ACCA F6 FA09 Study Text 2010

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Chapter 4: Employment income

Allowable deductions:

Employee pension contributions (X)

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

Earnings to decide whether an employee is a P11D employee X

Note that an individual’s earnings in this context are before deducting most

allowable expenses. The only two allowable deductions are shown above.

If it is decided that the employee is not a P11D employee, the benefits that do not

apply to a LPE are excluded in the employment income computation.

2.6 The general rules for assessing benefits of employment

There are two valuation rules for the assessment of benefits from employment. One

rule is for LPEs and the other is for P11D employees.

These general valuation rules apply to:

 all benefits that are not specifically exempt (listed above) and

 all benefits that are not subject to specific statutory valuation rules (described

later).

Lower paid employees

In general, LPEs are only assessed on benefits that are convertible into cash, and the

value of a benefit to an LPE is the cash equivalent of the benefit provided.

The cash equivalent of a benefit is defined as the cash sum that would be received if

the benefit were sold to a third party (in essence, the second-hand value).

P11D employees

In general, a P11D employee is assessed on benefits provided to him, or to a

member of his family or household, regardless of whether the benefit can be

converted into cash.

The value of a benefit to a P11D employee is the cost to the employer of providing

the benefit. Cost to the employer means the marginal cost or incremental cost to the

employer providing the benefit.

Two further general valuation rules

When measuring the taxable amount of a benefit, two further rules generally apply:

 Contributions made by the employee. Where the employee pays a contribution

to his employer towards the provision of the benefit, the value of the benefit is

reduced by the amount of the employee’s contribution. The only exception to

this general rule is the provision of private fuel (explained later).

 Provision of a benefit for only part of the tax year. Where a benefit is provided

for only part of the tax year, the general rule is that the benefit is time-

apportioned according to the number of months the benefit has been received

during the tax year.

Paper F6 (UK): Taxation FA2009

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Benefits assessed on all employees

 Overview of the benefits assessed on all employees

 Living accommodation benefits

 Vouchers and company credit cards

3 Benefits assessed on all employees

3.1 Overview of the benefits assessed on all employees

There are two key benefits assessed on all employees, regardless of their earnings or

status. These are:

 the provision of living accommodation

 the provision of vouchers.

3.2 Living accommodation benefits

An employee who lives in accommodation provided by the employer may be

assessable for the living accommodation benefits. These are covered in the next

section.

3.3 Vouchers and company credit cards

Vouchers

Vouchers exchangeable for goods or services (such as gift vouchers and travel

season tickets) are assessable benefits unless they are specifically exempt. (Exempt

items include meal vouchers up to 15p per day, child care vouchers costing up to

£55 per week, and car parking vouchers).

All employees are assessed on the cost to the person providing the vouchers.

Company credit cards

Where an employee uses a company credit card, they will be assessed on whatever

has been charged to the card, but not any charges in relation to acquiring the card or

in respect of late payment (e.g. interest).

However, an allowable deduction against employment income will be allowed in

the normal way if the expenditure satisfies the wholly, exclusively and necessary

tests. (These are explained later).

Chapter 4: Employment income

Example

George has been employed by Harris Ltd throughout 2009/10. He is a LPE. He

received wages of £6,700 and the following benefits of employment:

 Free meals in the works canteen, costing the company £575

 A place at the factory nursery for his daughter, costing £4,000

 An annual season ticket to travel on the local buses and trains which would have

cost George £1,050, but which Harris Ltd negotiated at a discount and paid only

£960

 Attendance at an internal training course which cost the company £450 per

employee.

Required

Calculate George’s employment income for 2009/10.

Answer

  £

Wages6,700

Benefitsofemployment:

Freemeals Exempt Nil

Workplacenursery Exempt Nil

Seasonticket Costtoemployer 960

Provisionofworkrelatedtrainingcourses Exempt Nil

Employmentincome 7,660

Season tickets for use on train or tram services are not exempt benefits. A bus-only

season ticket would qualify as an exempt benefit.

Paper F6 (UK): Taxation FA2009

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Benefits assessed on P11D employees only

 Overview of the benefits assessed on P11D employees only

 The provision of a company car

 The provision of private fuel

 The provision of a van

 Approved mileage allowances

 Living accommodation benefits

 The private use of business assets

 The provision of beneficial loans

4 Benefits assessed on P11D employees only

4.1 Overview of the benefits assessed on P11D employees only

For P11D employees there are several benefits with special statutory rules for

calculating the assessable amount of employment income, namely:

 the provision of a motor vehicle (for example, a car or van)

 the provision of private fuel

 the provision of living accommodation

 the private use of business assets

 the provision of loans at a cheap rate of interest.

4.2 The provision of a company car

A car provided to an employee by an employer is often referred to as a company

car.

If a P11D employee is provided with a company car that can be used for both

business and private use, he will be assessed on the benefit of the private use. The

value of this benefit is based on the list price of the car and its CO

(carbon dioxide)

emissions.

