Employment - CH 2

Question 1

What tax do employees pay compared to self employed?

Answer 1

Employees - Have a contract of service with their employer - Receive taxable earnings + Pay tax under PAYE System

Self employed - enter into a contract for services - pay tax on profits for a tax year (CH3)

Question 2

What is the test applied by HMRC to distinguish between employees and self employed? (9 lines)

Answer 2

1. Control over the worker + power to decide when work is performed
2. Obligation to accept work
3. Ability to hire subordinates to perform the work
4. Financial risk/reward, for example due to finishing work early or late
   5.Who provides the equipment for the work
   6.Wording of contract,(obey orders, obligation to appear, rights etc)
5. Sick Pay, holiday pay
6. Wearing a uniform
7. Job title

Question 3

Basis of tax for employees

Answer 3

On everything that constitutes a reward of employment eg salary, BIK, bonuses etc

Question 4

When are individuals normally taxed on earnings in earlier of?

Answer 4

1. the date of receipt
   2.the date when the employee becomes entitled to payment

Question 5

When do directors bonuses be taxed in dates - 5 lines

Answer 5

They are taxable on the earliest of the 5 dates:
1. date of the receipt
2.the date when the director becomes entitled to payment
3. the date the amounts are recorded in the accounts of the company
4.the end of the period of account (if the earnings are determined BEFORE the end of the period of account)
5. the date the earnings are determined (if the earnings are determined after the END of the period of account)

Question 6

When are employee benefits taxed

Answer 6

taxed when the benefit is provided to the employee so if a car is provided on 1 January, the benefit is 3/12 X full year benefit for that tax year

Question 7

what are allowable deductions in employee employment income? (8 lines)

Answer 7

Generally allowable as deductions from employment income

1.EE contribution into occupational pension scheme (CH9)
2. professional subscriptions for example ACCA subscriptions if paid by employee
3.Employment related insurance premiums if paid by employee
4.travel costs
5.deficits on mileage allowances
6. charitable payments under the payroll deduction scheme (give as you earn)
7.Cost of any share acquired under an approved Share incentive plan (SIP) (5.4)
8.Any other expenses incurred wholly, exclusively and necessarily for purposes of employment (very few get in here)

Question 8

what are the key points for travel costs

Answer 8

1. the cost of travel between home and normal place of work is not an allowable deductions
   2.all costs of travelling to and from other destinations are allowable provided the journey is not essentially the same as the individuals normal commute
   3.Employees on a secondment of <=24 months can claim relief for journeys to/from the temporary workplace
   4.Site based employees who do not have a permanent workplace are entitled to deduct all the costs of travelling from home to wherever they are working

Question 9

What is statutory approved mileage allowances and criteria? (5 lines)

Answer 9

1. if an employee makes business journeys in his own vehicle, the employer can pay a tax free allowance of up to a statutory amount.
2. In addition an employer can pay upto 5p per mile for each fellow employee on the same trip.
   3.if payments received (if any) are less than the statutory amount, an allowance deduction is available on the shortfall. An allowable deduction is not available in respect of passenger payments if the employer rate is less than 5p per mile.
   4.If payments received exceed the statutory amount, the employee is taxable on the surplus.
3. for NIC purposes a flat rate of 45p per mile is used irrespective of actual mileage (impacts the 25p rate after 10k miles) (CH10)

rate:
Car - 45p per mile (upto 10k miles) - excess is 25p per mile
Motorbike - 24p per mile
bicycle - 20p per mile

Question 10

Wholly exclusively and necessarily disallowed and allowed expenses?

Answer 10

Disallowed:
Smart clothes for work
Golf club membership fees for a bank manager who used the club to entertain customers and to build his network of contacts.

Allowed:
Cost of business calls made from a private phone (not line rental)
ACCA Membership fees for someone working as an accountant

Question 11

BIK - Cars - What is it and criteria

Answer 11

There is a taxable benefit on the provision of a car which is available for private use by the employee (private use includes home to work travel)

Taxable benefit = (list price - capital contribution) x Co2 % - running cost contribution

Capital contributions deduction is capped at £5k
the Co2 % depends on the Car Co2 emissions

Table available in exam

1% increase for every additional whole 5g/km over 55g/km

Add a further 4% for diesel cars not certified to the real driving emissions 2 standard

Maximum % is 37% for both petrol and diesel

Time apportion the benefit for less than 12 months availability including being unavailable for more than 30 days continuously.

