Fringe Benefits Tax Treatment

Introduction

The phrase “fringe benefits” is normally taken as referring to benefits, which are not in the form of money and which an employee derives from an employment. These are the perquisites and benefits-in-kind which are given to an employee in addition to salary, bonus and commission and which have the effect of increasing the employee’s economic wealth.

This article outlines how these fringe benefits are dealt with under the tax system and the reporting requirements for employers where benefits are provided for their employees. Any reference to employee applies equally to a director.

In particular, the article considers:

• the framework of the legislation that brings benefits within the tax charge, how the legislation evolved over the years and the scope of the tax charge
• the categories of benefits and the valuation rules applying
• the exemptions from benefit-in-kind - an outline of the statutory exemptions
• payment of the tax - the PAYE collection mechanism
• employers’ reporting obligations - the return of fringe benefits on Form P11D

Framework of the legislation

The tax system is one which concentrates on income and to operate successfully it needs to be able to measure that income i.e. money or money’s worth. The tax law sets out the basis of assessment, the persons chargeable and the extent of that tax charge and in the case of fringe benefits it applies valuation rules.

The main Schedule E charging provision in tax law is section 112 TCA 1997. It states that income tax under Schedule E applies to every person having or exercising an office or employment of profit and covers all salaries, fees, wages, perquisites or profits whatsoever from an office or employment for the year of assessment. The provision is wide ranging insofar as, in addition to charging the more obvious forms of income like salary, fees and wages it also charges “perquisites or profits whatsoever therefrom”.

Benefits-in-kind were brought into the tax charge over the years through various Finance Acts. Benefit-in-kind legislation is now at Chapters 3 and 4, Part 5 Taxes Consolidation Act 1997. The charge to tax on benefits applies to employees with total emoluments including benefits of £1,500 or more for the tax year and to all directors. The benefit-in-kind tax charge on the provision of company cars and preferential loans applies regardless of the level of the employee’s emoluments.

The benefit-in-kind legislation, which was introduced in 1958, charged to tax certain items which either escaped assessment to tax or could not be adequately charged. Up to that point perquisites were chargeable to tax if, say, they were capable of being converted into money by the director or employee i.e. money’s worth, or represented the discharge of a pecuniary liability by the employer on behalf of the director or employee. The benefit-in-kind legislation charged to tax living and other accommodation, entertainment, domestic or other services, or other benefits or facilities of whatever nature, provided for a director or employee not already caught within the framework of section 112 TCA 1997.

Where the employer incurs expense in or in connection with the provision of such benefits and the expense is not otherwise chargeable to income tax as income of the employee or director the charge to tax is under Schedule E on so much of the expense as is not made good to the employer by the employee or director. The benefit-in-kind charge also applies to benefits provided for the spouse, family, servants, dependants or guests of the employee or director.

Further significant changes to benefit-in-kind legislation were made in 1982 in relation to company cars and preferential loans and their valuation for benefit-in kind purposes. The benefit-in-kind rules for company cars were substantively changed and new benefit-in-kind legislation was introduced for preferential loans. As the various benefits were legislated for over the years they were treated as emoluments and taxed under the Schedule E rules.

What the benefit-in-kind legislation does is regard the benefit as income for tax purposes and it gives a measure or valuation of that income for the purposes of a tax charge.

Categories of Fringe Benefits

The valuation of non-cash benefits for tax purposes varies according to the type of benefit involved. In general, the amount on which tax is paid as a result of receiving a fringe benefit is the amount it costs the employer to provide it, less any payments made by the employee towards the cost. The benefit is chargeable to tax whether or not the employee wanted the fringe benefit. Certain fringe benefits have special rules for calculating the amount on which tax is paid e.g. company cars, preferential loans and living accommodation.

Benefits can be conveniently placed into three categories.

Discharge of a pecuniary liability of an employee

Where the employer discharges a pecuniary liability of an employee, the amount charged to tax is generally the sum paid out by the employer - see also paragraph titled Payment of the Tax on page 26. As mentioned above, these payments have always been taxable as perquisites under the ordinary rules of Schedule E, even before the introduction of benefit-in-kind legislation in 1958.

A typical example of this is an employer who pays the employee’s personal bill for, say, medical insurance. If, for example, an employer meets an employee’s medical insurance to the extent of £800 that amount is generally charged to tax.

Benefits convertible into cash (or money’s worth)

Where an employee gets a benefit which is capable of being turned to pecuniary account the amount to be charged to tax is the higher of the sum realisable on sale by the employee or the cost incurred by the employer in providing that benefit. In other words, the taxable value is the higher of the amount it would realise if sold by the employee on the open market or the expense incurred by the employer in giving the employee the benefit.

Typical examples of this would be, say, supermarket shopping vouchers, television or video etc.

The shopping voucher would display a face value - that face value would normally represent both the amount realisable when the employee presents the voucher at the supermarket checkout and the cost to the employer of providing the voucher. In such a case if the face value of the voucher is £100 [and assuming that this amount also represents the expense incurred by the employer] then that amount is chargeable to tax.

In the case of an employee who is given a television by his/her employer the higher of the two amounts [i.e. amount realisable on sale or expense incurred by employer] is chargeable to tax. Where the employer is a manufacturer of TVs the expense incurred by the employer in providing the employee with a TV would normally be lower than the amount that the TV would realise if sold by the employee on the open market. The higher of the two amounts would then be chargeable to tax.

Benefit not convertible into cash (or money’s worth)

Where an employee is provided with a benefit which cannot be converted into money or money’s worth the basis of valuation is the expense incurred by the employer. These are the “in-house” benefits as distinct from “bought-in” benefits. This would include such benefits as free or subsidised services or facilities. In circumstances where the provision of a benefit is such that it displaces an otherwise fee-paying individual then the income foregone is taken into account as part of the expense incurred by the employer in providing the benefit.

