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HMRC internal manual

Employment Income Manual

Optional remuneration arrangements: Employment related benefits – transfer of assets

Sections 205 and 206 ITEPA 2003

Where employment related benefits that are taxable as general benefits under Chapter 10 of Part 3 of ITEPA are provided to employees under an optional remuneration agreement, the normal method of working out the cash equivalent for those benefits does not apply. The relevant amount to treat as earnings from the employment for that tax year is the greater of:

  • the cost of the benefit, and
  • the amount foregone with respect to the benefit

This includes situations where an asset is transferred to an employee after having been provided for the employee’s use as an employment-related benefit.

Where the asset was provided for the employee’s use as an employment-related benefit, compare the cost of the benefit with the amount foregone to determine the relevant amount – the amount chargeable to tax and liable for Class 1A NICs.

Where an asset is subsequently transferred to the employee, follow the guidance in EIM21640.

Where the special rule in section 206(3) applies, then compare the market value of the asset at the time the asset was first provided with the amount foregone. Then deduct from that amount the cost of the benefit (20% of the market value when first provided for private use) for the years during which it was provided for the employee’s private use.

Example 3

An employer provides its employee with the use of a computer for 3 years. The employee sacrifices £300 each year. The market value of the computer when first provided for the employee’s private use was £1,200. The annual value is £240. The employee makes a payment of £300 under salary sacrifice and is given the computer at the start of year 4.

In years 1, 2 and 3, the amount foregone in each of those years (£300) is compared with the cost of the benefit (£240). The relevant amount is the greater of the two - £300.

In year 4, when the asset has a market value of £300, the employee is given the asset in return for foregoing £300. To work out the benefit for year 4 take the higher of the market value at the date of transfer (£300) and the market value when first applied as an employment-related benefit (£1,200) less the cost of the benefit in each of the tax years when provided as an employment-related benefit (3 X £240 = £720). This gives the cost of the benefit as £480 (£1,200 - £720). This is higher than the amount foregone so the relevant amount treated as earnings from the employment in year 4 is £480.