a given type of vehicle.

934. In subsection (2) the mileage rate information has been converted to tabular form.

935. Subsection (3) qualifies what is meant by the expression “the first 10,000 miles” in subsection (2), dealing particularly with the possibility that the same person might undertake business travel in respect of two or more associated employments.

936. Subsection (4) gives details of when one employment is associated with another.

937. In subsection (5) the reference to the definition of “control” is now direct, rather than diverting the user to section 168(12) of ICTA, only to find that that in turn refers to section 840 of ICTA.

938. Subsection (6) provides the Treasury with powers to make regulations to alter the rates or rate bands in subsection (2).

Section 231: Mileage allowance relief

939. This section explains what mileage allowance relief is and how the employee may be entitled to it. The section derives from section 197AF of ICTA.

940. Subsection (1) describes the circumstances in which entitlement to mileage allowance relief can arise.

941. Subsection (2) states how to calculate the amount of mileage allowance relief to which the employee is entitled.

942. Subsection (3) gives details of two circumstances in which mileage allowance relief is not available.

Section 232: Giving effect to mileage allowance relief

943. This section deals with the mechanics of giving effect to mileage allowance relief. The main difference between it and the source legislation is the absence of any reference to the Cases of Schedule E. The consequences of this are most evident in subsections (2) and (3). The section derives from section 197AG of ICTA.

944. Subsection (1) relates the deduction to a tax year.

945. Subsection (2) corresponds with the references to Cases I and II of Schedule E in section 197AG(2).

946. Subsection (3) corresponds with the references to Case III of Schedule E in section 197AG(3).

947. Subsection (4) contains some assumptions supplementary to the operation of subsection (3).

948. Subsection (5) gives an order of precedence as between deductions available under subsections (2) and (3).

949. Subsection (6) prevents a double deduction.

950. Subsection (7) defines two terms used in this section by reference to provisions in another Part of this Act.

Section 233: Passenger payments

951. This section sets out the basic availability of the exemption for passenger payments. The section derives from section 197AE of ICTA.

952. Subsection (1) gives details of the circumstances in which the exemption for passenger payments is available.

953. Subsection (2) qualifies part of the provisions in subsection (1).

954. Subsection (3) explains what are passenger payments.

955. Subsection (4) explains what are approved passenger payments.

956. Subsection (5) supplies additional information in relation to subsection (2).

Section 234: The approved amount for passenger payments

957. This section gives details of the approved amount for passenger payments. The section derives from paragraph 5 of Schedule 12AA to ICTA.

958. Subsection (1) gives a formula to calculate the approved amount for passenger payments.

959. Subsection (2) explains how the calculation is affected if there are times in the tax year when two or more passengers for whom the employee is entitled to passenger payments are carried concurrently.

960. Subsection (3) provides the Treasury with powers to make regulations to alter the rate in subsection (1).

Section 235: Vehicles to which this Chapter applies

961. This section defines the vehicles to which this Chapter applies. The section derives from paragraph 3 of Schedule 12AA to ICTA.

962. Subsection (1) simply names the types of vehicle within the Chapter.

963. Subsections (4) and (5) contain definitions of the meanings of “motor cycle” and “cycle” that refer to the Road Traffic Act 1988. When this Act was published as a draft Bill for consultation it included an expanded version of this section in which those definitions were reproduced in full. If either of the Road Traffic Act 1988 definitions were to change then, assuming the policy is to keep the definitions aligned, an amendment to the rewritten legislation would be required to maintain that alignment. That would have to be done by way of primary legislation, for which it might be difficult to find parliamentary time. That is an undesirable side effect of the expanded definitions. The Act therefore reverts to definitions that refer to the Road Traffic Act 1988.

964. As at February 2003, the definition of “motor cycle” in section 185(1) of the Road Traffic Act 1988 is as follows:

“motor cycle” means a mechanically propelled vehicle, not being an invalid carriage, with less than four wheels and the weight of which unladen does not exceed 410 kilograms;

965. and the definition of “cycle” in section 192 of that Act is as follows:

“cycle” means a bicycle, a tricycle or a cycle having four or more wheels, not being in any case a motor vehicle.

966. Subsection (6) contains some additional definitions of terms used in subsection (3).

Section 236: Interpretation of this Chapter

967. This section contains additional information needed to interpret the provisions in this Chapter. The presentation of this material varies slightly from the source legislation to make it easier to use. The section derives from parts of paragraph 1 and paragraphs 2 and 6 of Schedule 12AA to ICTA.

968. Subsection (1) gives signposts to three definitions used in this Chapter.

969. Subsection (2) defines what is a “company vehicle” by reference to other provisions in this Act.

970. Subsection (3) gives signposts to the provisions that define what is meant by when cars and vans are made available for private use and when they are made available by reason of the employment.

Chapter 3: Exemptions: other transport, travel and subsistence

Section 237: Parking provision and expenses

971. This section derives from the provisions in sections 197A and 155(1A) of ICTA, which provide an exemption from tax in respect of the provision of car parking, and the equivalent provisions for motor cycle parking and facilities for parking bicycles in section 49(2) of FA 1999. It only applies to parking places at the place of work. In this section the defined expression “workplace” has been used instead of “place of work”. See Note 29 in Annex 2.

972. There are definitions of “motor cycle” and “cycle” in section 49(3) of FA 1999. But there is no definition of “car” in sections 155(1A) or 197A of ICTA. As the subject of the exemption is a parking space, definitions of what might be put in it did not appear to add anything, so they have not been reproduced here.

Section 238: Modest private use of heavy goods vehicles

973. This section derives from section 159AC of ICTA which prevents a benefit being chargeable where there is modest private use of a heavy goods vehicle. The exemption here goes wider and provides for no liability to income tax however that liability may arise. See Change 41 in Annex 1.

974. The exemptions in section 159AC(2)(b), (3)(a) and (3)(c) of ICTA, dealing with expenses in connection with the vehicle, are dealt with in section 239.

Section 239: Payments and benefits connected with taxable cars and vans and exempt heavy goods vehicles

975. When an employee is chargeable to tax under the provisions in Chapter 6 of Part 3 in respect of a car or van that charge is intended to cover all the expenses in connection with the vehicle, other than the provision of a driver and, in relation to a car, of fuel. Subsections (1), (2) and (4) of this section provide various exemptions from tax. They derive from sections 157(3) and 159AA(3) of ICTA.Subsection (3) preserves the charge for car fuel.

976. If a heavy goods vehicle, which is not used wholly or mainly for private use, is exempted from the Chapter 6 of Part 3 charge by section 238 it is also exempt in respect of expenses connected with it. This rule derives from section 159AC(3) of ICTA.

977. As exemptions for all types of vehicle are expressed in the same terms in ICTA, they have been brought together in this section as a single exemption. Furthermore, the exemptions have been widened so that they now apply however the liability may arise. See Change 42 in Annex 1. The use of “taxable” car or van, and “exempt” heavy goods vehicle are labels to assist in identifying the basis on which the exemption is due.

978. In the source legislation, the exemption for the discharge of liability and certain expense payments in connection with an exempt heavy goods vehicle only applies in a case where there would otherwise have been a charge to tax under Chapter II of Part V of ICTA – applicable only to employees earning £8,500 or more and directors. In subsection (8), the exemption has been extended to employees in “excluded employment”. See Change 43 in Annex 1.

Section 240: Incidental overnight expenses and benefits

979. This section sets out the exemption for incidental overnight expenses. In so far as it relates to earnings and as expenses it derives from section 200A of ICTA. The exemption from a charge to tax under the benefits code derives from section  155(1B) of ICTA.

980. In the source legislation, sums paid by way of incidental overnight expenses are not eligible for the exemption in if the employee is already allowed a deduction under one of the provisions listed in section 200A(1)(b) of ICTA. That list includes all the provisions under which a deduction may be available. However, the approach in ICTA of listing all the references is long-winded and not necessarily easy to follow. It is simpler to say in subsections (1)(c) and (2)(b) “would not be deductible under Part 5”. This substitution of a general reference is analysed in Change 44 in Annex 1.

981. In subsection (1)(b) a new label of “the overnight stay conditions” has been used to describe the conditions which have to be satisfied in identifying a “qualifying period”. Those conditions are explained in subsection (4).

982. Subsection (2) exempts the charge on benefits under Chapter 10 of Part 3 where relief for the cost of the benefit could not be obtained under section 365, if the employee had paid for it. Subsection (2) derives from section 155(1B) of ICTA.

983. In setting out the condition about deductibility of travelling costs, section 200A(3)(b)(i) of ICTA contains a list of deduction provisions which are regarded as satisfying the test. In line with the simplification above, subsection (5) replaces this list and instead refers to expenses “deductible under Part 5 (otherwise than under any of the excepted foreign travel provisions)”. The “excepted foreign travel provisions” are listed in subsection (7).