Insurance, repairs, vehicle excise duty etc. are covered by the benefit above, so these costs are tax free and should be ignored in questions.

Question 12

Private use - BIK and calculation

Answer 12

Employees provided with private fuel are assessed on an additional taxable benefit

Taxable benefit = £27800 x Co2 %

time apportion benefit for less than 12 months availability (as for cars)

unlike all other benefits any partial employee contributions toward the cost of fuel does not reduce the taxable amount

Question 13

Company Van - BIK calculation

Answer 13

taxable benefit - £3960 but no taxable benefit if zero - emission

additional private fuel benefit = £757

Incidental private use of the van is ignored eg taking it home overnight.

Question 14

Job related accommodation - BIK

Answer 14

Accommodation is NOT a taxable benefit if it is job related ei

Necessary
Improves performance and customary to provide eg nurse
Provided for personal security eg gov minister

Directors can only claim the first 2 exemptions above if:
1.They do not have more than 5% interest in the company
2.Either they are full time working directors or the company is non profit making or a charity

Question 15

Non job related accommodation - BIK

Answer 15

If non job related then taxable benefit will arise

if the employer owns the property:

Taxable benefit = Annual value + (cost -75k)x 2.25% - Employee contributions

(Cost -75k)x2.25% is applicable if cost > 75k

Cost = purchase price + capital improvements made before start of the current tax year

Cost is replaced with MV when employee first moved in (+ subsequent improvements) if the property was acquired > 6 years before its first use by the employee

If employer rents the property from a 3rd party:

Taxable benefit = higher of (annual value, rent paid) - employeee contributions

Note: accommodation benefit does not cover living expenses or furniture (see later)

Question 16

Job related accomodation BIK - if it is job related criteria?

Answer 16

Not a taxable benefit if it’s job related ie

Necessary
Improves performance and customary to provide eg nurse
Provided for personal security (gov minister)

Directors can only claim the first 2 exemptions above if:

1.they do not have more than 5% interest in the company
2. Either they are full time working directors or the company is non profit making or charity

Question 17

Job related accomodation BIK - if it is job related criteria?

Answer 17

Not a taxable benefit if it’s job related ie

Necessary
Improves performance and customary to provide eg nurse
Provided for personal security (gov minister)

Directors can only claim the first 2 exemptions above if:

1.they do not have more than 5% interest in the company
2. Either they are full time working directors or the company is non profit making or charity

Question 18

Living expenses BIK treatment?
Electricity phone tv license etc and repairs and decoration

Answer 18

All are taxable benefits, with decorating taxable in the year the work is done

If accomodation is job related, the benefit is restricted to a max of 10% of the employee earnings and other non accommodation benefits

Question 19

Other assets for private use (furniture tv etc) BIK treatment?

Answer 19

Taxable benefit=20% of MV When first provided

If employee subsequently acq the asset, the additional taxable benefit is the GREATER of :

Mv at time of employee acq or
Original mv less cumulative taxable benefit to date for the employee

Question 20

Loans BIK treatment?

Answer 20

Taxable benefit = loan value x 2.25% - actual interest

Loan value - 2 methods and choose the lower, HMRC will only challenge if it’s materially different

Strict - calculate interest at 2.25% by month on the outstanding balance

Average - loan value = (opening loan bal + closing loan bal)/2 (time apportion if loan outstanding for part of the year)

Not a taxable benefit if less than 10k throughout the tax year, if exceeded, the whole amount including 10k is taxable

Write off of all loans whether above or below 10k is taxable

Question 21

Vouchers exchangeable for goods and services BIK treatment?

Answer 21

Taxable benefit= cost to the employer

Also subject to employee and employer class 1 primary NIC

Question 22

4 types of tax efficient share schemes?

Answer 22

1.schedule 4 company share option plans (CSOP)
2. Schedule 3 SAYE option scheme
3. Enterprise management incentives (EMI)
4. Schedule 2 share incentive plans (SIPS)

1-3 - share options
4 - share scheme

Question 23

Tax impact of tax and non tax advantaged share scheme for grant option exercise price £3, mv of share at exercise price of £5 and sold for £8?

