ACCA F6 FA09 Study Text 2010

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Chapter 4: Employment income

Living accommodation that is not job-related

When the living accommodation is not job-related accommodation, there may be

four separate elements to calculate in order to arrive at the total amount of living

accommodation benefits. These are listed in the table below. Two of these four

elements apply only to P11D employees.

Living accommodation that is job-related

If the living accommodation is job-related accommodation, there are no benefits

arising on a LPE and potentially only two benefits arising on a P11D employee

which are subject to a maximum limit:

Not job-related

accommodation

Job-related

accommodation

Potential benefits arising: LPE P11D LPE P11D

1. Capital benefit √ √ X X

2. Expensive accommodation benefit √ √ X X

3. Revenue benefit X √ X √* *subject

to max

limit

4. Provision of furniture benefit X √ X √*

Living accommodation provided by employers is usually not job-related

accommodation and is provided to P11D employees rather than LPEs. Therefore all

four associated benefits are potentially taxable.

In the examination, always assume that the accommodation is not job-related unless

it is clearly stated or shown that it satisfies the definition of job-related

accommodation.

(1) The capital benefit

The capital benefit is the charge for the basic provision of the property to the

employee, assuming an unfurnished property with no services.

The amount of the capital benefit is referred to as the annual value of the property,

which is a notional rental value. The annual value depends on whether the property

has been purchased by the employer or rented by the employer on behalf of the

employee. It is calculated as the greater of:

 the rateable value of the property

 the rent paid by the employer on behalf of the employee.

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2) The expensive accommodation benefit

Where the property has been purchased by the employer and the cost of providing

the accommodation is in excess of £75,000, an additional benefit arises.

This additional benefit is calculated as follows:

Cost of acquiring the property (see note (a) below) X

Plus: Capital improvements incurred before the start of the tax year

Minus: Capital contributions made by the employee (X)

Cost of providing accommodation X

Minus: Limit (75,000)

× Official rate of interest at the start of the tax year (see note (c)) = £XX

Notes

(a) If the property was purchased by the employer more than six years before the

employee first occupied it and the cost of providing the accommodation is in

excess of £75,000, the market value of the property when the employee first

occupied it should be used instead of the original cost of acquiring the

property in the above formula.

(b) Only capital improvements from the date the employee occupied the property

to the start of the tax year should then be brought into the computation, after

deducting any capital contributions made by the employee, if any.

specified by HMRC. For 2009/10 the rate is 4.75%. This rate is given in the tax

rates and allowances in the examination.

Example

Linda was provided by her employer with unfurnished living accommodation on 5

June 2006. She pays all the running costs and a monthly contribution of £200

towards the provision of the accommodation.

Her employer purchased the property for £300,000 and built an attached garage in

July 2008 for £2,800. The annual value of the property is £6,700.

Required

Calculate the assessable benefits arising on Linda for the accommodation in

2009/10.

Chapter 4: Employment income

Answer

 £ £

Capitalbenefit=annualvalueoftheproperty6,700

Costofacquiringtheproperty 300,000

Plus:Capitalimprovementsincurredbeforethestartofthetax

year

2,800

Minus:Capitalcontributionsmadebytheemployee (Nil)



–––––––––––––––––––––––––––––––––––



Costofprovidingaccommodation 302,800

Minus:Limit (75,000)



–––––––––––––––––––––––––––––––––––



 227,800



–––––––––––––––––––––––––––––––––––



 

×Officialrateofinterestatthestartofthetaxyear 4.75% 10,821

  –––––––––––––––––––––––––––––––––––

  17,521

Minus:Employeecontributionstowardsthebenefit:(£200×12)(2,400)

  –––––––––––

–

–––––––––––––––––––––––

Totalassessableaccommodationbenefits15,121

  –––––––––––––––––––––––––––––––––––

(3) The revenue benefit

Any running costs relating to the accommodation paid by an employer for a P11D

employee are assessable.

For example, gas, electricity, cleaning, repairs and maintenance (but not structural

alterations) would be assessed on the employee, using the general rule for P11D

employees. In other words, the benefit is assessable at the cost to the employer.

(4) Provision of furniture benefit

If furniture is provided with the accommodation, the assessable benefit is calculated

using the rules applicable to the use of assets, which are explained later.

Note that LPEs provided with living accommodation are not assessed either on the

revenue benefit or on the provision of furniture benefit.

Job-related accommodation: the revenue benefit and provision of furniture

benefit

If the accommodation is job-related, the total of the revenue benefit and the

provision of furniture benefit for a P11D employee is subject to a maximum amount.

This maximum amount is calculated as follows:

£ £

Employee’s employment income assessment excluding the

accommodation benefits

10% of this amount X

Minus: Employee contribution

(X)

Maximum total benefit for job-related accommodation X

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4.7 The private use of business assets

If a P11D employee is provided with the private use of a business asset (other than a

car or van), the assessable benefit is calculated as the higher of:

 20% × Market value of the asset when first made available to any employee, and

 the rent or hire charge paid by the employer on behalf of the employee.