Section 241: Incidental overnight expenses and benefits: overall exemption limit

984. The exemption for incidental overnight expenses in section 240 is a limited exemption. This section sets out the limit on the exemption and how it is applied and mainly derives from section 200A(2), (4) and (5) of ICTA. The cap on the exemption applies to the sum of the expenses and benefits exempted under section 240 and the amount exempted for non-cash vouchers and credit-tokens under section 268. The label “the exemption provisions total” in subsection (2) is used to refer to the aggregate total eligible for exemption under both of these sections.

985. Subsection (3) sets out “the permitted amount” for each qualifying period. The “permitted amount” is a new label for the amount described as the “authorised maximum” in section 200A(4) of ICTA.

Section 242: Works transport services

986. This section rewrites most of section 197AA of ICTA as extended by section 60 of FA 2001. That provision excludes from the charge to tax under section 154 the benefit arising from the provision of a works bus or minibus service for employees. This section goes wider and provides for no liability to income tax. See Change 45 in Annex 1.

987. The definitions of “qualifying journey” and “workplace” in section 197AA(3) and (7) have been taken to a new interpretative section, section 249, which applies to the whole Chapter. The definition of “qualifying journey” reflects the amendment to section 197AB of ICTA (support for public transport bus services) made by section 33 of FA 2002. It will enable bus and minibus journeys which start or end at pick-up points to qualify.

988. The only part of section 197AA of ICTA that has not been rewritten in this section is subsection (6). This deals with the exemption from the charge to tax under section 141 of ICTA (non-cash vouchers) where the employee is given a non-cash voucher to evidence entitlement to use the works transport service. That exemption is covered in section 266.

Section 243: Support for public bus services

989. This section derives from section 197AB of ICTA. That section excludes from the charge under section 154 the benefit arising from any financial or other support provided by one or more employers for a public bus service that their employees use for journeys to and from the workplace, or between workplaces. The section takes into account the amendments made by section 33 of FA 2002. Certain definitions are now in section 249. In providing for no liability to income tax the exemption in ICTA has been widened in the same way as in section 242. See Change 46 in Annex 1.

Section 244: Cycles and cyclist’s safety equipment

990. This section derives from section 197AC of ICTA. This prevents an employee being chargeable to income tax under section 154 in respect of the provision of a cycle or associated safety equipment. The part of section 197AC dealing with the provision of a voucher entitling the employee to use a cycle or safety equipment is covered in section 266.

991. The exception only applies where the employer provides the cycle or safety equipment for the employee’s use rather than transferring it to him. If the cycle or equipment is given to the employee to keep, the benefit arising is still chargeable to tax in the normal way.

992. The definition of “qualifying journey” in section 197AB(4) of ICTA has been taken to a new interpretative section, section 249, and in doing so has been extended by adopting the amendment to section 197AB made by section 33 of FA 2002.

993. Section 197AC(6) of ICTA includes an interpretation of “employment”. This has not been rewritten because the extension of the term to include “offices” is dealt with in section 5.

Section 245: Travelling and subsistence during public transport strikes

994. This section derives from ESC A58. It exempts payments and benefits in respect of travelling and subsistence when there is a disruption in public transport. Legislating the concession is a minor change to the law. See Change 47 in Annex 1.

995. In the normal way when the employer pays the cost of, or provides transport for, “ordinary commuting” it would in most cases be chargeable to tax and no deduction would be allowed. Nor would deductions be allowed for accommodation and subsistence paid for or provided near to the permanent workplace. This section provides an exemption for payments and benefits provided to employees to ensure they are able to get to work when there is a public transport strike.

996. If the employee is working at a temporary workplace, or on a training course, the provision of transport, accommodation and subsistence is not exempt, but a deduction is allowed under Part 5.

Section 246: Transport between work and home for disabled employees: general

997. This and the following section derive from ESC A59 and some practice as published in the Inland Revenue guidance manuals. Legislating the concession is a minor change to the law. See Change 48 in Annex 1.

998. The section provides a complete exemption from income tax where an employer provides help with home to work commuting for a disabled employee, except where a car is provided. No special mention of travelling to training is necessary because such travelling (except where it is in substance “ordinary commuting” eg when the training is held at the normal workplace) is exempt for everyone. Where that example involves a disabled employee this section provides an exemption.

Section 247: Provision of cars for disabled employees

999. This section also derives from ESC A59 and established Inland Revenue practice and concerns cases where a car is provided for a disabled employee. Legislating the concession and practice is a minor change to the law. See Change 48 in Annex 1.

Section 248: Transport home: late night working and failure of car-sharing arrangements

1000. This section derives from ESC A66. It grants an exemption from income tax in the cases of exceptional late night working and the failure of car-sharing arrangements. Legislating the concession is a minor change to the law. See Change 49 in Annex 1.

1001. The concession is limited to 60 occasions overall in the tax year. For each occasion after the sixtieth there is liability in the normal way.

1002. The journeys concerned are from work to home only. The term “ordinary commuting” cannot be used as this would include journeys from home to work.

1003. The conditions for the exemption require judgements about when it is “not…reasonable to expect” an employee to use public transport – subsection (2)(c)(ii), and what are “unforeseen and exceptional circumstances” in subsection (3)(b). It is not possible to define these questions of judgement further.

Section 249: Interpretation of this Chapter

1004. This section brings together definitions which apply to several provisions in this Chapter. The definition of “qualifying journey” has been extended by the addition of the words “the whole or part of” as made by section 33 of FA 2002 in relation to section 197AB of ICTA (support for public transport bus services). Adopting this extended definition in sections 242 and 244 is a minor change to the law. See Change 50 in Annex 1.

Chapter 4: Exemptions: education and training

Overview

1005. This Chapter contains exemptions from income tax on the provision of education and training for an employee by employers and third parties. It derives from sections 200B to 200D of ICTA (work-related training provided by employers etc), and from sections 200E to 200J of ICTA (education and training funded by employers etc).

1006. The sections first describe the provision and costs to which they apply. They then define the type of training or education with which they are concerned. Finally, they set out circumstances in which exemption from tax does not apply.

Section 250: Exemption of work-related training provision

1007. This section provides there is no liability to income tax on the provision of work-related training for an employee by the employer or by a person other than the employer.

1008. It derives from sections 200B (expenditure by the employer) and 200D (expenditure by a third party) of ICTA.

1009. Although it is possible for an employee to be exempt from tax under both section 250 and section 311 (retraining courses), it is not necessary (as in section 200C(4) of ICTA) to exclude provision exempted elsewhere, as exemption can be given under either. See Note 30 in Annex 2.

1010. Subsection (1) sets out the exemption. It covers both the provision and the payment or reimbursement of the cost of provision of the training (and any benefit incidental to the training) plus specified related costs.

1011. To accord with Inland Revenue practice, the exemption is expressed to cover training and training costs, whether provided or incurred by the employer or by a third party. See Change 52 in Annex 1.

1012. The exemption is so expressed that no charge arises under Part 2, whether as general earnings or specific employment income, on the provision and costs of work-related training. This reflects Inland Revenue practice not to apply any employment income charge which might arguably apply (say, a specific employment income charge, such as Chapter 3 of Part 6 where the training relates to a change of duties). See Change 51 in Annex 1.

1013. Subsection (2) specifies the ancillary costs within subsection (1)(b)(ii) to which the exemption applies. See Change 53 in Annex 1.

Section 251: Meaning of “work-related training”

1014. This section defines “work-related training” for the purposes of the exemption. It derives from section 200B of ICTA.

1015. The definition covers both the objectives of the training and the employment (or related employment) to which the benefit of that training must be relevant.

Section 252: Exception for non-deductible travel expenses

1016. This section deals with travel and subsistence to which the exemption does not apply. It derives from section 200C of ICTA.

1017. Subsection (1) sets out the conditions to be satisfied if travel and subsistence are not to be excepted from the exemption. Travel must meet condition A or B; subsistence must meet condition B.

1018. The section dispenses with a requirement that the expenses are incurred wholly, exclusively and necessarily in undertaking the training. Instead, as a result of cross-reference to other provisions in this Part and in Part 5, it simply requires amounts to be necessarily expended on travelling or subsistence. This accords with Inland Revenue practice and aligns the rules relating to travel and subsistence expenses in this section with those in sections 310 and 311 in Chapter 10 of this Part (exemptions: termination of employment). See Change 53 in Annex 1.

1019. Subsections (2) and (3) set out conditions A and B respectively.

1020. Travel and subsistence expenses meeting condition B include expenses that, on the assumptions in subsection (4), would be deductible under any provision of Part 5. Under ICTA, expenses within the exemption are restricted to expenses deductible only under selected sections of those rewritten in that Part. See Change 54 in Annex 1.

1021. This section is listed in section 332 (meaning of “the deductibility provisions”). Various provisions in Part 5 then ensure that certain rules in Part 5 do not adversely restrict expenses, deductible under that Part, for the purposes of condition B.

