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HMRC internal manual

Tax Credits Manual

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HM Revenue & Customs
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Eligibility - income (employed and self-employed): Specific payments / Benefits included as income (Info)

Specific payments and employment related benefits included as income for tax credits purposes where not already counted as earnings are

  • any payments of expenses which count as earnings.

The sort of expense payments which count as earnings include ‘round sum’ expenses allowances that are payable irrespective of whether the employee spends them in a particular way. For example, this includes those expenses such as mileage allowances paid by an employer to an employee for the use of his own car on business (other than those on which there is no liability to income tax) mileage allowances.

Mileage allowance payments which do not exceed the approved amount for each kind (calculated by multiplying the business miles in that kind of vehicle by these rates) are not counted as income. Where mileage allowance payments are paid in excess of the approved amount, the excess is counted as income.

Note: Where the amount paid is less than the approved amount, the difference between the approved amount and the amount paid can be deducted from the employee’s other employment income.

This is the same as income tax. For more information, use the Employment Income Manual paras EIM31200 to EIM31410.

For year 2001-2002, the approved mileage rates weren’t prescribed by law but approved mileage rates were established through an administrative arrangement known as the Fixed Profit Car Scheme (FPCS). For this year, employees have the choice of calculating mileage allowance income as the amount received less either the approved mileage rate or the actual costs of using their car for the business journeys.

Note: Where the amount paid is less than either the approved rate or actual costs, employees can’t deduct the difference from their other employment income. This is the same as income tax except that for income tax purposes, employees can make a deduction. For more information, use the Schedule E Manual.

  • any non-cash voucher received by the customer chargeable to income tax.

These are vouchers which can be exchanged for money, goods or services. The general rule is that income must include an amount equal to the expense incurred by the employer or third party specifically for the purpose of providing

* the voucher itself

and

* the money, goods or services for which the voucher can be exchanged

less

* any part of the expense made good to the provider.

The full guidance can be found in the first three rows in the table in the Employment Income Manual para EIM16140.

  • any credit token received by the customer chargeable to income tax.

These are mainly credit cards made available for obtaining money, goods and services for private use. The general rule is that, where the employee has used the credit token to obtain money, goods or services, income must include an amount equal to the expense incurred by the employer or third party in, or in connection with

* the provision of the money, goods or services obtained

less

* any part of the expense made good to the provider by the employee.

The full guidance can be found in the fourth row in the table in the Employment Income Manual para EIM16140.

  • any cash voucher received by the customer chargeable to income tax.

The general rule is that the income must include an amount equal to the sum of money for which the voucher is capable of being exchanged.

The full guidance can be found in the fifth row in the table in the Employment Income Manual para EIM16140.

  • Payments and benefits received in connection with the termination of a person’s employment or any change in the duties of, or earnings from, the employment.

From year 2003-2004 onwards, so much of a payment or benefit received as is chargeable to income tax These are payments and benefits in connection with the termination of a person’s employment or any change in the duties of, or earnings from, the employment including

* damages for breach of employment contract
* agreement for benefits provided during employment to continue beyond the termination
* redundancy pay
* compensation payments for wrongful and unfair dismissal.

The amount to include as income is the amount in excess of £30,000.

This is the Income Tax provision. For more information, use the Employment Income Manual para EIM12800 onwards for further details.

For year 2001-2002, the amount to include as income is the amount in excess of £30,000. However, this is narrower as it only covers statutory payments - that is, statutory redundancy pay and compensation payments for unfair dismissal.

Note: Non-statutory redundancy pay and compensation for wrongful dismissal are also taxed but for tax credit purposes, can be ignored in full for this year.

For more information, use the Schedule E (SE) Manual at SE13775 for details of non-statutory redundancy schemes and payments.

  • so much of a payment of Statutory Sick Pay received by the customer as is chargeable to income tax.
  • the amount (if any) by which a payment of Statutory Maternity Pay (SMP), Statutory Paternity Pay (SPP), Statutory Shared Parental Pay (ShPP) and Statutory Adoption Pay (SAP) received by the customer exceeds £100 weekly.

This is effectively a disregard of up to £100 for each week of SMP, SPP, ShPP or SAP received in the tax year.

Note: Where the rate of SMP, SPP, ShPP or SAP received is less than £100 weekly, only an amount equivalent to that received in each week of SMP, SPP, ShPP or SAP in the tax year can be deducted from the total pay and SMP, SPP, ShPP or SAP income for the year. For example, if £80 SMP, SPP, ShPP or SAP is received in any week, only £80 can be deducted.

This is different from the income tax treatment. All SMP, SPP, ShPP and SAP is included as income for income tax purposes.

  • where a car is made available for private use the amount to be included as income is the amount that would be chargeable to income tax. The general rule is that a ‘cash equivalent’ of the benefit of the use of the car calculated as follows

    • for year 2001-2002, the cash equivalent of the benefit is calculated as a percentage of the ‘price of the car as regards the year’, set according to the number of business miles driven in the car during the tax year. The resulting figure is then adjusted to account for age, periods of unavailability and payments for private use. So there are two stages to calculating the cash equivalent

    • identifying the ‘price of the car as regards the year’. For more information, use the Schedule E (SE) Manual para SE23100 onwards
    • multiplying the ‘price of the car as regards the year’ by the correct percentage to calculate the amount of the car benefit charge. For more information, use the Schedule E (SE) Manual para SE23320 onwards.

