What are vouchers?

That question is rather like asking 'how long is a piece of string?', suggests Ian Congreave. He explains the nature of vouchers, including cheques and credit cards, and their special treatment for tax and NICs.

The tax charge on the provision of vouchers and credit-tokens was first introduced in 1975. Employees earning at a rate of £8,500 or less, and in those days there were considerably more than there are now, are taxed on the second-hand value of goods provided by employers. To prevent vouchers being used to provide benefits with a negligible second-hand value, new rules were introduced that tax vouchers on the cost to the employer in providing them. The rules cover all employees irrespective of their earnings levels.

The tax legislation for vouchers is found in sections 141 to 143 of the Income and Corporation Taxes Act 1988. It defines three types of voucher; non-cash vouchers, credit-tokens and cash vouchers. We can consider each of these in turn.

Non-cash vouchers (s. 141)

These are documents of any kind that may be exchanged for money, goods or services, or any combination. Despite this definition, 'cash' vouchers, as described below, are specifically excluded and there are few situations where a voucher exchangeable for cash could be classed as a non-cash voucher. Common examples of non-cash vouchers are retail vouchers, gift tokens, disks or tokens entered into machines, and stamps that are collected on a card before they can be used. Normally, non-cash vouchers are given up in return for the receipt of goods or services.

In addition, the legislation defines two specific types of vouchers, namely:

• "transport vouchers" that are used to obtain passenger transport services, such as flight tickets, season tickets, travel cards and bus passes; and
• "cheque vouchers", such as a book of cheques used to pay for goods or services.

It does not matter that the vouchers cannot be used immediately, as in the case of savings stamps, or the voucher is not actually exchanged, as with season tickets, or that it is a cheque used to pay for goods or services.

A specific concession for "transport vouchers" is provided in the legislation, but only in relation to passenger transport services that are provided to an employee or relative by the employer, related employer, or other passenger transport undertakings, and where the arrangement was in place on 25 March 1982. Some airlines have such arrangements.

Credit-tokens (s. 142)

This is the way that the tax legislation refers to credit cards. A credit token is a card, token, document or "other thing" that, when presented by an employee, the person providing it undertakes to:

• supply money, goods and/or services on credit, e.g. a store card supplied by a retailer, where goods or services are supplied by the retailer and payment is later made to that retailer
• pay a third party for the money, goods and/or services provided by that third party to the employee, e.g. a Visa or MasterCard credit card supplied by a bank, where goods or services are supplied by a retailer, the retailer is paid by the bank, and payment is later made to the bank

The definition applies to anything that must be produced in order to obtain goods and services without immediate payment. It includes the use of a card to operate a machine, for example, to obtain cash, or to pay for car parking. There is no requirement that it be given up in exchange and, in this significant respect, credit tokens are different from non-cash or cash vouchers.

Exclusions

The Taxes Act contains a number of exclusions from the tax liabilities arising from the use of non-cash vouchers and credit tokens. The list is long but the general effect is that if a payment is made or a benefit provided for which an employee can claim tax relief or on which no tax charge arises, the same tax relief applies to vouchers used to make the payment or provide the benefit.

Cash vouchers (s. 143)

These are documents of any kind that may be exchanged for money, even though they may also be exchangeable for goods or services. To be a 'cash' voucher, the document must be capable of being exchanged for an amount that is greater than, equal to, or "not substantially less" than the cost incurred by the provider of the voucher. So, for example, a voucher that could be exchanged for goods to the value of £100 or cash to the value of £10 would be treated as a non-cash voucher, taxable on the cost of providing it.

The tax liability on a cash voucher is the amount for which it is capable of being exchanged as long as that amount, following the definition above, is greater than, equal to or not substantially less than the cost of providing it. Although this may commonly be the amount the employee receives for the voucher, what the employee actually receives is not considered. The tax liability arises at the time that the cash voucher is "received" by the employee, even if that is some time before it is exchanged for cash, and must be handled under PAYE.

The provision of cash vouchers is relatively rare. There is little point in giving an employee a voucher for £10 cash that costs the employer £10 to provide. The definition is directed particularly at holiday pay schemes, where stamps are collected on a card before they can be exchanged for holiday pay. Tax under PAYE is due when the stamp is "appropriated", i.e. stuck on the card, not when the card is later given to the employee to exchange for cash. The definition would also include the provision of Premium Bonds.

Some holiday stamp schemes provide a cash value for the stamps that is "substantially less" than the cost of providing them, because the difference represents an amount paid by the employer to buy sickness, personal injury or death benefits for the employees. In this situation, the legislation allows the cost incurred in providing the stamps to be reduced by the cost of providing the additional benefits. As long as the cash value of the stamps is then not "substantially less" that the employer's reduced cost, the stamps may be treated as cash vouchers.

A document is not a cash voucher if the amount paid out when exchanged would not have been taxable if it had been paid out without using the voucher. This exclusion rules out any tax liability arising on payments made to the employer on receipt of a petty cash voucher or an expenses claim form.

Liabilities

Where tax liabilities arise on the provision of non-cash vouchers and credit cards, and that is a major subject in its own right, they are reported in section B of form P9D or in section C of form P11D as appropriate. If there is a reportable tax liability, a corresponding Class 1 NICs liability arises at the time the vouchers are provided or appropriated. Cash vouchers have both a tax liability under PAYE and a Class 1 NICs liability at the time the vouchers are provided or appropriated. If a third party provides vouchers to employees of other companies, the third party is responsible for the tax liabilities and should seek guidance from the tax office.