1022. Subsection (4) sets out the assumptions to be made for the purposes of subsections (2) and (3).

1023. Subsection (5) provides definitions for the purposes of the section.

Section 253: Exception where provision for excluded purposes

1024. This section deals with provision to which the exemption does not apply. It derives from section 200C of ICTA.

1025. Subsection (1) disapplies the exemption to provision for excluded purposes.

1026. Relief under section 32 Finance Act 1991 (vocational training) was repealed by Finance Act 1999, with effect from 1 September 2000 (SI 2000 No 2004, Finance Act 1999, section 59(3)(b), (Appointed Day) Order). As the exclusion from the exemption of amounts eligible for vocational training relief is obsolete, this Act does not rewrite section 200C(5) of ICTA.

1027. Subsections (2) to (4) list and define the excluded purposes.

Section 254: Exception where unrelated assets are provided

1028. This section excepts provision of assets from the exemption, where the assets are not training-related. It derives from section 200C of ICTA.

1029. Subsections (2) and (3) define “training-related asset” and “training materials”.

1030. The definition of “training materials” consists of an illustrative, rather than exhaustive, list to cater for future development in the means of delivering training without having to amend the list. See Note 31 in Annex 2.

Section 255: Exemption for contributions to individual learning account training

1031. This section provides there is no liability to income tax, from a current or former employment, on the provision of, and payment or reimbursement of the costs of, individual learning account training given by a person other than the trainee’s employer (or former employer).

1032. It derives from sections 200E (education and training funded by employers) and 200J (education and training funded by third parties) of ICTA.

1033. Although an employee may be exempt from tax under section 255 and either or both of sections 250 (work-related training) and 311 (retraining courses), provision exempted elsewhere need not be excluded (as in section 200H of ICTA), because exemption can be given under any of these. This Act does not therefore rewrite section 200H. See Note 30 in Annex 2.

1034. Subsection (1) sets out the exemption, which covers the provision of training by a training provider, funding of that training, incidental benefits of training and specified other costs paid or reimbursed.

1035. To accord with Inland Revenue practice, the exemption is expressed to cover the provision, funding and benefit of individual learning account training, whether funded or provided by the employer (or former employer) or a third party. See Change 52 in Annex 1.

1036. The exemption is so expressed that no charge arises under Part 2, whether as general earnings or specific employment income, on the funding and provision of individual learning account training. As with work-related training (section 250), it is Inland Revenue practice not to apply any employment income charge which might arguably apply. See Change 55 in Annex 1.

1037. Subsection (2) defines the trainees eligible for the exemption as account holders under the Learning and Skills Act 2000 and parties to arrangements under the Education and Training (Scotland) Act 2000.

1038. Subsection (3) specifies the ancillary costs within subsection (1)(d) to which the exemption applies. See Change 53 in Annex 1.

Section 256: Meaning of “individual learning account training”

1039. This section defines “individual learning account training” for the purposes of the exemption by reference to the Learning and Skills Act 2000 and the Education and Training (Scotland) Act 2000.

1040. It derives from section 200E of ICTA.

Section 257: Exception for non-deductible travel expenses

1041. This section deals with travel and subsistence to which the exemption does not apply. It derives from section 200F of ICTA.

1042. Subsection (1) sets out the conditions to be satisfied if travel and subsistence are not to be excepted from the exemption. Travel must meet condition A or B; subsistence must meet condition B.

1043. The section dispenses with a requirement that the expenses are incurred wholly, exclusively and necessarily in undertaking the training. Instead, as a result of cross-reference to other provisions in this Part and in Part 5, it simply requires amounts to be necessarily expended on travelling or subsistence. This accords with Inland Revenue practice and aligns the rules relating to travel and subsistence expenses in this section with those in sections 310 and 311 in Chapter 10 of this Part (exemptions: termination of employment). See Change 53 in Annex 1.

1044. Subsections (2) and (3) set out conditions A and B respectively.

1045. Travel and subsistence expenses meeting condition B include expenses that, on the assumptions in subsection (4), would be deductible under any provision of Part 5. Under ICTA, expenses within the exemption are restricted to expenses deductible only under selected sections of those rewritten in that Part. See Change 54 in Annex 1.

1046. This section is listed in section 332 (meaning of “the deductibility provisions”). Various provisions in Part 5 then ensure that certain rules in Part 5 do not adversely restrict expenses, deductible under that Part, for the purposes of condition B.

1047. Subsection (4) sets out the assumptions to be made for the purposes of subsections (2) and (3).

1048. Subsection (5) provides definitions for the purposes of the section.

Section 258: Exception where provision for excluded purposes

1049. This section deals with provision to which the exemption does not apply. It derives from section 200F of ICTA.

1050. Subsection (1) disapplies the exemption to provision for excluded purposes.

1051. Subsections (2) and (3) list and define the excluded purposes.

Section 259: Exception where unrelated assets are provided

1052. This section excepts provision of assets that are not training-related from the exemption. It derives from section 200F of ICTA.

1053. Subsections (2) and (3) define “training-related asset” and “training materials” similarly to section 254(2) and (3).

1054. The definition of “training materials” again consists of an illustrative, rather than exhaustive, list to cater for future development in means of delivering training without having to amend the list. See Note 31 in Annex 2.

Section 260: Exception where training not generally available to staff

1055. This section sets out the requirement that individual learning account training be generally available to an employer’s staff or former staff. It derives from section 200G of ICTA.

1056. Subsection (1) limits the exemption to funding and other costs incurred under “existing arrangements” which cover the making of contributions to such funding and other costs of individual learning account training for employees generally.

1057. The section extends contributions made to “existing arrangements” to contributions made by a third party as well as an employer (or former employer).

1058. Subsection (2) defines “existing arrangements” so as to link the making of contributions to arrangements in place at the time the contributions are made, whether by the employer (or former employer) or by a third party. See Note 32 in Annex 2.

1059. Subsections (3) to (5) authorise the Treasury to make regulations to determine the employer of Crown servants for the purposes of this section.

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).

Chapter 6: Exemptions: Non-cash vouchers and credit-tokens

Overview

1084. This Chapter provides exemptions which apply to non-cash vouchers and credit-tokens. Anything provided by way of a non-cash voucher or credit-token which is not in the exemptions provided by this Chapter remains chargeable, even if it would be exempt where provided direct. Bringing these exemptions together is a change in approach.

1085. The derivations of the exemptions in this Chapter are those given for the exemptions applying to equivalent direct provision.

1086. The different wording used in each section and subsection in this Chapter reflects the different ways in which vouchers and credit-tokens may be used and the circumstances in which the exemption will apply.

Section 266: Exemption of non-cash vouchers for exempt benefits

1087. Subsection (1) derives from sections 141(6A), and (6B) and 197A of ICTA, section 49(1) of FA 1999, and ESCs A59 and A66. All these exemptions apply to non-cash vouchers to the extent that they are used to obtain the exempt item. The inclusion of the exemptions provided by the ESCs is a minor change to the law. See Changes 48 and 49 in Annex 1.

1088. Subsection (2) derives from sections 197AA, 197AB(5) and 197AC(5) of ICTA. In each of these provisions the voucher is not handed over, but is used as evidence of entitlement.

1089. Subsection (3) derives from sections 197(2) and 197G(1) of ICTA and ESCs A58, A70B and A74. For each of these the voucher is used only for the exempt purpose. The inclusion of the exemptions provided by the ESCs is a minor change to the law. See Changes 47, 56 and 58 in Annex 1.

1090. Subsection (4) provides the voucher exemption in respect of something exempted by use of the regulations in respect of minor benefits.

1091. Subsection (5) ensures that exemptions under this section apply even if the employee is in lower-paid employment. Unlike other benefits charges, chargeability for non-cash vouchers and credit-tokens applies to all employees.

Section 267: Exemption of credit-tokens used for exempt benefits

1092. This section derives from section 142(3A) and (3B) of ICTA, section 49(1) and (2) of FA 1999, and ESCs A58, A59, A66 and A74. The inclusion of the exemptions provided by the ESCs is a minor change to the law. See Changes 47, 48 and 49 in Annex 1.

Section 268: Exemption of vouchers and tokens for incidental overnight expenses

1093. This section exempts from charge by virtue of Chapter 4 of Part 3 both non-cash vouchers and credit-tokens used to meet “incidental overnight expenses”. It derives mainly from sections 141(6C) and 142(3C) of ICTA.

1094. Subsection (1) sets out the terms of the exemption where the voucher or token is used to obtain goods, services or money.

1095. Subsections (2) to (5) set out the conditions to be satisfied.

1096. Subsection (6) provides definitions of terms used in the section by cross-reference to the exemption in sections 240 (incidental overnight expenses and benefits) and 241 (incidental overnight expenses and benefits: overall exemption limit) for equivalent direct provision.

Section 269: Exemption where benefits or money obtained in connection with taxable car or van or exempt heavy goods vehicle

1097. This section exempts from charge by virtue of Chapter 4 of Part 3 both non-cash vouchers and credit-tokens used for expenditure on taxable cars or vans, or on exempt heavy goods vehicles.