Answer 23

Tax advantage
Upon grant - no impact
Upon exercise - no impact
Upon sale - chargeable gain £8-£3=£5 gain

Non tax advantaged
Upon grant - no impact
Upon exercise - employee suffers income tax on employment income of £5-£3=£2 (and class 1 NIC if company is quoted)
Upon sale - chargeable gain of £8-£5=£3 gain

Question 24

Table on share schemes on page 18

Question 25

3 types of payments received by an employee on the termination of employment

Answer 25

1. Fully exempt from income tax
2. Fully taxable
3. First 30k exempt

Question 26

Fully exempt from tax - termination examples

Answer 26

Payments made on the death, injury or disability of the employee;

Lump sum payments under registered pension schemes

Question 27

Fully taxable termination of employment examples

Answer 27

Payments as a reward for services eg terminal bonuses

Compensation for loss of office which was either a contractual entitlement or there was a reasonable expectation of payment (including any payments in lieu)

Question 28

First 30k exempt on termination of employment criteria (payments in lieu will be on next card)?

Answer 28

1. First 30k of discretionary payments (ex gratis payments) and discretionary benefits (NB statutory redundancy reduces the 30k exemption - this is first)
2. Some payments in respect of the notice period are treated as ex gratia (next card)
3. For NIC purposes if the payment is taxable asa. Reward for services it will be “earnings” for NIC purposes and subject to Class 1 NIC.

However if a payment attracts the 30k exemption, the part covered by the exemption is exempt from NIC and any excess is subject to class 1A NIC (employer pays this)

Question 29

Payments in lieu of notice (pilon) termination of contract criteria?

Answer 29

PILONS are amounts paid to employees to compensate them for having their employment terminated immediately without them working their notice period.

If a pilon is contractual, then it is fully taxable and not subject to the 30k exemption before

If a pilon is non contractual then it needs to be split into two parts;

1.the amount receivable if the employee had worked their notice period( based on their normal salary) is subject to income tax and class 1 NICS

2. The balance is treated as ex gratia and subject to the 30k exemption before

Question 30

Personal service companies (PSC) anti avoidance rules criteria?

Answer 30

Anti avoidance rules apply to remove the tax saving from using a PSC if;

1. An individual provides services to a client via a PSC
2. The individual would be treated as an employee of the client if not for the PSC - “relevant engagement”
   3.the individual has >=5% interest in the company

The impact of the anti avoidance rules differs depending on whether the services are provided to a small organisation or medium/large organisation

Question 31

What are the rules where services are provided to a small organisation? (5 points)

Answer 31

1.it is the responsibility of the PSC to determine if the IR35 rules apply
2.A salary is deemed to have been paid to the individual at the end of the tax year by the PSC, on which

• the PSC pays class 1 secondary NIC
• the individual pays income tax and class 1 primary NIC

3. The PSC is prevented from using the NICs employment allowance
   4.any dividends paid by the PSC are reduced by the amount of deemed salary payments - any remaining dividend is taxable
   5.the deemed salary is deemed to have been paid on the 5th April (end of tax year) - the PSC gets an allowable expense for the salary in the accounting period containing the deemed payments date

Question 32

The pro forma for calculating deemed salary? (6 lines)

Answer 32

1. Take 95% of fees received by the company from the client (ignore other 5%) X
2. Deduct any salary and employer nic on payments made to individual (x)
3. Deduct any employer pension contributions made (x)
   4.deduct any expenses that would be allowable for the employee (x)

A.This leave an amount deemed to include employers NIC X

5.deduct employers NIC from A (13.8/113.8xA)

Deemed salary for individual, deemed paid on last day of tax year X

Question 33

Rules where services are provided to medium/large organisations? (4 big points)

Answer 33

1.it is the responsibility of the medium/ large organisation receiving the services to determine whether the anti avoidance rules apply to the worker and to issue a status determination statement to the worker

2.if they do, then the M/L org must do the following:
i) calculate the deemed direct payment (DDP)
ii)calculate the income tax and class 1 NIC on the DDP
iii) pay the income tax and class 1 NIC on the DDP to HMRC (as they would in respect of an employee)

3.the DDP is calculated as follows;

3.1 Payments made to the PSC (net of VAT)
3.2 less direct costs of materials incurred by the PSC
3.3 less deductible employee expenses incurred by the PSC

= deemed direct payment (DDP)

4. The PSC will then treat any fee subject to the DDP calculation as an exempt from tax and any remuneration drawn by the worker from the PSC will be free from tax upto the value of the DDP