Chapter 19 – Loans to employees and use of assets Flashcards
loans to employees, average method, strict method
Loans to employees – when a company lends money to an employee it is likely to give rise to a taxable benefit. The cash equivalent of the benefit is calculating using HMRC’s official rate of interest. The cash equivalent is the difference between the interest that would have been payable at the official rate of interest and any interest which is paid. To calculate this, you can use the average or the strict method. The employee will have no taxable benefit if the aggregate of all loans outstanding throughout the tax year is £10,000 or less.
Average method – you add the loan at the start of the tax year with the loan at the end of the tax year divide by 2 and then multiply by the average official rate of interest for the year. If there is no loan at the start of the tax year is given during the tax year, instead of using the start of the tax year, you use the date when the loan was made. You would apportion the months if the loan was made during the tax year or repaid before the tax year finished. If the employee makes contributions to the interest of the loan, they reduce the cash equivalent.
Strict method – you calculate the interest on a daily basis, for exam purposes you work to the nearest month. The taxpayer can elect for this method to be used. HMRC will only insist on the strict basis if the average basis gives a significantly distorted result.
If a loan is released or written off by the employer, the amount released or written off is treated as earnings.
uses of employers asset, transfer of assets, transfers of cars/houses and use of computers
Use of employers assets – if an employer lends an asset to one of his employees this will give rise to a taxable benefit, the benefit is the higher of the annual value of the asset or the sums paid by the employer in providing the asset by way of rent or hire charge. The annual value is 20% of the market value of the asset at the time it was first made available to an employee. You can deduct employee contributions to the asset. If they owned it for part of the tax year, you must apportion for the months they owned the asset. If the employer lets the employee keep the asset there will be a taxable benefit on this transfer.
Transfer of assets – the benefit will be the higher of the market value of the asset at the date it was transferred to the employee, the market value of the asset at the date it was lent to the employee reduced by amounts which have been charged to tax in respect of an employee’s use of the asset. Any payments made by the employee to the employer for the transfer of the asset can be deducted.
Transfers of cars or houses – the usual transfer of assets rules does not apply to these items. For cars the benefit when transfer occurs is the market value of the car at the date of the transfer minus any payments made by the employee for the transfer of the car. The same applies to transfers of houses.
Use of computers – if computer equipment is lent by an employer to an employee and the employee uses that for private uses, this gives a benefit using the 20% rule. Computer equipment does not include access to public electronic communications (for example line rental). If the computer equipment is used entirely for business purposes it is not taxable. When the equipment is used for both business and private use, you calculate the benefit using the 20% rule and then deduct the business proportion to calculate the taxable benefit.