1098. Subsection (1) sets out the exemption. It derives from sections 157(3)(b), 159AA(3)(b) and 159AC(3)(b) of ICTA.

1099. Subsection (2) qualifies the exemption by reference to the provisions of section 149 (benefit of car fuel treated as earnings) where what is obtained is fuel for a car.

1100. Subsections (3) and (4) provide definitions of terms used in the section and make clear the tax year for which the car, van or heavy goods vehicle is taxable or exempt. See Note 33 in Annex 2.

1101. The definition of how a heavy goods vehicle is “exempt” for the purposes of this section ensures that the exemption applies where the employee is in lower-paid employment. This is a minor change to the law. See Change 43 in Annex 1.

Section 270: Exemption for small gifts of vouchers and tokens from third parties

1102. This section provides there is no liability to tax by virtue of Chapter 4 of Part 3, in respect of small gifts from third parties which take the form of a non-cash voucher or credit-token, where conditions are satisfied. It derives from ESC A70A and is a minor change to the law. See Change 59 in Annex 1.

1103. Subsection (1) sets out the terms of the exemption where the conditions are satisfied.

1104. Subsections (2) to (4) set out the conditions, in part by cross-reference to the provisions of section 324 (small gifts from third parties).

Chapter 7: Exemptions: Removal benefits and expenses

Section 271: Limited exemption of removal benefits and expenses: general

1105. This section gives details of the limited exemption for removal expenses. It sets out the general proposition that no liability to income tax arises in respect of any removal benefits or reimbursed removal expenses listed in this Chapter, up to the limit set out in section 287 of this Act. The section derives from parts of paragraph 1 of Schedule 11A to ICTA.

1106. Subsection (1) sets out the basic proposition that the exemption is available. The opening words of paragraph 1(1) of Schedule 11A, “where by reason of a person’s employment” have not been rewritten. Those words are not necessary because there is no tax charge in respect of benefits or reimbursed expenses unless they arise “by reason of a person’s employment”. The exemptions in this Chapter only apply where there is the possibility of such a charge.

1107. Subsection (2) reproduces the effect of the exclusion, by virtue of paragraph 1(1) of Schedule 11A, of certain income from the exemption because it is within Case III of Schedule E. Paragraph 2 of Schedule 11A ensures that the exemption from charge under Cases I and II of Schedule E does not result in the benefits or expenses being chargeable under Case III of Schedule E, as a result of the operation of section 131(2) of ICTA. In this Act, by virtue of the provisions that define “taxable earnings” for the purposes of Chapter 4 of Part 2, it is no longer possible for the same earnings to fall within one of those provisions and also within “taxable earnings” as defined for the purposes of Chapter 5 of Part 2. As a consequence there is no need to rewrite paragraph 2.

1108. Subsection (3) gives a signpost to the section containing the limit on the exemption.

Section 272: Removal benefits and expenses to which section 271 applies

1109. This section identifies the types of benefits and expenses that qualify for the exemption. It derives from paragraphs 3, 4, 7 and 16 of Schedule 11A to ICTA.

1110. Subsection (1) lists all the benefits potentially within the scope of the limited exemption set out in section 271. It gives signposts to the sections that contain the detailed descriptions of those benefits and states the overriding conditions that must be satisfied.

1111. Subsection (2) ensures that if a voucher or credit-token is used to obtain goods or services or money to pay for them such benefits are within the scope of the exemption. See Change 60 in Annex 1.

1112. Subsection (3) lists the types of expenses that qualify for the exemption. It relies largely on the list in subsection (1) and adds, in paragraph (c), one expense for which there is no corresponding benefit.

1113. One of the conditions for the exemption to be available is that the benefits must be provided or that the reimbursed expenses must be incurred on or before a particular day. In the source legislation that day is called the “relevant day” and is defined in paragraph 6 of Schedule 11A to ICTA. That label has been changed to “the limitation day”, which is defined in section 274 of this Act.

Section 273: Conditions applicable to change of residence

1114. This section gives more details about the three conditions referred to in section 272(1)(a). The section derives from paragraph 5 of Schedule 11A to ICTA. The words in brackets in paragraphs 5(1)(b) and (c) of Schedule 11A have not been reproduced, as they do not add anything.

1115. Subsection (1) introduces the three subsections that give details of the conditions.

1116. Subsection (2) identifies the three possible events that can trigger the exemption.

1117. Subsection (3) is concerned with the reason for the change of residence.

1118. Subsection (4) contains a restriction on the application of the exemption if a change of residence would be unnecessary.

Section 274: Meaning of “the limitation day”

1119. This section defines “the limitation day”, which rewrites the idea labelled “the relevant day” in ICTA, using a reference to a new concept, “the employment change”. The section derives from paragraph 6 of Schedule 11A to ICTA.

1120. Subsection (1) defines “the limitation day”, subject to subsection (2).

1121. Subsection (2) gives scope for the Inland Revenue to extend the period before the limitation day, if it seems reasonable to do so. The reference to “Inland Revenue” reflects the practice whereby the Board of Inland Revenue delegates the initial decision on this matter to the Officer in Charge of the local office concerned. See Change 158 in Annex 1.

Section  275: Meaning of “the employment change”

1122. This section is pure drafting, which defines the new label “the employment change”.

1123. A number of the later paragraphs in Schedule 11A to ICTA refer to the circumstances set out in paragraph 5(1). The relevant change in those circumstances, now rewritten in section 273(2), has been given the label “the employment change” to make the rewriting of those references more straightforward.

Section 276: Meaning of “residence”, “former residence” and “new residence” etc.

1124. This section defines three labels related to the employee’s various possible residences, including a definition of “residence” itself. The section derives from section 191B(16) of ICTA and paragraph 25 of Schedule 11A to ICTA.

1125. In subsection (1) there is no longer a reference to an employee’s “sole or main residence”. Instead the residence in question is defined more closely as being the employee’s main residence.

1126. Subsection (2) defines “former residence” and “new residence”.

1127. Subsection (3) defines what is meant by “an interest in a residence”.

Section 277: Acquisition benefits and expenses

1128. This section combines two similar provisions and so cuts out duplication. It sets out the benefits and expenses associated with the acquisition of a residence that come within this Chapter. The same approach (of combining the rules for benefits and expenses) has been adopted in a number of the following sections. The section derives from paragraphs 9 (expenses) and 18 (benefits) of Schedule 11A to ICTA.

1129. Subsection (1) makes it clear that the interest in the new residence need not be held exclusively or indeed at all by the employee, provided it is held (either exclusively or jointly) by one or more members of the employee’s family or household.

1130. Subsection (2) identifies the types of benefit within the section.

1131. Subsection (3) identifies the types of expenses within the section, by building on the description of some of the benefits covered and adding those expenses where there is no equivalent benefit.

1132. Subsection (4) broadens the scope of who can raise a loan, other than or as well as the employee, in similar terms to those applying to an interest in the new residence covered in subsection (1).

1133. Subsection (5) defines terms used in subsection (3)(d).

Section 278: Abortive acquisition benefits and expenses

1134. This section brings together in one section the provisions relating to expenses and benefits connected with an abortive acquisition of a new residence. It describes the circumstances that could lead to it being applied and relates back to section 277 to identify the type of benefits or expenses covered. The section derives from paragraphs 10 (expenses) and 19 (benefits) of Schedule 11A to ICTA.

Section 279: Disposal benefits and expenses

1135. This section brings together in one section the provisions relating to expenses and benefits connected with the disposal of the employee’s former residence. The section derives from paragraphs 8 (expenses) and 17 (benefits) of Schedule 11A to ICTA.

1136. Subsection (1) describes the circumstances in which the section applies.

1137. Subsection (2) identifies the types of benefit within the section.

1138. Subsection (3) identifies the types of expenses within the section, by building on the description of some of the benefits covered and adding those expenses where there is no equivalent benefit.

1139. Subsection (4) broadens the scope of who can have an interest in the former residence, other than or as well as the employee, in similar terms to those applying to an interest in the new residence as covered in section 277(1), dealt with in paragraph 1129.

1140. Subsection (5) defines what is meant by “related loan” for the purposes of this section. This Act widens the scope of loans that qualify for exemption under this section. See Change 61 in Annex 1.

Section 280: Transporting belongings

1141. This section brings together in one section the provisions relating to expenses and benefits connected with the transportation of belongings. It derives from paragraphs 11 (expenses) and 20 (benefits) of Schedule 11A to ICTA.

1142. Subsection (1) identifies the types of benefit within the section.

1143. Subsection (2) identifies the types of expenses within the section, by reference to the description of the benefits covered.

1144. Subsection (3) defines “domestic belongings” and “transportation”.

Section 281: Travelling and subsistence

1145. This section brings together in one section the provisions relating to expenses and benefits connected with travelling and subsistence. It derives from paragraphs 12 (expenses), 21 (benefits) and 28 of Schedule 11A to ICTA.

