In July 2004, we asked the Inland Revenue to comment on the advice given by the Department of Trade and Industry (DTI) in their Implementation Guide for Employer Provided Home Computing Initiatives. The Home Computing Initiative is a scheme whereby an employer loans computers for the personal use of employees under a salary sacrifice arrangement. Such an arrangement takes advantage of the tax relief available for employer-provided computers as long as their taxable value in a year does not exceed £;500. Combining this tax relief with a salary sacrifice provides tax savings for the employer and Class 1 NICs savings for both employee and employer.

The guidance given by the DTI is that "at the end of the loan period, the employer may choose to give the employee the option to purchase the equipment at fair market value (typically a fraction of the original value of the equipment)".

We pointed out that, according to the Income Tax (Earnings and Pensions) Act 2003 (s.206), when an asset is transferred to an employee and that asset has been provided as a taxable benefit, the reportable value is the higher of

• the market value of the asset at the time of transfer, and
  
  
• the asset's market value when first provided as a benefit, reduced by the total of the cost of the benefit in each of the years that it was provided as a benefit.

The purpose of this procedure is to prevent assets being transferred shortly after first being provided in order to take advantage of the depreciation in value.

If this rule is applied, the reportable value of a computer after three years is likely to be more than its market value at the time of transfer.

Example

An employee is loaned, for three years, a computer under a Home Computing Initiative that has an original market value of £;1000. The market value three years later is £;150.

The cost of the benefit in each of the three years is £;200, i.e. 20% of the original market value. (ITEPA s.205) As this is below the £;500 exemption, the benefit is not reported. If the computer is transferred to the employee at the end of three years, the taxable benefit is the higher of

• £;150, the market value at the time of transfer, and
  
  
• £;400, the original market value of £;1000, reduced by £;600.

If the DTI's published guidance were followed and the employee paid £;150 for the computer at the end of the loan period, the employer would have to report £;400 on the P11D, less £;150 made good by the employee.

Changes to the legislation

Between July and October, the Inland Revenue argued, in three separate letters, that our understanding of the statutory rules, as outlined above, was wrong. All of the arguments put forward contradicted the legislation and the Inland Revenue's own guidance and worked examples on page EIM21652 and EIM21653 of the Employment Income Manual. It appears that these incorrect arguments were an attempt to support the incorrect guidance already given by the DTI.

We responded to each of the Revenue's letters, demonstrating that the advice given was incorrect. Our objective was not to force employees to have to pay more tax; rather to get the Inland Revenue to make some provision to allow employees to pay the current market value. In our letter on 10 January 2005, we said: "Enough time has passed for a solution to have been found that will enable employers to sell their ex-salary sacrifice computers to their employees at their current market value. The legislation does not permit this, but it is surely possible for an extra-statutory concession to be made to allow it in the specific situation".

The Inland Revenue has now acknowledged the problem and, rather than make an extra-statutory concession, appears to be intending to amend the legislation itself with effect from 6 April 2005. The change will also apply to employer-provided bicycles which also benefit from a tax exemption.

The Inland Revenue's announcement states:

"A simplification of the 'benefits in kind' rules on employer-provided computers and bicycles was announced today. It clarifies the position when an employee buys a computer or bicycle that has previously been loaned to them by their employer.

The announcement removes any uncertainty about whether or not a tax charge arises if, at the end of the loan period, the employee buys the computer or bicycle at its current market value.

From 6 April there will be a single basis of valuation - the market value will always apply. So when an employee buys a previously loaned computer or bicycle for its full current market value, no tax charge will arise on the transfer of ownership. This is in line with current guidance provided in relation to the Government sponsored Home Computer Initiative."

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...back to 18 February 2005


Source:
www.inlandrevenue.gov.uk/news/comps-and-bikes.htm
www.ir.gov.uk/manuals/eimanual/EIM21652.htm