New Extra-Statutory Concession 104 - car benefits

The Benefits Code, as set out in Part 3 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA), provides the tax rules that apply to the provision of benefits and expenses. In general, the taxable value of such benefits and expenses is reported annually on form P11D. However, in the case of "lower-paid employees", i.e. those whose earnings rate is less than £;8,500, most of the provisions of the Benefits Code do not apply and any benefits that are taxable are reported on form P9D.

To determine whether an employee is a lower-paid employee, the taxable value of all of the benefits and expenses provided are added to the employee's earnings under PAYE. If the total is less than £;8,500, form P9D is completed; if the total is £;8,500 or more, form P11D is completed.

Extra-Statutory Concession 104 addresses a situation that can arise where a lower-paid employee is provided with a company car. If an employee has a company car and is liable to pay tax on the car benefit charge and, if relevant, the fuel benefit charge, no further tax liability arises on any of the costs incurred by the employer in providing the car. So, if the employer meets the costs of servicing the car and providing fuel, those additional costs are not reported as a taxable benefit - they are all covered by the car and fuel benefit charges. This is equally true if the employee uses non-cash vouchers or a credit token e.g. a company credit card, to pay for the running costs of the car.

The difficulty addressed by the Concession is that, although chapter 6 the Benefits Code does not impose a tax charge for a company car on lower-paid employees, chapter 4 of the Benefits Code, which covers vouchers and credit tokens, applies to all employees, including lower paid employees.

As a result, in checking whether an employee's earnings reach the £;8,500 threshold, it is necessary to include (1) the car/fuel benefit charges as appropriate, and (2) the taxable value of any vouchers used or credit card purchases incurred in covering the running costs of the car. By adding on these two amounts, the earnings rate could reach £;8,500 and the employee would be taxed on the company car, whereas, if only the car/fuel benefits charges were added, the earnings rate could be less than £;8,500 and no tax would be due on the company car.

Extra-statutory Concession 104 allows for the taxable value of the voucher or credit card use not be added for the purpose of the £;8,500 threshold in that situation. It states:

"Where car or car fuel benefits are provided to employees via a credit token or a voucher chargeable under Chapter 4 of Part 3 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA), then in computing the total amount of earnings from an employment for the purpose of deciding whether it is a `lower paid` employment under Chapter 11 of Part 3 ITEPA, no account shall be taken of an amount of earnings within Chapter 4 of Part 3 where they would be excluded from charge to tax by virtue of Section 239 or Section 269 ITEPA."

The occasions when this situation might arise are infrequent. Most employees with company cars have PAYE earnings that exceed £;8,500, even before the car/fuel benefit charges are added. When a company car is provided to a lower-paid employee, it is often because the lower-paid employee is a member of the family of another employee in the same employment. In that situation, the tax charge falls on that other employee.

However, the Employment Income Manual, at page EIM23072, states "There are cases where a person in lower paid employment has a car made available to them on purely commercial grounds, unconnected to any family relationship that also exists. They are rare, but it does happen occasionally."

Examples:

1. An employee has PAYE earnings of £;6,000 and is provided with a company car which has a benefit charge of £;3,000. The employee has an earnings rate of £;9,000 so the car is reported on form P11D.
   
   
2. An employee has PAYE earnings of £;5,000 and is provided with a company car which has a benefit charge of £;3,000. The employer also incurs running expenses of £;1,000. As the running expenses are covered by the car benefit charge, the earnings rate is £;8,000. The car is not therefore a taxable benefit and is not reported.
   
   
3. An employee has PAYE earnings of £;5,000 and is provided with a company car which has a benefit charge of £;3,000. The employee pays for running expenses totalling £;1,000 using the employer's credit card. Without the Concession, the earnings rate is £;9,000 and the car is taxable. With the concession, the earnings rate is £;8,000 and the car is not taxable.

The Concession applies as from 5 July 2004 to all cases where the liability for a year has not been finalised.

At the earliest opportunity, the concession will be incorporated into the ITEPA.

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Sources:
www.gnn.gov.uk/environment/detail.asp?ReleaseID=122067
www.inlandrevenue.gov.uk/manuals/eimanual/EIM23072.htm