Budget 2016: A clarification of the calculation of the tax charge on benefits in kind

The Benefits Code in Income Tax (Earnings & Pensions) Act 2003, Part 3 contains a number of provisions detailing how to calculate tax charges arising in respect of each class of benefit.

Chapter 10 of Part 3 contains a “sweeping up” provision, which applies a tax charge to other benefits that are not covered elsewhere in Part 3 or are not explicitly exempted from tax.

Where an employee reimburses his or her employer, the value chargeable to tax will be reduced or, where the employee meets the whole “cost” of the benefit, extinguished.

For benefits that are taxed under Chapter 10, the current rule is that if an employee receives something or some service at the same cost and under the same terms and conditions as a member of the public, then they will have struck a “fair bargain” and no benefit will have arisen.

The concern has been expressed that employers are arguing that they have struck a “fair bargain” with employees in respect of benefits in kind that are taxed under the chapters 3-9 of Part 3, over-riding the computational provisions in those chapters.

It has been announced that legislation will be introduced to clarify that the concept of “fair bargain” is limited to Chapter 10 and cannot be applied to benefits that are within the scope of the rest of Part 3.

One specific “carve-out” has been announced from the new legislation, so that employees of car hire firms, who hire cars from their employer on the same terms and at the same cost as members of the public will still be able to apply the principle of “fair bargain” and will not be subject to tax.