The assessable benefit for each car is calculated separately as follows:

Assessable benefit of a car £ £

Manufacturer’s list price (MLP) (max £80,000) X

Minus Employee’s capital

contribution

(max £5,000) (X)

X at appropriate % X

Minus Employee’s contribution for the private use of

the car

(X)

Car benefit X

Chapter 4: Employment income

The manufacturer’s list price (MLP) is the published price of the car when it was

new and first registered, including:

 VAT

 delivery charges

 standard accessories provided with the car

 optional accessories provided with the car

 optional accessories provided at a later date which cost in excess of £100.

However, the MLP is restricted to a maximum of £80,000.

Any contribution by the employee towards the capital cost of the car, including

qualifying accessories, can be deducted from the MLP, subject to a maximum

deduction of £5,000.

The appropriate percentage to apply depends on the car’s CO

emissions.

 If the CO

emissions are more than 120 g/km, but no more than 135 g/km, the

appropriate annual percentage is 15% for a petrol engine car and 18% for a diesel

engine car.

 The percentage increases by 1% per annum for each additional 5 g/km of

emissions above the base figure of 135 g/km, up to a maximum percentage of

35% whether a petrol or diesel engine car.

 A percentage of 10% is used for petrol cars with CO

emissions of exactly 120

g/km or less. A percentage of 13% applies to diesel cars with CO

emissions of

120 g/km or less.

The appropriate annual percentage for cars with CO

emissions of more than 135

g/km is therefore calculated as follows:

g/km Petrol Diesel

The car’s CO

emissions in g/km

(rounded down to the nearest 5 g/km)

Minus

Base level of CO

emissions

(i.e. 135 g/km for 2009/10)

(See tax rates and allowances)

(135)

÷ 5 g/km X

Plus Minimum percentage

Appropriate annual percentage

Restricted to a

maximum of 35%

The appropriate percentage is an annual percentage. If an employee does not have

the use of the car for the whole tax year, the benefit is time-apportioned.

 This applies if the car is acquired or disposed of during the year.

 It also applies if the car is made unavailable to the employee for at least 30

consecutive days during the year.

Paper F6 (UK): Taxation FA2009

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Example

Harry and Janice are P11D employees. They are provided with the following

company cars:



Harry Janice

Typeofcar Citroen Honda

Typeofengine Petrol Diesel

Datecarwasmadeavailable 6July2007 6September2009

Manufacturer’slistprice £20,235 £19,600

2emissions 162g/km 198g/km

Capitalcontribution £5,900 Nil

Contributionfortheprivateuseofthecar £55permonth £20permonth

Required

Calculate the benefits assessable on Harry and Janice in 2009/10.

Answer



Harry

anice Harry Janice



g/km g/km Petrol% Diesel%

2emissions

(roundeddowntonearest5

g/km)

160 195

BaselevelofCO2emissions (135) (135)



–

–––––––––––––––––––––––––––

–

–––––––––––––––––––––––––––



 25 60 ÷5g/km 5 12



–

–––––––––––––––––––––––––––

–

–––––––––––––––––––––––––––



Minimumpercentages15 18



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

Appropriatepercentages 20 30



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

Numberofmonthscaravailablein2009/10 12 7



Harry’scarbenefit

 £

Manufacturer’slistprice 20,235

MinusHarry’scapitalcontribution(restricted) (5,000)

 15,235 at20% 3,047

MinusContributionfortheprivateuseofthecar(£55×12) (660)

Carbenefit2,387



anice’scarbenefit

 ££

Manufacturer’slistprice 19,600

MinusCapitalcontribution (Nil)

 19,600 at30%×7/12 3,430

MinusContributionfortheprivateuseofthecar(£20×7)(140)

Carbenefit3,290

Chapter 4: Employment income

Note that the assessable benefit is for the private use of the car. There is no

assessable benefit on the provision of a car if the car is used entirely for business

purposes.

Pool cars

There is also no benefit arising if the employee has the use of a pool car.

A pool car is defined as a car which is:

 not allocated to a particular employee and which is available for use by more

than one employee, and

 not normally garaged at or near any employee’s home overnight, and

 used primarily for business purposes, any private use by an employee being

incidental to its use for business purposes.

Costs covered by the car benefit

The benefit is meant to cover all the capital and running costs incurred by an

employer in providing the use of the car (for example, car tax, insurance, repairs

and maintenance).

You should therefore ignore any information about these associated costs in an

examination question, as they have already been taken into account in the

calculation of the car benefit.

However, the car benefit does not take into account the provision of private fuel.

4.3 The provision of private fuel

An additional benefit arises if an employee is provided with a company car and is

also provided with fuel for his private mileage. (Note that there is no private fuel

benefit if an employee is provided with a pool car and is also provided with private

fuel.)

The provision of private fuel for a company car is a common scenario in practice

and in examination questions.

An employee with the use of a company car is automatically taxed for a fuel benefit,

unless:

 the individual employee pays for all his fuel and the employer only reimburses

the business mileage cost, or

 the employer pays for all the fuel and the employee reimburses the employer for

all his private mileage cost.

In both these situations, the employer does not bear the cost of any private fuel, and

the employee does not receive a private fuel benefit.

