The Finance Bill has been published and includes, among many other provisions, the new rules for the changes to fringe benefits that will apply for the 2005/06 tax year. The rules are in draft and may differ somewhat when the Bill becomes law. The number at the end of each section is the number of the Finance Bill clause that defines the change.

Childcare vouchers

The value on which the tax charge for non-cash vouchers is usually based is the cost incurred by the employer in providing them, i.e. not necessarily their face value. For example, employers can obtain Marks & Spencer gift vouchers with either a 2½% or 5% discount depending on the order value. It may, therefore, cost the employer £;47.50 to provide a £;50 gift voucher. Unless there are any other acquisition costs, the reportable benefit for such a voucher would be £;47.50.

A different rule is introduced for childcare vouchers by the Finance Bill. As most childcare vouchers provided for employees under salary sacrifice schemes are provided by specialist suppliers, there are normally additional charges to be paid on top of the voucher cost. For example, the management fee on a £;50 childcare voucher could be £;5. If the cost incurred by the employer, i.e. £;55, were used to determine the reportable benefit, only £;50 would be tax free under the new childcare voucher rules from 6 April 2005, and the employer would have to report the £;5 excess.

To prevent this situation, the "voucher administration costs" are excluded from the calculation, with effect from 6 April 2005. The amount that may be excluded is the difference between

• the expense incurred by the employer in providing them, and
  
  
• the face value of the voucher.

The "face value" of a childcare voucher is the value printed on the voucher or the value of childcare that may be obtained using it.

So, for example, if it costs the employer £;55 to provide a £;50 voucher, the taxable value of the voucher is £;50, all of which is offset by the £;50 per week exemption.

If, however, the employer could obtain a £;50 childcare voucher for £;47.50, plus £;5 administration costs, the amount to be excluded is £;2.50, i.e. the difference between £;52.50, the cost to the employer and £;50, the voucher's face value. The £;50 exempt amount is therefore still used up in full. (22)

Transfer of previously loaned computer or cycle etc.

Where a used or depreciated asset of the business is given or sold to an employee, a tax charge arises under the residual liability to charge provisions of the Benefits Code. This means that the taxable value of the transfer is the current market value of the asset, less any amount paid by the employee.

If, however, the used or depreciated asset has been provided as an employment benefit, the taxable value is the higher of

• the current market value of the asset, and
  
  
• the market value of the asset when it was first applied as a benefit, less the total of the taxable values of the asset in each of the tax years during which it was provided as a benefit.

The result of this calculation means that in the case of, for example, a computer that has been loaned to an employee under a salary sacrifice scheme (Home Computing Initiative), the computer would have to be sold to the employee at the end of the loan period at a price that is considerably more than its market value at the time if a tax charge is to be avoided.

To ensure that a computer, in this situation, could be sold for its current market value at the end of the loan period, the provision of a computer is added to the list of benefits that are excluded from the special rules for assets that have provided as benefits, with effect from 6 April 2005.

Exactly the same exclusion is also applied to the provision of a cycle and cyclist's safety equipment.

It should be noted that this relaxation of the tax rules opens up again an abuse that the special rules were intended to prevent. There is nothing now to stop an employer from buying a new computer for, say, £;1,500, giving it to the employee to use as an employment benefit for a month, then selling it to the employee for, say, £;1,000, its current market value at the time of sale. There is no tax charge for the month's use of the employer's computer as long as the conditions for exemption are met and, as long as the employee pays £;1,000 for the computer, there is no tax charge on the transfer. (24)

Extension of exemptions for childcare, workplace parking, cycles etc.

There are already tax exemptions, or partial tax exemptions, in place for the provision of

• workplace parking
  
  
• cycles and cyclist's safety equipment
  
  
• childcare vouchers
  
  
• childcare provided on the employer's premises
  
  
• childcare contracted by the employer.

The exemptions, as currently defined, are only from a tax charge arising under the Benefits Code and are conditional on the conditions for exemption being met. If the conditions are not met, the benefit is taxable, in whole or in part as applicable, under the "residual liability to charge" provisions, i.e. generally based on the cost incurred by the employer in providing the benefit.

However, there is no exemption from a tax charge where the benefit is "money's worth", i.e. the benefit is "capable of being converted into money or something of direct monetary value to the employee". This can occur where

• the employee is able to choose between cash salary and a benefit provided under a salary sacrifice scheme, e.g. taking a wage cut and receiving childcare vouchers to the same value
  
  
• a benefit has a cash alternative, e.g. the employee can choose between a workplace parking place and a regular cash payment
  
  
• the employer pays the employee's personal liability, e.g. the employer pays the employee's car parking fees direct to the car park provider.

From 6 April 2005, no liability for income tax arises on any of the provisions listed above, no matter how they are provided. As with the changes to the charging rules for computer and cycles, described above, these changes are introduced in particular to remove the possibility of tax charges arising in any other way when these benefits are provided under salary sacrifice schemes. (23)

Tax exemption on outplacement counselling and training expenses

The provision of outplacement counselling when an employee is redundant and the payment or reimbursement of related fees and expenses are exempt from a tax charge if the defined conditions are met. The requirement for the employee to have been employed full-time is removed from 6 April 2006. Counselling may be provided also, therefore, for part-time employees without creating a tax charge.

The payment or reimbursement of retraining course expenses, including travel expenses and course fees, is also exempt from tax if the statutory conditions are met. From 6 April 2005, courses qualify if they do not exceed two years in duration (instead of one year), employees no longer have to be working full-time, and attendance on the course does not have to be full-time or substantially full-time. (25)

Armed forces pensions and compensation schemes

From 6 April 2005, no liability to income arises on

• lump sums provided under a scheme established by the Armed Forces Early Departure Payments Scheme Order 2005, and
  
  
• a benefit under a scheme established by an order under the Armed Forces (Pensions and Compensation) Act 2004 payable by reason of his illness or injury
  • by way of a lump sum, or
    
    
  • following the termination of the person's service in the armed forces or reserve forces.

Various other pensions and allowances provided under earlier schemes are already exempt from tax and these are now listed specifically. (30)



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Source:
Finance Bill
Finance Bill 2005