Policy paper

Income Tax: preventing liability to charge being removed from certain taxable benefits in kind

Published 16 March 2016

Who is likely to be affected

Individuals who pay for benefits-in-kind they receive, where the taxable value is determined by specific legislative rules (other than the cost to the employer of providing the benefit).

Any employer who provides its employees with benefits-in-kind who then pay for the benefit, where the taxable value is determined by specific charging rules other than cost of providing the benefit.

General description of the measure

The policy intention has always been that ‘fair bargain’ does not apply to certain taxable benefits in kind where the charge is based on tax rules that specify how the benefit in kind should be calculated. This type of benefit includes beneficial loans, expenses, employer-provided living accommodation, company cars, vans and fuel.

This measure is a technical change to the wording of the legislation to ensure clarity.

There is no change to existing government policy.

Policy objective

The measure seeks to clarify in law that the concept of “fair bargain” applies only to general taxable benefits where the taxable amount is based on the cost to the employer of providing the benefit. It does not apply to the taxation of certain benefits in kind which have specific charging rules.

Background to the measure

This measure was announced at Budget 2016. It puts beyond doubt that the principle of ‘fair bargain’ does not apply to benefits chargeable to income tax within Part 3, Chapter 10 of Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003).

Detailed proposal

Operative date

This measure will have effect on and after 6 April 2016.

Current law

Part 3, Chapter 10 of ITEPA 2003 imposes a charge to tax where an employment-related benefit is provided to a director or an employee by reason of their employment except for those benefits which are already chargeable to income tax by virtue of Chapters 3 to 9 of Part 3 or other legislation, or are specifically exempt from charge.

A benefit is defined in Section 201(2) of ITEPA 2003 as a ‘benefit or facility of any kind’. When a benefit is provided to an employee by reason of the employment, it is an ‘employment-related benefit’. The definition of a benefit includes everything that confers a special bounty on the recipient.

However, for the purposes of Part 3 Chapter 10 of ITEPA 2003, something which is a ‘fair bargain’ between the employer and the employee is not a ‘benefit’. Fair bargain applies where an employee has received goods or services from their employer at exactly the same cost, terms and conditions as a member of the public or other independent third party dealing with the employer on arms-length terms. When this occurs, there is no benefit in kind.

The government’s policy intention is that the principle of ‘fair bargain’ does not apply to benefits chargeable to income tax within Part 3, Chapters 3 to 9 of ITEPA 2003. For those benefits the amount of the taxable benefit is calculated by reference to the specific charging rules and any payments made by the employee are deducted from that charge.

Proposed revisions

Legislation will be introduced in Finance Bill 2016 to amend ITEPA to put this matter beyond doubt. It will provide a general provision to exclude the application of fair bargain to identified taxable benefits in kind where the level of the benefit is set out in statute.

The changes will apply to Chapter 5 Taxable benefits: living accommodation, Chapter 6 Taxable benefits: cars, vans and related benefits and Chapter 7 Taxable benefits: loans.

Legislation will be introduced in Finance Bill 2016 to amend ITEPA to provide a provision to exclude the application of fair bargain to the identified benefits.

The legislation will specifically exclude employees who work for an employer where the employer trades in the provision of hire cars to the public. In the circumstances where the employee hires a car from the employer at the same cost and under the same terms and conditions as any member of the public, there will not be a benefit in kind charge.

This measure is a technical change to the wording of the legislation to ensure clarity. There is no change to existing government policy.

Summary of impacts

Exchequer impact (£m)

2016 to 2017	2017 to 2018	2018 to 2019	2019 to 20120	2020 to 2021
negligible	negligible	negligible	negligible	negligible

This measure is expected to have a negligible impact on the Exchequer.

Economic impact

This measure is not expected to have any macroeconomic impacts.

Impact on individuals, households and families

This measure is not expected to have a significant impact on individuals and households or on family formation, stability or breakdown.

Equalities impacts

HMRC does not hold data on the protected characteristics of those affected, but the measure is not expected to have equality impacts on groups with protected characteristics.

Impact on business including civil society organisations

This measure is expected to have a negligible impact on businesses and civil society organisations who will incur one-off costs to familiarise themselves with the new rules. Employers will continue to annually declare these benefits in kind on forms P11D and the associated employer Class 1A National Insurance contributions (NIC’s) costs for the relevant employees. This measure is not expected to bring any more employers into the scope of benefits in kind and there are not expected to be any additional on-going costs.

Operational impact (£m) (HMRC or other)

There will be no significant operational impact on HMRC.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be monitored and assessed through communication with affected taxpayer groups.

Further advice

If you have any questions about this change, please contact the Employment Income Policy Team on email: employmentincome.policy@hmrc.gsi.gov.uk.