However, where the employer pays for the private fuel and the employee makes a

contribution towards the cost of private mileage but does not pay for all of the

Paper F6 (UK): Taxation FA2009

private mileage costs, the fuel benefit will be assessed on the employee in full with

no deduction allowed for the employee’s contributions.

This is the exception to the general rule that contributions paid by an employee to

an employer in respect of a benefit will reduce the taxable amount of that benefit.

Calculating the private fuel benefit

The private fuel benefit is based on the car’s CO

emissions and a base figure set by

HMRC each year. The base figure for 2009/10 is £16,900 and is given in the tax rates

and allowances provided in the examination.

The private fuel benefit is therefore calculated as follows:

Private fuel benefit = £16,900 ×

Appropriate percentage (same as car

benefit appropriate percentage)

Note that the percentage is an annual percentage.

If an employee does not have the use of the car for the whole tax year, the fuel

benefit as well as the car benefit is time-apportioned.

 This applies if the car is acquired or disposed of during the year.

 It also applies if the car is made unavailable to the employee for at least 30

consecutive days during the year.

The fuel benefit can also be time-apportioned where the employee opts out of

private fuel provision by the employer or where the fuel itself is only provided for

part of the year. Time-apportionment in these situations is only available provided

that the withdrawal from the provision of fuel is a permanent rather than a

temporary withdrawal.

Example

The facts are the same as in the previous example – Harry and Janice.

Required

Calculate the assessable fuel benefits for Harry and Janice in 2009/10.

Answer

The appropriate percentage, calculated in the previous example, is 20% for Harry

and 30% for Janice.



Benefit

 ££

Harry’sfuelbenefit(fullyear) 16,900 at20% 3,380



anice’sfuelbenefit(7monthsoftheyear) 16,900 at30%×7/12 2,958

Chapter 4: Employment income

4.4 The provision of a van

If a P11D employee is provided with a van that can be used for both business and

private use, he will be assessed on the benefit of the private use unless the only

private use is ordinary commuting (i.e. from home to work).

The assessable benefit is a fixed annual scale rate of £3,000.

There is also a separate private fuel benefit if fuel is provided for private mileage in

a van. This is £500 a year.

Note that these scale rates are annual rates. Therefore if the van and/or the fuel are

only available for part of the tax year, the scale rates are time-apportioned.

Note that these scale rates are not provided in the tax rates and allowances in the

examination.

4.5 Approved mileage allowances

As an alternative to an employer providing an employee with a company car, the

employee may buy and run his own car and claim a mileage allowance from the

employer for business travel.

Approved mileage allowances are statutory tax-allowable mileage rates for the use

of privately-owned cars, vans, motor cycles and bicycles. In addition, there is a tax-

free allowance for payments made to an employee who carries one or more

colleagues as passengers in his own car or van to make the same business trip.

The rates for a car, van, motor cycle and bicycle are different. For example, the

approved mileage allowance for 2009/10 for the first 10,000 business miles in a

privately owned car is 40p, and 25p thereafter. The approved mileage allowances

for cars are given in the table of tax rates and allowances. If required in the

examination, the statutory mileage rates for other vehicles will be given in the

question.

The consequences of approved mileage allowances are as follows:

If the mileage allowance received is: Consequence:

 Equal to the approved mileage

allowance

 The allowance received is tax-free

 No benefit arises

 In excess of the approved mileage

allowance

 An assessable benefit arises

 Benefit = excess allowance received

 Less than the approved mileage

allowance

 An allowable deduction from

employment income is available.

 Deduction = shortfall of allowances

received

Paper F6 (UK): Taxation FA2009

Example

Kevin uses his own car for business travel. During 2009/10 his business mileage

was 14,000 miles, for which his employer paid him 45p per mile. Included in this

mileage was a trip to Glasgow to a business conference, totalling 460 miles. Kevin

took his colleague Len to the conference in his car as Len could not drive, and

received £45 for taking Len as a passenger.

The approved mileage allowance (AMA) for a car is 40p for the first 10,000 miles

and 25p thereafter. The passenger rate is 5p per passenger per mile.

Required

Calculate the assessable benefit, if any, arising on Kevin as a result of receiving the

mileage allowances.

Answer

£ £

Mileageallowancereceived 14,000×45p6,300

AMAforthecar 10,000×40p 4,000 

 4,000×25p 1,000 

(5,000)

1,300

Passengerallowancereceived 45 

AMAforpassengers 460×5p (23) 

22

Assessablebenefit 1,322

4.6 Living accommodation benefits

The amount of the assessable benefit varies according to whether:

 the employee is a LPE or a P11D employee, and

 the living accommodation is job-related accommodation or not.

Definition of job-related accommodation

Job-related accommodation is accommodation provided by the employer for one of

the following reasons:

 It is necessary for the employee to live in the accommodation for the proper

performance of his duties (e.g. a school caretaker).

 It is not necessary, but it is customary for such accommodation to be provided in

that type of employment and it assists the better performance of his duties (e.g.

vicar, hospital employee, hotel employee, policeman).

 It is provided as part of security arrangements as there is a special threat to the

employee’s security (e.g. the Prime Minister’s official residence).