    • for 2003-2004 year onwards, the cash equivalent of the benefit continues to be calculated as a percentage of the ‘price of the car’.

    However, the percentage is based on the carbon dioxide (CO2) emissions of the cars and the adjustments for age and business mileage don’t apply. For more information, use the Employment Income Manual para EIM23350 onwards.

    Note: For year 2001-2002 only, Extra Statutory Concession A71 exempts charge where the private use is by a relative of the employee in certain circumstances and also allows for apportionment of the benefit where the use of the car is shared between employees (use ESCA71). The concession ceased to have effect after 5 April 2003 because its provisions were incorporated into law.

  • where car fuel is provided, the amount to be included as income is the amount that would be chargeable to income tax. For more information, use the Employment Income Manual para EIM23750 onwards.
  • any sum to which taxation of consideration for certain restrictive undertakings applies.

This is where an employee receives payment in connection with his or her employment for agreeing to restrict their future conduct or activities. Such an agreement is known as a restrictive covenant or undertaking. It’s usually, though not invariably, made between employee and employer in order to restrict the employee’s activities if the employment is terminated.

This is income tax provision. For more information, use the Employment Income Manual para EIM03600.

  • strike pay received by the customer as a member of a trade union.

This is different from the income tax treatment as these payments are non-taxable.

  • gains from employment related shares and other securities.

The amount to be included as employment income is the amount that is taxable as employment income so the tax credit rules are the same as those for Income Tax.

The gains referred to are those made where an employee or director receives shares or other securities (or an interest in shares or other securities) by reason of their employment, for free, below market value or is assisted in selling them above market value.

The general rule is that such gains are taxable and included as employment income for tax credit purposes unless they’re covered by exemptions that are available under HMRC Approved Share Schemes. The following is a summary of the taxable gains and income from unapproved share schemes.

  • gains where shares or securities are acquired in pursuance of an employment-related securities option.
  • payments received in exchange for transferring, cancelling, or otherwise releasing in connection with an option to buy shares or other securities.
  • gains where shares or other securities are acquired for less than market value.
  • post-acquisition benefits - that is, gains made as a result of ownership or an interest in the shares or other securities

    • gains where shares or other securities were received with conditions or restrictions (for example, they may be forfeited) and these are lifted
    • gains where convertible shares or other securities received are converted to more valuable shares or securities
    • other benefits from the ownership or interest. For example, bonus or rights issues of shares, cash, and vouchers or tokens exchangeable for cash or services (not dividends).
  • gains where shares or other securities received are sold at more than market value.
  • gains evaded by the artificial increase or decrease of the value of shares or other securities that the employee or director receives or has an interest in.
  • HMRC Approved Share Schemes, as follows

Save As You Earn (SAYE) share option schemes

These allow employees to save up to £250 monthly from their salary or wages to acquire shares through share options.

Gains from exercising options in this scheme are only taxable if the option was exercised within three years of receiving it and because the company the employee worked for was sold or taken over.

The full amount of any payment received in return for transferring, cancelling, releasing or otherwise not exercising an option under this scheme is also included as income.

Approved Company Share Option Plans (CSOP)

Allow a company to grant options worth up to £30,000 to individual employees or directors.

Gains are taxable under these schemes if an option is exercised

* within three years of receiving it (except where exercised within six months of retirement, redundancy, injury or disability)

or

* more than ten years after receiving it.

The full amount of any payment received in return for transferring, cancelling, releasing or otherwise not exercising an option under this scheme will also be included as income.

Enterprise Management Incentive (EMI) options

These allow smaller companies to grant employees share options with a market value of £100,000, subject to a total share value of £3 million.

Gains are taxable under this scheme if

* the gain results from granting an option at less than the market value at the date the option was granted

or

* an option is exercised more than ten years after receiving it or more than 40 days after a ‘disqualifying’ event.

The full amount of any payment received in return for transferring, cancelling, releasing or otherwise not exercising an option under this scheme will also be included as income.

Approved Share Incentive Plans (SIP)

Previously known as All Employee Share Ownership Plans or Employee Share Plans. These allow employees to buy ‘partnership shares’ from their gross pay (currently up to the lower of £1,500 yearly or 10% of annual gross). Employees may also be awarded free and ‘matching’ shares by their employer. Dividends from partnership shares, free or matching shares may be used to buy further shares called ‘dividend shares’.

The value of any partnership, free or matching shares removed from the plan within three years of acquisition are taxable on their market value when they leave the plan, except where employees leave through retirement, redundancy, injury or disability.

There is a reduced income tax charge if shares are withdrawn between three and five years.

If dividend shares are removed from the plan within three years then there is a charge to tax (under Schedule F) on the amount of the dividend used to buy the shares. After three years there is no charge.

The full amount of any payment received in return for cancellation of the ‘partnership share’ agreement will also be included as income.