Company Cars
If a car is made available to a director or employee who is paid more than £8,500 a year, the employee will be liable to tax based on the value of the benefit. This value is calculated by reference to the list price of the car and the level of CO2 (carbon dioxide) emissions. Until 6 April 2002 the car benefit was calculated on the list price of the car, with deductions available for the amount of business mileage and the age of the car. There are now no discounts available for higher levels of business mileage or for older cars. Furthermore, the emissions criteria become stricter over the initial three-year period. Cars that are made available to employees or to their families are considered to be derived from employment and taxed as employment income accordingly.
The cash equivalent for the car benefit is reduced for any periods of 30 days or more when the car is unavailable. This also applies to the provision of fuel benefit. If the employee is required to contribute to the cost of the car, the cash equivalent is reduced accordingly.
If employees use their own car for business purposes, they can claim a deduction for a business proportion of their running costs, eg insurance, road tax, petrol, etc. Mileage allowances paid are taxable if they exceed the tax-free allowance. These limits vary with the kind of vehicle.
From 6 April 2003, the new car fuel benefit regime is linked to the level of the car's CO2 emissions. The CO2 emissions' percentages that apply to determine the company car benefit are also used in the car fuel calculation. However, instead of applying the percentage to the list price of the car, the percentage is applied to a specified amount. For the 2004/05 tax year, the specified amount is £14,400. However, the Treasury do have the power to change the defined specified amount.
The benefit of fuel has been eroded over the past few years due to the increase in the scale charges. It is necessary for an employee to cover significant private mileage in a year to realize the value of fuel benefit.
Generally, if living accommodation is provided for employees that is not wholly, exclusively and necessarily provided for them to perform their job, this is treated as earnings assessable under ITEPA 2003. Tax is charged on the cost of providing the benefit. The charge to tax arises if living accommodation is provided for 1) the employee, or 2) a member of his or her family or household.
The method for calculating the amount of earnings depends on the cost of providing the accommodation. Briefly, where the cost is less than £75,000 the cash equivalent is the rental value of the accommodation less any sum made good by the employee. Where the cost exceeds £75,000 the cash equivalent increases to include a notional interest charge on the excess. The charge for living accommodation applies to higher and lower-paid employees.
Generally if an employee or his relative is provided with a cheap loan the employee is taxable on the cash equivalent of the loan. A cheap loan is one that carries a low rate of interest or is interest-free. In this case the amount of earnings is calculated by reference to the Inland Revenue's official rate of interest less any amount of interest actually paid by the employee on the loan. The official rate of interest is set by the Inland Revenue and generally moves in line with bank rates, although has been set at 5 per cent since January 2002.
Organizations introduce share schemes for a number of reasons such as:
§ to provide an incentive for key members of the management team based on performance; and
§ to encourage employees generally by giving them a stake in the company.
The Inland Revenue has specific provisions for a number of tax-efficient share schemes. There are the approved Save As You Earn (SAYE) share option scheme and the Share Incentive Plan (SIP), both of which are allemployee plans, which are regarded by employers and employees as important ways in which to achieve loyalty and commitment. In addition there are Company Share Option Plans and Enterprise Management Incentives.
§ SIP: This is an all-employee scheme. Employees participate by purchasing shares out of their pre-tax salary (partnership shares), which may be matched with free shares. In addition, employees can simply be awarded free shares. These shares, once purchased or awarded, are held on behalf of participants. The employee can receive the shares after five years tax free.
§ SAYE Plan: This is an all-employee plan that enables employees to save between £5 and £250 a month under an approved contract. Individuals are granted options to buy shares in the company, which they can exercise after a period of three, five or seven years. These savings and also a tax-free bonus can be used to exercise their options. Under this plan, a discount of up to 20 per cent can be set on the option price. When the option is exercised there is generally no charge to income tax. On sale of the shares, any rise in value is subject to capital gains tax.
§ Company Share Option Plan: This is a discretionary share scheme so the company is able to decide which of its directors/employees should participate. Under this plan, the maximum market value of the shares at the time of grant is subject to a limit of £30,000. There is no tax payable at the time of grant. At exercise, there is generally no income tax payable. When the individual sells the shares, the growth in value from exercise to sale is subject to capital gains tax.
§ Enterprise Management Incentive (EMI): The EMI was introduced in 2000 and is specifically aimed at smaller companies. The EMI is very flexible and allows an employer to grant options to the value of £100,000 to each employee. There are a number of qualifying conditions that companies and employees have to fulfil. Provided the conditions are not breached when the employee exercises the option, no income tax or National Insurance liability arises. On the eventual sale of the shares, capital gains tax is payable on the difference between the sales proceeds and the option exercise price. The employee can claim the relief from the date the option was granted.
Generally, a corporation tax deduction is available for an employing company in respect of the opportunity cost of providing shares to employees. This will broadly be based on the market value of the shares when they are acquired. The tax relief will be calculated based on the difference between the market value of the shares when they are acquired and any amounts payable for the share, ie the 'profit' to the employee. The corporation tax deduction is not available until the employee becomes taxable on the receipt of the shares. This change was introduced in the Finance Act 2003.
Set-up and administration costs relating to approved share schemes will continue to be tax deductible.
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