1146. Subsection (1) identifies the types of benefit within the section. Subsection (1)(f) introduces a new label “education-linked living accommodation”. Subsection (1)(g) introduces a new label “the employee’s accommodation”. It also widens the scope of the exemption for travel to and from such accommodation. See Change 62 in Annex 1.

1147. Subsection (2) defines “education-linked living accommodation”.

1148. Subsection (3) defines “the employee’s accommodation”.

1149. Subsection (4) identifies the types of expenses within the section, by reference back to the description of the benefits covered.

1150. Subsection (5) identifies some exclusions from the exemptions provided by this section, by reference to circumstances described in subsequent sections.

1151. Subsection (6) defines “new duties”, “former area”, “new area”, “relevant child” and “subsistence”.

Section 282: Exclusion from section 281 of benefits and expenses where deduction allowed

1152. This section identifies benefits and expenses that are excluded from the exemptions provided for in this Chapter. It derives from paragraphs 12(4) and 21(7) and (8) of Schedule 11A to ICTA.

1153. Subsection (1) states the general proposition about exclusion of certain benefits or expenses by reference to an amount being deductible under other provisions.

1154. Subsection (2) identifies those provisions.

1155. Subsection (3) deals with the circumstance where a deduction might be allowed for only part of a benefit provided. In that case the other part of the benefit might still be exempt.

Section 283: Exclusion from section 281 of taxable car and van facilities

1156. This section provides that the exemption does not apply to car or van benefits. It derives from paragraphs 21(2) and (4) to (6) of Schedule 11A to ICTA.

1157. Subsection (1) provides that the exemption in section 281(1) does not apply to car or van benefits. The Act widens the scope of the exemption when compared with a strict interpretation of the source legislation. See Change 63 in Annex 1.

1158. Subsection (2) identifies the sections containing the definitions of the terms used in subsection (1).

Section 284: Bridging loan expenses

1159. This section deals with bridging loan expenses (interest) connected with an employee’s change of residence resulting from an employment change. It derives from paragraph 13 of Schedule 11A to ICTA.

1160. Subsection (1)(a) combines the first two conditions that the bridging loan must satisfy, which are in paragraph 13(1)(a) and (b) of Schedule 11A. Subsection (1)(b) and (c) list the other conditions.

1161. Subsection (2) gives a restricted definition of interest that falls within the section. Paragraphs 13(4) and (5) of Schedule 11A set out the purpose for which the loan must have been used. The Act combines those provisions without any change in effect. The same change as described in paragraph 1140 in relation to section 279 has been made here. See Change 61 in Annex 1.

1162. Subsection (3) places a further restriction on the amount of interest that can come within the section.

1163. The source legislation does not specify how to allocate the total loan interest between exempt and non-exempt parts of the loan where paragraph 13(3) and (4) of Schedule 11A both apply. Subsection (4) recognises that possibility by introducing the idea of “the appropriate fraction”. See Change 64 in Annex 1.

1164. Subsection (5) includes a method statement to explain how to arrive at the appropriate fraction. See Change 64 in Annex 1.

1165. Subsection (6) combines in one subsection the provisions from paragraph 13(7) of Schedule 11A that extend the meaning of interest payable by an employee and paragraph 13(8) of Schedule 11A that apply a parallel extension in meaning to references to a loan being raised by the employee.

Section 285: Replacement of domestic goods

1166. This section brings together in one section the provisions relating to expenses and benefits connected with replacing domestic goods. The heading in the source legislation, “duplicate expenses”, does not really describe what this provision is about. The new heading is more informative. The section derives from paragraphs 14 (expenses) and 22 (benefits) of Schedule 11A to ICTA.

1167. Subsection (1) describes the circumstances in which the section operates. Under paragraph 14(2) of Schedule 11A if an employee sells any of the domestic goods replaced by the new goods covered by paragraph 14(1) of Schedule 11A, the sale proceeds have to be deducted from the amount that qualifies under that paragraph. This subsection does not reproduce that requirement to deduct the sale proceeds of replaced domestic goods. See Change 65 in Annex 1.

1168. Subsection (2) broadens the scope of who can have an interest in the new and/or former residence(s), other than or as well as the employee, in similar terms to those applying to an interest in the new residence as covered in section 277(1), dealt with in paragraph 1129.

Section 286: Power to amend sections 279 to 285

1169. This section brings together the provisions dealing with the Treasury’s regulation-making powers. It derives from paragraphs 15 (expenses) and 23 (benefits) of Schedule 11A to ICTA.

1170. Subsection (1) provides powers that allow the Treasury to make regulations to extend sections 279 to 285 to bring within their scope benefits or expenses not otherwise covered.

1171. Subsections (2) and (3) allow the Treasury some latitude in what they may do and how they may do it.

Subsection (4) prevents the Treasury from making retrospective regulations under the powers in this section.

Section 287: Limit on exemption

1172. This section sets out the limit on the total amount of the exemption available under this Chapter. It derives from paragraph 24 of Schedule 11A to ICTA.

1173. Subsection (1) states the limit that applies to the amount of benefits and expenses that can be exempted.

1174. Subsection (2) includes a list of items that count towards the £8,000 limit. Subsection (2)(b) states that the benefit code earnings, which in this Act includes amounts related to the use of vouchers and/or credit-tokens, are to be counted towards the value of the exemption. See Change 60 in Annex 1.

1175. Subsection (3) explains what is meant in subsection (2) by “the section 62 earnings”.

1176. Subsection (4) explains what is meant in subsection (2) by “the benefits code earnings”. In combination with subsection (2)(b) it prevents any possible double counting of an amount. See Change 66 in Annex 1.

1177. The source provisions also go into great detail about how to quantify the amount of benefit relating to the provision of living accommodation in paragraph 24(4) to (8) of Schedule 11A. Subsection (5) amalgamates all that detail. It brings together the various permutations for the computation of amounts chargeable in such cases.

Section 288: Limited exemption of certain bridging loans connected with employment moves

1178. This section gives details of what kind of loan is covered. It contains a formula for working out the day by which the loan must be repaid if there is to be no charge to tax under what was section 160 of ICTA (rewritten in Chapter 7 of Part 3 of this Act, mainly in section 175). It also includes some interpretative provisions. The section derives from section 191B(1) to (6), (10) to (12) and parts of (8), (9) and (13) of ICTA.

1179. Subsection (1) describes the circumstances in which the exemption arises.

1180. Subsection (2) describes in what circumstances a loan is within the term “a removal benefit” as used in subsection (1).

1181. Subsection (3) describes how there can be “unused removal benefit exemption” as mentioned in subsection (1).

1182. Subsection (4) shows how to calculate the amount of “the exempted loan discharge period”, as mentioned in subsection (1).

1183. Subsection (5) broadens the scope of who can raise a loan that qualifies for the exemption. Similarly it broadens who can have an interest in the new and/or former residence(s), other than, or as well as, the employee. It does that in similar terms to those applying to an interest in the new residence as covered in section 277(1), dealt with in paragraph 1129.

1184. Subsection (6) provides for the tax payable to be decided on a provisional basis, should the whole circumstances surrounding the loan not be known at the time the need to make a decision arises.

Section 289: Relief for certain bridging loans not qualifying for exemption under section 288

1185. This section provides a measure of relief for those loans that do not qualify under the provisions of the section 288. It derives from section 191B(8) and (13) of ICTA.

1186. Subsection (1) describes the circumstances in which this section applies.

1187. An employee who has a bridging loan that would otherwise come within the provisions of the preceding section may not repay that loan until after the day determined by the formula set out in section 288(4). If so, the employee would not come within the exemption now set out in that section. In such a case the employee’s liability in respect of the beneficial loan under section 175 of this Act is worked out as if the loan had been made on the day determined by that formula. Subsection (2) rewrites the corresponding provision from the source legislation.

1188. Subsection (3) maintains the position in the source legislation whereby that extension only applies to those matters covered by what was section 160 of ICTA and not to the matters covered by what was section 161 of ICTA.

1189. Subsection (4) provides for the tax payable to be decided on a provisional basis, should the whole circumstances surrounding the loan not be known at the time the need to make a decision arises.

Chapter 8: Exemptions: Special kinds of employees

Section 290: Accommodation benefits of ministers of religion

1190. This section provides that there is no liability to tax in respect of benefits arising in connection with accommodation provided for a full-time minister (defined at subsection (5)) in premises owned by a charity or ecclesiastical corporation.

1191. It derives from section 332 of ICTA.

1192. Subsection (1) provides that no liability to tax arises in respect of the payment or reimbursement of a statutory amount or statutory deduction. Both these terms are defined at subsection (5).

1193. Subsection (2) provides that no liability to tax arises in respect of expenses paid or reimbursed in connection with the provision of the accommodation where the minister is in “excluded employment”. “Excluded employment” is defined in section 239(9).

1194. Subsection (3) excludes from the exemptions any parts of the property for which the minister is in receipt of rent.

