Guernsey: Taxation of Benefits-in-Kind - Taxation of benefits through ETI from January 2009

Written by Ian Congreave - Filed under: Guernsey on October 27th, 2008

In June 2008, the Treasury and Resources Department put forward proposals to change income tax law to require the taxation of benefits-in-kind through the Employees’ Tax Instalment (ETI) Scheme from 1 January 2009. Benefits taxed in this way would also be liable for social security contributions.

The States of Guernsey has agreed to proceed with this change from January 2009 and a letter has been sent to all employers known to provide benefits to their employees explaining how the new arrangements will work. An explanatory letter has also been sent to payroll software developers.

Income Tax Office statistics show that during the calendar year 2006 (the year for which the most reliable information is currently available):

331 Guernsey employers provided benefits-in-kind to employees (equivalent to approximately 1 in
11 employers)
1146 employees received benefits-in-kind
The tax yield from benefits-in-kind was approximately £640,000.

Existing arrangements
Under the existing ETI Scheme an employer is required to deduct tax from “any payment of, or on account of, emoluments is made by an employer” made to employees. Although some benefits, such as private expenses paid by the employer, are covered by the ETI Scheme, the majority of benefits are detailed on the Benefit-in-kind Return at the end of the tax year. Employers may voluntarily tax benefits through ETI but, if they do so, they must still be reported at the year end and the Return must be clearly indicate that tax has already been deducted.

The Social Security Department currently has no mechanism by which it can economically identify benefits-in-kind which are received by employees and charge contributions unless the benefits-in-kind are treated as part of the employee’s total emoluments for the purposes of the ETI Scheme, in which case social security contributions are automatically charged accordingly.

New arrangements
Where benefits are provided, the value of the benefit must be added to the employee’s gross pay in the pay period in which the benefit was provided, and tax deducted from the total amount, as if the benefit had been paid in cash. The arrangement also applies to share option/share award schemes where there is a taxable emolument.

In the case of ongoing benefits, the annual value of the benefit is apportioned across all of the pay periods (e.g. weekly or monthly) in the tax year.

The first £450 each year of certain benefits continues to be exempt from tax. This adjustment was carried out by the Income Tax Office but employers will now have to take the exemption into account when the benefits are included in an employee’s gross pay, by apportioning it across all of the pay periods in the tax year.

Example: An employee receives individual health insurance cover of £100 per month on a continuing basis. The benefit to be included in each pay period would be calculated as follows:

Value of benefit                         £100
Less exemption (£450/12)         £ 38
Monthly benefit                         £ 62

This £62 must then be added to the employee’s gross monthly pay and the tax deducted accordingly on the total figure.

The £450 exemption does not apply to motor vehicle or accommodation benefits or to emoluments arising under share option/share award schemes.

Example: An employee receives a car benefit of £2,500 per annum. The relevant monthly figure of £208, i.e. £2,500 ÷ 12, must be added to the employee’s gross pay each month and tax deducted accordingly. There is no exemption so nothing can be deducted.

Where a one-off benefit is provided, such as a performance incentive prize, the full £450 exemption may be offset against the value of the benefit in the month in which the payment is made.

Example: An employee receives an incentive prize of £600 and no other benefits are, or will be, provided to that employee during the year. The full £450 is deducted from the payment. The amount of £150 is added to the gross pay for the month and tax deducted accordingly.

With the taxation of all benefits-in-kind through the ETI Scheme, there will no longer be a requirement for benefit-in-kind returns to be submitted from 2010. However, returns must be completed in January 2009, providing details of all benefits provided for the calendar year 2008.

There will be an exception in cases where it is not possible for tax to be deducted from the benefits provided (for example, where there is no cash payment from which to deduct tax). This may apply where, for example, a caretaker receives free accommodation in lieu of salary. In such cases it will still be necessary for a benefit-in-kind return to be completed at the beginning of the following year, and such forms will be issued on request.

Social Security contributions will also be due on the value of the benefits added to gross pay for ETI purposes. The gross pay in each pay period, including any benefits, will be used to calculate both income tax through ETI and Social Security contributions.

Employers affected by these new arrangements should check with their payroll software supplier that the payroll system will be compliant with the new Regulations from 1 January 2009.

Employers requiring further information about the taxation of benefits-in-kind through the Employees Tax Instalment Scheme should contact the ETI Section on 01481 740440.

Further information:
Collection of benefits in kind through the ETI Scheme - letter issued to employers who currently submit benefit in kind returns
Collection of benefits in kind through the ETI Scheme - letter issued to software suppliers
Proposed Taxation of Benefits in Kind through the ETI Scheme and Information Exchange with Social Security Department

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Written by Ian Congreave -

Filed under: Guernsey on October 27th, 2008