If the asset used by the P11D employee is later sold or gifted to him, a further

benefit arises. This is calculated as the higher of:

(1) Market value at the date of sale/gift X

Minus: Price paid by employee, if any (X)

(2) Market value when first provided to any employee X

Minus: Benefits already assessed (X)

Minus: Price paid by employee, if any (X)

However, the outright gift of a new asset acquired by an employer for a P11D

employee would be assessed as a benefit using the general rule of cost to the

employer.

Example

On 6 August 2007, a company provided one of its directors, Michael, with a home

entertainment system for his own use. The system cost £5,500 in December 2006 and

was used by the company until 5 August 2007 when its market value was estimated

to be £5,000.

On 6 April 2009 Michael purchased the system from the company for £1,200. Its

market value was estimated to be £2,800 at the date of sale.

Required

Calculate the assessable benefits arising on Michael each year.

Answer

 £ £

2007/08

20%×£5,000×8/12(privateuseforonly8months)667

2008

09

20%×£5,0001,000

2009

10



Higherof:

(1) MVatthedateofsale 2,800 

 Minus:Pricepaidbyemployee (1,200) 

 1,600 

Chapter 4: Employment income

(2) Marketvaluewhenfirstprovidedtoanyemployee 5,000 

 Minus:Benefitsalreadyassessed (1,667) 

 Minus:Pricepaidbyemployee,ifany (1,200) 

 2,1332,133

Totalassessments3,800

These rules do not apply to the sale or gift of a company car, van, bicycle or

computer. In these cases, the assessable benefit is calculated as follows:

 £

Marketvalueatthedateofsale/gift X

MinusPricepaidbyemployee,ifany (X)

Assessablebenefit X

4.8 The provision of beneficial loans

When an employer provides a P11D employee or any of his relatives with a loan

and does not charge a commercial rate of interest (i.e. when the employer provides a

cheap loan to a P11D employee), a taxable benefit arises as follows:

Interest on the loan at the official rate of interest X

Minus: Interest paid by the employee or relative, if any

(X)

Assessable benefit X

However, an assessable benefit arises on a cheap loan only if the total loans made to

that employee (and/or relatives) are in excess of £5,000.

The official rate of interest on beneficial loans is set by HMRC each tax year. The

rate to be used in the examination for 2009/10 is 4.75%. This rate is given in the tax

rates and allowances sheet in the examination.

Calculating the interest on the loan at the official rate of interest

The interest on the loan at the official rate of interest can be calculated in one of two

ways, using:

 the average method or

 the strict basis of calculation.

(1) The average method

The interest is calculated on the average amount of the loan outstanding. The

average is calculated as follows:

(Balance at start of tax year + balance at end of tax year) divided by 2

If the loan was taken out part way through the year, the opening balance of the loan

is used instead of the balance at the start of the tax year. Similarly, if the loan was

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repaid part way through the year, the closing balance of the loan is used instead of

the balance at the end of the tax year.

(2) The strict basis calculation

The interest is calculated on the actual loan outstanding during each month of the

year.

Example

Nigel is a P11D employee. His company lent him £50,000 on 6 June 2009. Nigel

repaid £10,000 on 6 December 2009. The company charged him £1,500 interest in

2009/10.

Required

Calculate the assessable benefit on Nigel for 2009/10.

Answer

Average method - Interest at the official rate

Loan taken out part-way through the year = £50,000

Balance outstanding at the end of the tax year = £40,000

Length of time loan outstanding = 10 months

Interest at the official rate:

£1,781 = 10/12 4.75% £45,000 =

40,000 + 50,000

××

Strict basis – Interest at the official rate

Balance outstanding from 6 June 2009 to 6 December 2009 (6 months) = £50,000

Balance outstanding from 6 December 2009 to 6 April 2010 (4 months) = £40,000

Interest at the official rate:

 £

Interestfrom6June2009to6December2009(6months)

=£50,000×4.75%×6/12 1,188



Interestfrom6December2009to6April2010(4months)

£40,000×4.75%×4/12 633

 1,821

Chapter 4: Employment income



Average

method

 Strict

basis

 ££

Interestontheloanattheofficialrateofinterest 1,781 1,821

MinusInterestpaid (1,500) (1,500)



Assessablebenefit 281 321

Note that the two methods give slightly different benefit values.

The benefit is usually calculated using the average method, but the individual has

the right to insist on the strict basis if he so wishes. He will do so if the strict basis

calculation gives a lower benefit.

However, HMRC also have the right to insist on the strict basis if they so wish. They

will only do so if:

 they believe that the individual has deliberately manipulated the loan payments

and repayments during the year to minimise the assessable benefit by using the

average method, or

 the difference between the two methods is material (i.e. significant in amount).

Finally in relation to beneficial loans, if any part of the loan is written off by the

employer, the amount written off is assessed as a further benefit.