1195. Subsection (4) defines the premises in respect of which benefits qualify for the exemption.

1196. Subsection (5) provides definitions for terms used in the section, including a definition of “charity” drawn from section 506(1) of ICTA. See Note 34 in Annex 2.

Section 291: Termination payments to MPs and others ceasing to hold office

1197. This section derives from section 190 of ICTA. It refers to Acts that give MPs, MEPs and certain other political office-holders an entitlement to termination payments. That entitlement, established prior to termination, makes the payments chargeable to tax as earnings. The payments are in fact compensation for loss of office. If it were not for the predetermined entitlement they would normally fall within section 148 of ICTA and tax would be chargeable on an amount above the £30,000 threshold.

1198. This section ensures that such payments are not treated as earnings and are instead taxed as termination payments under Chapter 3 of Part 6 (which derives from section 148 of ICTA), subject to the threshold set out in that Chapter.

1199. Section 190(3) of ICTA applies to “grants and payments if they are not pension payments”. The reference to pension payments is unnecessary because section 190 applies to “emoluments” and pension payments are not taxed as emoluments. The reference to pension payments has not been included in the rewritten section because they are not taxed as employment income.

1200. The reference to the Parliamentary Pensions Act 1984 has been omitted as it was repealed by the Ministerial and other Pensions and Salaries Act 1991 and would only apply where the loss of office was before 28 February 1991. It is now spent.

1201. The meaning of “a relevant office” is set out in section 4(6) of the Ministerial and Other Pensions and Salaries Act 1991. Broadly it covers all Government Ministers, Opposition Leaders and Whips, the Chairman and Deputy Chairmen of Ways and Means, and the Chairman and Deputy Chairman of Committees of the House of Lords.

Section 292: Overnight expenses allowances of MPs

1202. This section derives from part of section 200 of ICTA. It provides an exemption from income tax for certain allowances paid to Members of Parliament which without the exemption would be chargeable to tax as earnings.

1203. The allowances that qualify are those provided for by a resolution of the House of Commons covering the overnight expenses set out in the section, where an MP has to stay away from home overnight either in London or in the constituency in order to carry out Parliamentary duties.

1204. The material in sections 200 and 200ZA of ICTA has been rearranged. Overnight expense allowances to members of the House of Commons are dealt with in this section. Those paid to members of the Scottish Parliament, the National Assembly for Wales and the Northern Ireland Assembly are covered in section 293. Travel by members to European Union institutions or to the parliament of another member State is dealt with in section 294.

1205. Although the allowances are exempt from tax this section does not prohibit a deduction for an MP’s expenses in respect of which the allowances are paid. That prohibition is in section 198(4) of ICTA, which is rewritten as section 360.

Section 293: Overnight expenses of other elected representatives

1206. This section derives from the overnight expenses part of section 200ZA of ICTA in respect of elected representatives of the Scottish Parliament, the National Assembly for Wales and the Northern Ireland Assembly.

1207. This exemption has not been combined with the similar one for Members of the House of Commons because the detailed rules are different. It is clearer to keep them separate. Again, this section is supplemented by section 360.

Section 294: EU travel expenses of MPs and other representatives

1208. This section brings together the exemption for European Union travelling expenses paid to MPs and members of the Scottish Parliament, the National Assembly for Wales and the Northern Ireland Assembly. It derives from parts of sections 200 and 200ZA of ICTA.

1209. The definition of European Union travel expenses is the same in both section 200 and section 200ZA of ICTA. It incorporates the extension to EU candidate countries made by section 41 of FA 2002. Combining the relevant parts of the two sections cuts out duplication. Again this section is supplemented by section 360.

Section 295: Transport and subsistence for Government ministers etc.

1210. This section provides an exemption in respect of transport or subsistence provided for certain Government office-holders, mainly Ministers, and members of their families or households. It derives from section 200AA of ICTA. The exemption also covers payments and reimbursements of travel and subsistence expenses if they are made by or on behalf of the Crown.

1211. The exemption was extended in FA 1999 to apply to Ministers and similar office-holders serving in the Scottish Parliament, the National Assembly for Wales and the Northern Ireland Assembly.

1212. For the purposes of this exemption, the provision of transport includes the provision of a car, which would otherwise give rise to a charge to tax under the benefits code. The source legislation applies the exemption specifically to cars, but then goes on to define a car as “any mechanically propelled road vehicle” – a phrase which could include, for example, a van or a motorbike. This slight incongruity has been removed by applying the exemption to the provision of a “vehicle”, and defining “vehicle” in the same way as “car” is defined in the source legislation. It therefore applies to vans and motorbikes as well as cars.

Section 296: Armed forces’ leave travel facilities

1213. This section provides there is no liability to tax on armed forces’ leave travel facilities. It derives from section 197 of ICTA.

1214. Subsection (1) sets out the exemption. It covers the various travel warrants and allowances, including allowances for the use of private cars, made available to service personnel.

1215. The section substitutes “the armed forces of the Crown” for the wording, “the naval, military or air forces of the Crown”, in section 197 of ICTA. The two terms are construed as having the same meaning and include all United Kingdom service personnel, both members of a regular force and members of a reserve force. References to the “armed forces” now also include the women’s services, which was not the position in 1977 when the exemption was introduced. The same term is used in this section and in section 297 for the same body of taxpayers.

1216. Subsection (2) excludes the provision of a vehicle for leave travel. Such provision remains taxable as a benefit under Chapter 6 of Part 3 (taxable benefits: cars, vans and related benefits). “Travel facilities” are not otherwise defined or limited.

Section 297: Armed forces’ food, drink and mess allowances

1217. This section provides that no liability to income tax arises in respect of allowances paid to members of the armed forces, if those allowances are paid instead of food or drink, or as a contribution to the expenses of a mess. The section is the first of two that derive from parts of section 316 of ICTA.

1218. The legislation in section 316 derives from a number of different provisions originally enacted between 1946 and 1951. Those provisions were consolidated first as section 457 of ITA 1952 and then as section 366 of ICTA 1970 before becoming section 316. In the case of Lush (HM Inspector of Taxes) v Coles (1967) 44 TC 169, at 172G, Stamp J described them as containing “something of a hotchpot”.

1219. Section 316 has five subsections, which may be divided into three categories.

1220. The first category consists of subsection (3), which deals with food and mess allowances. Subsection (3) is dealt with in this section. The subsection makes provision for two different categories of allowances; and it has been found helpful to deal with the two categories separately.

1221. The second category consists of subsection (4), which deals with training expenses allowances. Subsection (4) is dealt with in section 298.

1222. The third category consists of subsections (1), (2) and (5). These subsections deal with re-enlistment bounties and gratuities under schemes set up in 1946 and 1950 for certain categories of military personnel who had seen active service, either during the Second World War or in the years immediately following it. So far as may now be discovered, these schemes all came to an end many years ago; and consultations between the Inland Revenue and the Ministry of Defence have led to agreement that these provisions should not be retained. These subsections are not rewritten in this Act on the grounds that they are obsolete.

Section 298: Reserve and auxiliary forces’ training allowances

1223. This section provides that no liability to income tax arises in respect of training allowances and bounties payable out of the public revenue to members of the reserve and auxiliary forces of the Crown. The section is the second of two deriving from provisions contained in section 316 of ICTA, and derives from subsection (4) of that section.

1224. This provision was litigated in Lush (HM Inspector of Taxes) v Coles (1967) 44 TC 169, where the taxpayer was an officer in the Civil Defence Corps who received a training bounty of £15 from local authority funds. The General Commissioners upheld his appeal against an assessment under Schedule E on the grounds that the bounty fell within what is now section 316(4). But the Inspector’s appeal to the High Court was successful, because Stamp J held that a sum paid out of local authority funds could not be described as being paid “out of the public revenue”.

Section 299: Crown employees’ foreign service allowances

1225. This section provides there is no liability to tax on allowances paid to Crown employees as compensation for the extra cost of having to live outside the United Kingdom when working abroad. It derives from section 319 of ICTA.

1226. An allowance is exempt only if a certificate as to its purpose has been given by the Treasury or by an appropriate Minister.

1227. Subsection (2) lists the persons who, in addition to the Treasury, may give such a certificate.

1228. That list derives from the Transfer of Functions (Foreign Service Allowance) Order, SI 1996 No 313 (as varied by the Transfer of Functions (Lord Advocate and Secretary of State) Order, SI 1999 No 678 with effect from 19 May 1999, and the Ministry of Agriculture, Fisheries and Food (Dissolution) Order 2002, SI 2002 No 794 with effect from 27 March 2002).

Section 300: Consuls

1229. This section provides that employment income from the office of a consul (defined in subsection (3)) in the United Kingdom in the service of a foreign state is not liable to income tax.

1230. It derives from section 321 of ICTA.

1231. Subsection (1) provides the exemption.

1232. Subsection (2) provides that the income is also disregarded in estimating income for any other income tax purpose.

1233. Subsection (3) defines “consul”.

Section 301: Official agents

1234. This section provides that employment income from an employment as an official agent (defined at subsection (5)) in the United Kingdom for a foreign state is not liable to tax if certain conditions are met.

