FINANCE BILL 2002: EXPLANATORY NOTE
CLAUSE 37 AND SCHEDULE 6: MINOR AMENDMENTS TO SCHEDULE E CHARGE
SUMMARY
1. This clause introduces Schedule 6 which provides for a number of minor changes to modernise and bring into line with practice the income tax legislation for employment income. The changes will also help the Tax Law Rewrite Project make the legislation easier to understand in the rewrite Bill planned for later in 2002.
DETAILS OF THE CLAUSE
2. Clause 37 introduces Schedule 6, which sets out changes to five separate areas of the income tax legislation relating to employment income.
DETAILS OF THE SCHEDULE
Share options
3. Paragraph 1 provides for a new way of preventing double taxation where tax is payable both on the grant and on the exercise of employee's share options.
4. Where an employer grants a long-term share option to an employee, the employee may be taxed twice. The first charge is when the option is granted. This charge is on the difference between the value of the option and anything the employee pays for it (1st gain). The second charge is when the option is exercised. This charge is on the difference between the value of the shares and anything the employee paid for the shares and for the option (2nd gain). Section 135(5)(a) ICTA 1988 currently removes a double charge by reducing the tax charged on the 2nd gain by the amount of tax charged on the 1st gain. This gives arbitrary results depending on the prevailing rates of tax and is out of step both with other deductions from charges on share options and with the equivalent rules for National Insurance Contributions.
5. Paragraph 1 substitutes a new version of section 135(5)(a) which instead deducts the amount of the 1st gain from the 2nd gain in computing the amount chargeable to tax on exercise of the option.
Credit tokens and non-cash vouchers
6. If an employer gives a voucher or credit token to a relation of an employee it is treated as being provided to the employee. In most cases this works straightforwardly to tax the employee on the benefit thus provided by the employer. But the tax charge on a credit token (typically a credit card) depends on use by the employee. In order to bring the treatment of employer-provided credit tokens into line with vouchers and other benefits paragraph 2 treats use of the credit token by a relation of the employee as if it were use by the employee.
7. Where a credit token is used to obtain goods or services there could potentially be a double tax charge: on the use of the token and on the goods etc obtained. With employees, this double charge is removed by taxing only the use of the credit token, except in the case of goods related to cars and other vehicles, where any car (or other vehicle) benefit charge takes precedence. After the amendment in paragraph (2) the basic rule that only the use of the credit token is taxed will also apply in the case of use by a relation of the employee. Paragraph (3) amends the special rule for use of a credit token to obtain vehicle-related goods to include such goods obtained by a relation of the employee.
Benefits in connection with termination of employment or change in duties or emoluments
8. Section 148 ICTA 1988 sets out the rules for taxing benefits provided and payments made in connection with termination of, or changes in, employment. Tax can be charged under section 148 on a number of benefits that would be exempt if paid in connection with a continuing unchanged employment. Paragraph 5 relaxes that line and specifically lists a number of ?normally exempt? benefits that will also be excluded from a section 148 charge.
9. The benefits now excluded from a section 148 charge are, if provided in connection with a change in a continuing employment,
- benefits connected to a change of residence as a consequence of such a change (paragraph 1(1) of Schedule 11A.)
10. And if provided in connection with the termination of an employment, the excluded benefits are:
- benefits provided in connection with a car or van that is otherwise taxable (sections 155(1), 157(3), 159AA(3))
- meals in a staff canteen (section 155(5))
- use of a mobile telephone (section 155AA)
- provision of computer equipment (if within the £500 limit) (section 156A)
- benefits provided in connection with an exempt heavy goods vehicle (section 159AC(3))
- benefits of work-related training provided by employers (sections 200B(2)(b) and 200D(1))
- benefits of education and training (section 200E(2)(b))
- retraining courses (section 588)
- counselling services (section 589A)
- employer's contributions to approved personal pension arrangements (section 643(1))
Taxation of benefit where income received free of tax
11. In certain circumstances, tax has to be accounted for by an employer in respect of a payment made to an employee from which it was not possible to deduct PAYE. If the employee does not reimburse the employer for that tax within a specified time, the amount of the tax is treated as additional income of the employee. But that additional income cannot currently be counted in deciding whether or not the employee is ?higher-paid? (earning emoluments of £8,500 or more a year). There is a range of benefits (e.g. car benefits) that are only taxable on the higher paid.
12. Paragraph 4 rectifies the position be reclassifying the unreimbursed tax as ?emoluments? rather than simply ?income?.
Priority between charges under sections 148 and 595 of the Taxes Act 1988
13. Some sums paid after an employment has ended could potentially be charged under both sections 148 and 595 ICTA 1988 (although in practice the Inland Revenue has only ever applied one charge). Each of these provisions applies to 'sums not otherwise chargeable to tax?. The first covers payments and benefits on termination or changes in employment and the second covers payments to provide retirement benefits - so there are sums that could fall into both categories. Paragraph 6 provides that the more specific charge on the provision of retirement benefits should take precedence over the more general section 148 charge.
BACKGROUND NOTE
14. The next Tax Law Rewrite Bill is due to be introduced at the end of 2002. It will deal with income tax on employment income, pensions and social security income, including the primary legislation for Pay As You Earn (PAYE). The Tax Law Rewrite Project has already consulted on parts of the Rewrite Bill in Exposure Drafts, and aims to publish the whole Bill in draft in the summer.
15. During the course of the Rewrite a number of places have come to light where there are anomalies in the existing law or where it does not seem to work in a logical way or where it is out of step with practice.
16. It is possible to remove some of these anomalies as part of the Rewrite process. This clause, and clause 39 address anomalies that it would not be possible to correct as part of the Rewrite.
17. These changes will therefore help the Tax Law Rewrite Project make the legislation easier to understand in the rewrite Bill planned for later in 2002.