Paper F6 (UK): Taxation FA2009

Allowable deductions against employment income

 Overview of allowable expenses

 The treatment of travel expenses

 The treatment of entertainment expenses

 Dispensations

5 Allowable deductions against employment income

5.1 Overview of allowable expenses

The legislation specifically allows the following deductions from employment

income:

 Employee contributions into an occupational pension scheme up to a maximum

of 100% of earnings. (Pension contributions are dealt with in more detail in a

later chapter.)

 Donations to charity under an approved payroll giving scheme (known as Give

As You Earn). The employer deducts the donations from the employee’s salary

before calculating PAYE (thus giving tax relief for the donation) and pays them

to an approved agent. The agent distributes the funds to charities selected by the

employee.

 Subscriptions to approved professional bodies, if the subscription is relevant to

the employment.

In addition, where an employee uses his own car and claims a mileage allowance,

any shortfall in allowance received compared with the approved mileage

allowances is an allowable deduction from employment income. (This was

illustrated earlier.)

Expenses other than those referred to above are only allowable deductions if they

satisfy the general rule and are incurred wholly, exclusively and necessarily in the

performance of the employee’s duties. This general rule for an employee is more

rigorous than the wholly and exclusively rule for a self-employed individual.

 The expense must be wholly and exclusively incurred such that only the

business benefits from the expenditure. Any personal benefit that the employee

gains as a result of the expenditure must be incidental to the primary purpose of

the expense.

 The expense must also be necessarily (i.e. unavoidably) incurred by the

employee in order for him to carry out his duties. To satisfy the necessary test

the employee must be able to show that it is necessary for any employee to have

to incur the expense in order to perform the task. Expenses are not allowable if

they are necessary for that individual to perform the task but would not be

necessary for another employee.

Chapter 4: Employment income

 The expense must also be incurred in the performance of the duties. Therefore

any expenses incurred in order to prepare the individual to be able to perform

the duties (e.g. ordinary commuting costs) are not allowable.

5.2 The treatment of travel expenses

Travelling and subsistence expenses are allowable provided that:

 they are not expenses of ordinary commuting

 they are not expenses of private travel, and

 they are necessary in the performance of duties (i.e. the job can not be performed

unless the employee travels to that location). For example, sales representatives

and service engineers have to travel to clients in order to perform their duties.

Expenses of journeys from home to a temporary workplace (e.g. an associated office

in another town) will be allowable provided the attendance at that work place lasts,

or is expected to last, for no more than 24 months.

5.3 The treatment of third party entertaining expenses

The treatment of third party entertaining expenses depends on how the expense is

paid for.

If the entertaining is paid for by the employee and reimbursed by the employer (or

if it is paid for with a specific entertainment allowance):

 The individual is assessed on the cost of the entertaining, but can claim a

deduction for the expenses under the wholly, exclusively and necessarily rule.

 The expenses are disallowed in the employer’s adjustment of profit

computation.

If the entertaining is paid for with a general round sum allowance or out of an

increased salary:

 The individual is assessed on the amount of the general allowance or increased

salary, but he cannot claim a deduction for the expenses under the wholly,

exclusively and necessarily rule.

 In this instance, the expenses are allowed in the employer’s adjustment of profit

computation.

5.4 Dispensations

An employer can apply for a dispensation from HMRC. This allows the employer to

exclude certain expenses payments from the end of year return. A dispensation will

only be granted if HMRC are satisfied that the employees would be able to claim a

deduction for the expenses and that their payment is properly controlled by the

employer. Items usually included in a dispensation are therefore travel and

subsistence payments.

A dispensation will not affect the amount of income tax payable. However, it will

avoid the need for the employee to include the expenses in his tax return.

Paper F6 (UK): Taxation FA2009

The employment income computation

 A proforma for the employment income computation

 Example of an employment income calculation

6 The employment income computation

6.1 A proforma for the employment income computation

The following proforma can be used to compute employment income.

Wages / salary X

Bonuses / commissions X

Assessable benefits X

Allowable deductions:

Employee pension contributions (X)

Donations to charity under an approved payroll giving scheme (X)

Earnings for the purposes of deciding whether an employee is a

P11D employee

Subscriptions to professional bodies (X)

Expenses incurred wholly, exclusively and necessarily

e.g. Travel and subsistence expenses (X)

Entertaining expenses (X)

AMA deduction (X)

6.2 Example of an employment income calculation

Olga is employed by Pacific Enterprises plc. In 2009/10 she received a salary of

£60,000 and a bonus of £15,000 paid on 15 January 2010.

She also received the following benefits:

(a) A diesel engined company car costing £23,000, with a list price of £26,500 and

emissions of 229 g/km. She contributed £4,600 towards the purchase of

the car and £60 per month towards the use of the car. The company paid the

car tax of £160, insurance of £550, and repairs in the year which cost £1,350.

(b) Private fuel which cost the company £2,400.

£900.

(d) Private medical insurance which cost £1,300, permanent health insurance

which cost £400, and death in service insurance cover which cost £340.