1235. It derives from section 321 of ICTA.

1236. Subsection (1) provides that no liability arises on the employment income when two conditions are met.

1237. Subsection (2) gives the first of those conditions.

1238. Subsection (3) gives the second of those conditions.

1239. Subsection (4) provides that such income is disregarded in estimating the amount of income for any income tax purpose.

1240. Subsection (5) defines “official agent”.

1241. Subsection (6) provides a condition to the definition of “official agent” in subsection (5).

Section 302: Consular employees

1242. This section provides that employment income from an employment in the United Kingdom as a consular employee (defined at subsection (4)) of a foreign state is not liable to tax where the appropriate Order in Council has been made and certain conditions are met.

1243. It derives from section 322 of ICTA.

1244. Subsection (1) provides that no liability arises on the employment income when an Order in Council gives effect to a reciprocal arrangement (defined at subsection (4)) and one of two conditions is met.

1245. Subsection (2) gives the first condition.

1246. Subsection (3) gives the second condition. Following the enactment of the British Overseas Territories Act 2002, references to “British Dependent Territories citizen” in earlier enactments are to be read as “British overseas territories citizen”. This has been incorporated here.

1247. Subsection (4) defines “consular employee” and “reciprocal arrangement”.

1248. Subsection (5) allows an Order in Council to limit the operation of the section in such a way as is considered necessary or expedient.

1249. Subsection (6) allows the Order in Council to have effect from an earlier date than the date on which it is made and to contain transitional provisions.

1250. Subsection (7) provides that the statutory instrument containing the Order is subject to a negative resolution.

1251. Subsection (8) provides that this section operates without prejudice to section 301.

Section 303: Visiting forces and staff of designated allied headquarters

1252. This section confers income tax benefits upon visiting forces and NATO staff.

1253. The section derives from section 323 of ICTA, which confers two income tax benefits:

• earnings paid by the government of a designated country or by a designated allied headquarters are exempt from income tax; and

• an individual to whom the section applies is not treated as resident in the United Kingdom by reason solely of being a member of a visiting force or of being attached to, or an employee of, a designated allied headquarters.

1254. This section deals with the first income tax benefit. It is proposed to deal with the second benefit in a future rewrite Bill.

1255. The exemption from income tax applies for several different descriptions of individuals:

• members of a visiting force of a designated country;

• members of a civilian component of a visiting force of a designated country;

• members of the armed forces of a designated country attached to a designated allied headquarters;

• members of a civilian component of the armed forces of a designated country attached to a designated allied headquarters; and

• employees of a designated allied headquarters who come within a description agreed between the government and the other members of the NATO Council.

1256. Section 323 of ICTA is entitled “Visiting forces”. This section has a longer title, which is designed to be more informative.

1257. Two definitions needed for this section are contained in Part 1 of the Visiting Forces Act 1952. The definitions are those of a visiting force, in section 12(1) of that Act, and of a member of a civilian component of a visiting force, in section 10 of that Act. No attempt has been made to set out those definitions in this section – partly for reasons of length and partly because there is no wish to lose the explicit link between this section and the 1952 Act.

1258. Following the enactment of the British Overseas Territories Act 2002, references to “British Dependent Territories citizen” in earlier enactments are to be read as “British overseas territories citizen”. This change has been incorporated in subsection (4) .

1259. In this section, the cross-references to the Visiting Forces Act 1952 differ slightly from those in section 323 of ICTA. Subsection (5) contains a reference to “Part 1 of the Visiting Forces Act 1952” as opposed to the reference to “the Visiting Forces Act 1952” in section 323(4). The additional words “Part 1 of” were in section 367(3) of ICTA 1970 (the predecessor of section 323(4) of ICTA 1988). These words have been reinstated, because the two most important interpretative provisions, for present purposes, are in Part 1 of the 1952 Act and apply for the purposes of that Part. Those provisions are the definitions of a member of a civilian component of a visiting force and of a visiting force.

1260. Subsection (5) also corrects another minor drafting error in section 323(4). That subsection refers to subsections (1) and (2) of section 323, and it is then stated that “those subsections shall be construed as one with the Visiting Forces Act 1952”. However, the reference to a “civilian component” of a visiting force depends entirely upon subsection (4) itself; and no requirement is imposed to construe subsection (4) as one with the 1952 Act. It is thought that there cannot be any doubt that the provisions of section 10 of the Visiting Forces Act 1952 must be applicable; and the provision has been rewritten on this basis.

1261. Section 323 is one of a number of provisions that confer tax benefits to visiting forces and NATO staff. Other provisions are:

• section 11(1) of TCGA 1992 (for capital gains tax);

• section 155 of the Inheritance Tax Act 1984 (for inheritance tax); and

• section 74 of the Finance Act 1960 (for stamp duty).

Section 304: Experts seconded to European Commission

1262. This section provides there is no liability to tax on daily subsistence allowances paid by the European Commission to “detached national experts”.

1263. It derives from ESC A84. See Change 67 in Annex 1.

1264. Subsection (1) sets out the exemption for allowances paid to persons seconded under the “detached national experts scheme”.

1265. Detached national experts are people seconded to the Commission to advise and assist Commission officials for periods from three months to three years, under a scheme introduced on 26 July 1988.

1266. Subsection (2) defines “detached national experts scheme” and provides for the exemption from tax to continue in the event that the scheme is replaced by a new scheme having broadly the same effect.

Section 305: Offshore oil and gas workers: mainland transfers

1267. This section provides an exemption from income tax for certain benefits received by a limited number of employees who work on offshore oil or gas installations. It derives from ESC A65. Legislating the concession is a minor change to the law. See Change 68 in Annex 1.

1268. Those employees whose permanent workplace is the installation would normally be chargeable to tax in respect of any transport, accommodation and subsistence provided. That is because the travel to that workplace would be travel between home and work, so no deduction could be claimed under Part 5 for that or for any associated accommodation and subsistence. Under ESC A65 such benefits are not charged to tax.

1269. The provision of transport exempted by this section is confined to that part of the journey between home and work which starts at the mainland departure point from which the oil and gas rig workers are normally transported to the offshore installation. In subsection (3) this is defined as “transfer transport”. Apart from travel from the nearby overnight accommodation (defined in subsection (6) as “local transport”), it does not provide exemption for travel between the mainland departure point and a place other than the offshore installation.

1270. If the employee has a permanent workplace on the mainland, the provision of transport to the installation is not exempt, but a deduction under Part 5 would be available. The same applies to the accommodation and subsistence in connection with such travel. This position is preserved by subsection (5) which makes it clear that the exemption only applies to the provision of transport, accommodation and subsistence for which a deduction would not be due if the employee had met the cost.

Section 306: Miners etc.: coal and allowances in lieu of coal

1271. This section provides an exemption from income tax to free coal, and smokeless fuel, and payments in lieu of free coal given to miners and certain other colliery workers. It derives from ESC A6. Legislating the concession is a minor change to the law. See Change 69 in Annex 1.

1272. Subsection (1) identifies the scope of the exemption and who qualifies.

1273. Subsection (2) limits the scope of the exemption to the provision of free coal, or the payment of cash in lieu, of an amount that represents a reasonable level of personal consumption. But subsection (3) assumes that this condition is met unless the Inland Revenue can show that it is not. The purpose of these two subsections is to reproduce the restriction that applies to all ESCs - a concession will not be given where an attempt is made to use it to avoid tax. It is not expected that anyone benefiting from the concession will not continue to benefit from exemption under this section.

1274. Subsection (4) gives the definition of “colliery worker”. It includes all those persons who were regarded as coming within the scope of the concession.

Chapter 9: Exemptions: Pension provision

Section 307: Death or retirement benefit provision

1275. This section provides an exemption from the charge under the benefits code in respect of the provision by an employer for death or retirement benefits for an employee. It derives from a combination of the exemptions currently available under section 155(4) of ICTA and under ESC A72. That concession widens the scope of section 155(4), which only applies to death etc benefits payable to an employee’s spouse, children or dependants. The concession covers death etc benefits payable to other members of the employee’s family or household as defined in section 168(4) of ICTA. That definition is now in section 721(5).

1276. To the extent that this section legislates ESC A72 it is a minor change to the law. See Change 70 in Annex 1.

1277. An employee normally nominates the person to whom any death benefits should be paid. The exemption only applies if that nominee remains a member of the employee’s family or household.

Section 308: Exemption of contributions to approved personal pension arrangements

1278. This section provides there is no liability to income tax on contributions by an employer under approved personal pension arrangements made by the employee. It derives from section 643(1) of ICTA.

1279. Subsection (1) provides there is no liability to income tax on such contributions as earnings.

1280. Subsection (2) sets out relevant definitions by cross-reference to section 630(1) of ICTA.

1281. A personal pension scheme may be approved by the Board of Inland Revenue under section 631 of ICTA, in accordance with the rules in Chapter 4 of Part 14 of that Act.