Where an asset which is owned by the employer, such as a house, is provided for the private use of the employee for free or less than full consideration, the benefit-in-kind is calculated on the annual value of the use of the asset plus the current expenses incurred by the employer in connection with the asset. Any amounts made good by the employee to the employer are deducted in arriving at the taxable amount.

The benefit-in-kind on private accommodation which is provided rent free or at a reduced rate is calculated as follows:

• the open market rent of the house [As a general rule of thumb for calculating the market rent a figure of 8% of the current market value of the property is taken. However, if a more accurate figure is available, it will be used.],
  plus
• the annual value of any furnishings / fittings in the house [5% of the cost, when new, of furnishings / fittings is generally taken as their market value.],
  plus
• any incidental expenses (repair, maintenance, insurance etc.) paid by the employer.

Summary of Valuation Rules

The exemptions from Benefit-in-Kind

The vast majority of benefits-in-kind are taxable. The specific exemptions provided for in the legislation are:

• office accommodation, furniture or supplies used by a director or employee in carrying out the duties of the office or employment. In other words facilities used solely for business purposes are tax free e.g. stationery, briefcase etc.
• living accommodation provided for an employee (but not a director) on the employer’s business premises, if the employee is, for the purpose of enabling him/her properly perform the duties of the employment, required by the terms of his/her employment to reside in the accommodation and either -
  • the accommodation is provided in accordance with a practice which, since before 30 July 1948, has commonly prevailed in trades of the class in question as respects employees of the class in question, or
  • it is necessary, in the particular class of trade, for employees of the class in question to live on the premises.
• meals in a canteen where meals are provided for staff generally - an exclusive executive canteen would not be included. The facility must be available to all employees - otherwise, the exemption does not apply.
• contributions paid by the employer in or in connection with the provision of a pension, annuity, lump sum, gratuity or other like benefit to be given on the death or retirement of the director or employee.
• annual or monthly bus or train passes provided by an employer to an employee in respect of scheduled licensed passenger transport services
• childcare services provided by the employer for a child of a director or employee on premises which are made available:
  • solely by the employer,
  • by the employer jointly with other persons and the employer is wholly or partly responsible for financing and managing the provision of the childcare service,
  • by any other person or persons and the employer is wholly or partly responsible for financing and managing the provision of the service
  subject to certain requirements of the Child Care (Pre-School Services) Regulations 1996.
  
  “Childcare service” means any form of child minding service or supervised activity to care for children whether or not provided on a regular basis.

Where there is no cost or expense to the employer in providing the benefit-in-kind and assuming that the tax law has not otherwise provided for a taxable value [for example, an annual taxable value in the case of company cars, preferential loans, living accommodation etc.] then there is no taxable amount. The type of benefit-in-kind which would fall into this category would be “in-house” benefits where the marginal cost is nil e.g. the employer, say, a surveyor or solicitor gives free expert advice to an employee on the handling of a contract for the purchase of his/her house. As there is no cost to the employer in giving the advice the taxable amount is nil.

Payment of the Tax

The charge to tax is under the Schedule E income tax rules and the employee or director is ultimately chargeable on the benefits and will get credit for any PAYE tax suffered.

The legislation and the PAYE regulations require the deduction of PAYE on the payment of emoluments. The legislation defines emoluments as anything assessable to income tax under Schedule E. This, in strictness, would include fringe benefits, particularly payments of a pecuniary nature. Employee is defined as any person in receipt of emoluments and employer is any person paying emoluments. Where there is a payment of emoluments to an employee the PAYE tax deduction system must operate. The term “payment” is wide enough in some contexts to include non-pecuniary payments.

Some benefits are not amenable to PAYE tax deduction because their nature is such that they may not constitute a straightforward payment. These are the pure benefits-in-kind like company cars, preferential loans, living accommodation, facilities and services. These particular benefits-in-kind are taxed by restriction of Tax-Free Allowances or by direct assessment on the employee / director.

Benefits, other than benefits-in-kind, are exposed to PAYE tax deduction and PRSI and Health Contribution charges. The Employer’s Guide to PAYE at paragraph 23 gives an outline of the items that should be included in “pay”. Income tax due on the benefits, other than benefits-in-kind, is normally deducted by the employer at source under PAYE. In practice, Revenue currently accept in certain circumstances that the benefits may be taxed by restriction of Tax-Free Allowances or by direct assessment on the employee. Where, for example, there is salary substitution or vouchers exchangeable for cash or the payment of material amounts of perquisites or benefits or tax planning or avoidance involved Revenue insist on deduction of income tax under PAYE [and PRSI and Health Contribution charges] on an on-going basis.

Perquisites such as vouchers and the payment of a pecuniary liability of the director or employee are pecuniary or cash-like in nature and, in strictness, are subject to PAYE/PRSI/Health Contributions and should be regrossed at the director’s or employee’s marginal rate of tax and also for PRSI and Health Contribution charges. However, where the amounts are reasonable the benefits may normally be taxed by restriction of TFA or by direct assessment, as appropriate.

A practice is also in place whereby settlement of the overall liability for employees’ fringe benefits may be made by the employer. In such cases the employer must agree the overall liability with the Inspector.

Employers’ Reporting Obligations

Employers who are given notice by Revenue on Form P11D - Return by Employer of benefits, non-cash emoluments etc., must return details of their employees’/ directors’ fringe benefits within the time limit mentioned on the form. The Form P11D lists the relevant taxable benefits which should be returned.

Forms P11D for 1999/2000 issued at the end of April to about 1,900 employers. The return filing date is 30 June 2000.