The Taxation of Benefits for Employees in the UK - Essay Example

Benefits in kind (aka fringe benefits) are those compensations that are provided to employees in addition to the salaries or wages. For instance, the provision of a car by an employer is a benefit in kind. S 62 of ITEPA 2003 includes all the benefits in kind to earnings which is money or money’s worth. “Money’s worth” means that the benefit is either of direct monetary value to the employee or can be converted into something that is of direct monetary value to the employee. This monetary value is included in the total earnings of the employee and then taxed accordingly.

There has been a debate whether benefits in kind should be taxed or not. Taxing such benefits is essential because employees cannot be allowed to have numerous benefits but low salaries so that they are taxed less. However, the same can prove to be very unfair when an employee is provided with a one-time benefit in kind and he has to pay too much tax as a result. Another problem arises when an employee is provided with a benefit in kind which is clearly of a great value but is not taxed u/s 62 because it cannot be converted into something having monetary value. A valuation can be very tricky for some articles and it can end up relieving the employee of tax liability for the benefit hence giving him an unfair advantage. There have been numerous cases that had to be settled in court due to the confusion of valuation. The courts have a history of deciding these cases while remaining within the confines of S 62. This section seems inadequate and unfair on occasions where accommodation can go untaxed but a mere provision of a suit is taxed because one can be valued and the other cannot. In order to be fair, the valuation system is required to be adequate and broader in scope.

Another problem is that the benefits code does not apply to lower-paid employees. The lower-paid employees are defined in such a way that can include those employees who are not actually lower paid. According to S 217(1), a lower-paid employee is one who has an earning rate of less than £8,500. By the inclusion of benefits obtained under the benefits code, many employees, who have the monetary earnings rate of less than £8,500, do not fall in the definition of lower-paid employees. However, when employees hold benefits of great value, which are such that are not convertible to something having a monetary benefit, the employees fall in the definition of lower-paid employees and become exempt from the benefits code. This is a huge problem that can only be solved by broadening the scope of S 62 and the valuation system.

Section 64 is also of importance as it deals with the relationship between earnings and benefits code. There may be a case that a single benefit is provided to an employee but it gives rise to both an amount treated as earnings and an amount to be treated as earnings under the benefits code. Section 64(2) provides that in such a case, the amount that is constituted as earnings is to be treated as earnings, and only that portion of the second amount is to be treated as earnings under the benefits code which exceeds the first amount. This section actually attempts to avoid the double taxation of a benefit if it falls both under S 62 and S 63. It is not a bad idea to tax such benefits in this way but there can be another way that is simpler to understand. Such benefits could also have been taxed entirely under the benefits code system. This would not have brought many changes to the resulting revenue but it would have been a better tax due to its simplicity.

The underlying principle of having the benefits code system is very fair. This system is designed to make employees accountable for their perquisites. However, this system has many loopholes which allow avoidance of tax. Also, employees are also open to the danger of paying more tax than the fair amount. As mentioned above, most of the problems are created by the valuation process. Another problem arises in cases of benefits that are clearly of great value but their immediate conversion to something having a monetary value to the employee is very unlikely. For instance, in Tennant v Smith, the employee was clearly enjoying the benefit of accommodation but was not taxed because the locality of the accommodation made it almost impossible for it to be converted into money. This exemption was granted under the law but it is difficult to call it fair. This means that if any benefit’s conversion to money is deliberately made impossible through astute measures, the employee can easily avoid tax. If the conversion to money rule is forgone, the only criterion left would be that of valuation. The valuation system also has many shortcomings but its use as a sole criterion can bring more employees into the tax bracket. Therefore, the conversion to money rule requires significant devotion of thought so that it is not abused.