Chapter 10: Exemptions: Termination of employment

Section 309: Limited exemptions for statutory redundancy payments

1282. This section provides for limited exemptions from income tax in respect of redundancy payments and approved contractual payments.

1283. Subsection (1) provides that there is no liability to income tax on redundancy payments and approved contractual payments as general earnings, except where subsection (2) applies. That subsection applies where the amount of an approved contractual payment exceeds the amount which would have been due if a redundancy payment had been payable. In such a case the excess is liable to income tax.

1284. Subsection (3) provides that there is no liability to income tax on redundancy payments and approved contractual payments as specific earnings, except under Part 6 Chapter 3 (payments and benefits on termination of employment).

1285. This section derives from parts of sections 579 and 580 of ICTA. It is drafted by reference to an “approved contractual payment” as opposed to the “corresponding amount of any other employer’s payment” – the expression used in section 579(1). The section also introduces the expression “statutory payment” to describe the sum specified in section 579(6). These new expressions should make the legislation easier to follow. They also have the consequence that it is possible to dispense with the definition of “the Minister” in section 580(1)(c).

Section 310: Counselling and other outplacement services

1286. This section provides there is no liability to income tax on the provision of counselling and other services in connection with the cessation of a person’s employment.

1287. It derives from sections 589A and 589B of ICTA as they apply to an employee. The provisions of 589A and 589B as they apply to an employer do not change, except that they have been amended to reflect the minor changes to the law made in this section. See paragraph 69 of Schedule 6.

1288. Subsection (1) provides the exemption and the conditions to be satisfied.

1289. Subsection (2) sets out condition A, which relates to the purpose of the provision of the services.

1290. Subsection (3) sets out condition B, which relates to the services provided.

1291. Subsection (4) sets out condition C, which relates to the qualifying two year period of continuous employment.

1292. Under the Employment Rights Act 1996, some events that involve a change in the identity of the employer are treated as not breaking the continuity of employment. The two year requirement is therefore expressed in terms of the employment that is ceasing, not of employment by the employer. See Change 71 in Annex 1.

1293. Subsection (5) sets out condition D, which relates to the availability of the services to employees generally.

1294. Subsection (6) sets out condition E, which relates to travel expenses.

1295. Travel expenses meeting condition E include expenses that, on the assumptions in subsection (7), would be deductible under any provision of Part 5. Under ICTA, expenses within the exemption are restricted to expenses deductible only under selected sections of those rewritten in that Part. See Change 73 in Annex 1.

1296. This section is listed in section 332 (meaning of “the deductibility provisions”). Various provisions in Part 5 then ensure that certain rules in Part 5 do not adversely restrict expenses, deductible under that Part, for the purposes of condition E.

1297. Subsection (7) sets out the assumptions made in applying condition E to travelling expenses. To accord with Inland Revenue practice, one of those assumptions is that the expenses are incurred and paid by the employee. But the assumption that they are paid out of emoluments has not been rewritten. See Change 81 in Annex 1.

1298. To accord with Inland Revenue practice, the section omits the condition in section 589B(2)(e) of ICTA, that the services are provided in the United Kingdom, and the apportionment rule in section 589B(3) which applies if services are provided partly in and partly outside the United Kingdom. A similar condition, in section 589(1)(d) of ICTA, has been omitted from section 311 for the same reason. Removal of this condition aligns sections 310 and 311 with the exemptions in Chapter 4 of Part 4. See Change 72 in Annex 1.

Section 311: Retraining courses

1299. This section provides there is no liability to income tax on payment or reimbursement of retraining course expenses when a person’s employment has ceased or is expected to cease.

1300. It derives from sections 588 and 589 of ICTA as they apply to an employee. The provisions of 588 and 589 as they apply to an employer do not change, other than to adopt the minor changes to the law made in this section. See paragraph 67 of Schedule 6.

1301. Subsection (1) provides the exemption and the conditions to be satisfied.

1302. Subsection (2) defines “retraining course expenses” for the purposes of the exemption.

1303. Subsection (3) sets out the course conditions.

1304. The section does not require a course to be undertaken “with a view to retraining the employee”. In practice a course is regarded as so undertaken if the conditions in the section are satisfied. This additional requirement is superfluous. See Change 74 in Annex 1.

1305. To accord with Inland Revenue practice, the section also omits the condition in section 589(1)(d) of ICTA, that all teaching and practical application forming part of the course takes place in the United Kingdom. A similar condition, in section 589B(2)(e) of ICTA, has been omitted from section 310 for the same reason. Removal of this condition aligns sections 310 and 311 with the exemptions in Chapter 4 of Part 4. See Change 72 in Annex 1.

1306. Subsection (4) sets out the employment conditions.

1307. Under the Employment Rights Act 1996, some events that involve a change in the identity of the employer are treated as not breaking the continuity of employment. The requirement that the employee be employed continuously for two years prior to retraining or, if earlier, when the employment ceased, is therefore expressed, as in section 310(4), in terms of the employment that is ceasing, not of employment by the employer.

1308. Expressing the requirement this way aligns sections 310 and 311 in their treatment of the same requirement. See Change 71 in Annex 1.

1309. Subsection (5) sets out the conditions that relate to travelling expenses.

1310. As in section 310, travel expenses meeting this condition include expenses that, on the assumptions in subsection (6), would be deductible under any provision of Part 5. Under ICTA, expenses within the exemption are restricted to expenses deductible only under selected sections of those rewritten in that Part. See Change 73 in Annex 1.

1311. This section is listed in section 332 (meaning of “the deductibility provisions”). Various provisions in Part 5 then ensure that certain rules in Part 5 do not adversely restrict expenses, deductible under that Part, for the purposes of subsection (5).

1312. Subsection (6) sets out the assumptions made in applying the condition in subsection (5) to travelling expenses. To accord with Inland Revenue practice, one of those assumptions is (as in section 310) that the expenses are incurred and paid by the employee. But the assumption that they are paid out of emoluments has not been rewritten. See Change 81 in Annex 1.

Section 312: Recovery of tax

1313. This section provides machinery for an assessment to charge the amount due if exemption under section 311 has been given and there is a subsequent failure to meet certain of the conditions in section 311(4).

1314. It derives from section 588 of ICTA.

1315. Subsection (1) sets out the circumstances in which the section applies.

1316. Subsection (2) sets out what will be assessed if the section applies, and provides the mechanism for such an assessment.

1317. Subsection (3) provides the time limit for the making of such an assessment.

1318. Subsections (4) to (6) contain provisions which:

• require the employer or former employer to notify the Inland Revenue of a failure within the terms of subsection (1) to meet the conditions in section 311(4); and

• permit the Inland Revenue to require information from a person they have reason to believe has failed to fulfil that requirement.

Chapter 11: Miscellaneous exemptions

Section 313: Repairs and alterations to living accommodation

1319. This section derives from section 155(3) of ICTA. It only applies in the case of provided accommodation which falls within Chapter 5 of Part 3.

1320. In the case of alteration and additions to the property within subsection (2)(a), the cost would sometimes result in an increase in the cash equivalent under Chapter 5 of Part 3. In order to prevent a double charge to tax it is necessary to exempt the cost of the alterations and additions which fall through to Chapter 10 of Part 3 because the cost of provision was “not otherwise chargeable to tax”.

1321. The second part of this exemption at subsection (2)(b) refers to landlord’s repairs, the definition of which prevents it extending to tenant’s repairs, or improvements disguised as repairs.

Section 314: Council tax etc. paid for certain living accommodation

1322. This section derives from section 145(4) of ICTA. Without this section, a tax liability could still arise if charges in connection with the property were paid (or the cost reimbursed) by the employer.

1323. Subsection (1) applies the section when certain exceptions from a charge on living accommodation apply.

1324. Subsection (2) applies the exemption to a fuller and more updated description of domestic property charges: “council tax or rates, water or sewerage charges”, in line with Inland Revenue practice. This is a minor change to the law. See Change 75 in Annex 1.

Section 315: Limited exemption for expenses connected with certain living accommodation

1325. This section limits the amount charged to tax in respect of certain expenditure (or reimbursement of expenditure by the employee) in connection with living accommodation. It derives from section 163 of ICTA. It applies to all employees whether in excluded employment or not whereas section 163 applies only to those employments within Chapter 2 of Part 5 of ICTA. This is a minor change in the law. See Change 76 in Annex 1.

1326. Subsections (2) and (3) set out the conditions which must be satisfied for the exemption to apply.

1327. Subsection (4) provides a formula to calculate the amount to which the exemption is applied. The following example shows how the formula works, using NE, DA, DE and SMG as defined in the section.

1328. Assume an employee’s earnings are £10,000 a year (and there are no deductions) and no sums made good. The formula works to give the right pro-rata result for each of the following circumstances:

• Employment held and accommodation provided for whole year