House of Lords - Explanatory Note
Income Tax (Earnings And Pensions) Bill - continued          House of Lords

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Clause 157: Value of exclusive availability

611.     This clause gives the value of the benefit of a van that is available to only one employee. It sets out the steps involved in the calculation using a method statement. The clause derives from paragraph 1(2) and parts of paragraphs 2(1) and 3(1) of Schedule 6A to ICTA.

Clause 158: Deduction for periods of unavailability or shared use

612.     This clause provides for an adjustment of the value calculated under clause 157 if the van is not available or is shared for any period in the tax year. The clause derives from parts of paragraph 2(1) and from paragraph 2(2) and (3) of Schedule 6A to ICTA.

613.     Subsection (1) provides for a deduction to be made from the value calculated at Step 2 of clause 157 when there are "excluded days" in relation to the van.

614.     Subsection (2) defines "excluded days" as days when the van is unavailable or shared.

615.     Subsection (3) gives a formula to calculate the deduction. The formula uses "Y" for the number of days in the year instead of "365" in the source legislation. This is the same change in principle as that described in paragraph 596. See item A of Change 28 in Annex 1.

616.     Subsection (4) defines the periods of non-availability. Apart from periods relating to the van first being available or ceasing finally to be available, such periods must last for a continuous period of at least 30 days. They can run from the beginning of the tax year involved to the date on which the van first became available or from the date when the van ceased permanently to be available to the end of that tax year. There can also be one or more periods of temporary non-availability for each continuous period of 30 days or more. Such periods can span two tax years, ie the period of 30 days or more does not have to fall wholly within one tax year.

Clause 159: Deduction for payments for private use

617.     This clause provides for adjustment of the value calculated under clause 157 for payments made by the employee for private use of a van. The clause derives from paragraph 3(1), (2) and (3) of Schedule 6A to ICTA.

618.     Subsection (1) states when the clause applies. That is when, as a condition of the van being made available for private use, the employee is required to pay for, and does pay for, that use. The words "(whether by way of deduction from earnings or otherwise)" avoid any doubt about whether a deduction from earnings can amount to a payment. The same approach is used in clauses 144(1)(a) and 165(1)(a).

619.     Subsections (2) and (3) provide for the deduction of the appropriate amount at Step 4 of the calculation in clause 157.

620.     Subsection (4) specifies that for cases where the van is shared for part of the tax year, the deduction relates to the period(s) when it is not shared.

621.     Subsection (5) extends the clause to private use of a van by a member of the employee's family or household.

Clause 160: Value of shared availability

622.     This clause introduces the two methods of calculating the value of shared availability, the second of which has to be claimed by the employee. This clause is new.

Clause 161: Value of shared availability: normal calculation

623.     This clause gives the normal rule used to calculate the value of the shared availability of one or more vans. The clause derives from paragraphs 5(1), (4) and (5), 7 and part of paragraph 9(1) of Schedule 6A to ICTA.

624.     Subsection (1) sets out the steps involved in the calculation using a method statement. This is the calculation that applies if the employee does not claim the alternative calculation under clause 164.

625.     The words in parentheses in Step 1 make it clear that "made available by the same employer" means made available to any of the participating employees, whether or not including the one whose liability is being calculated.

626.     The second sentence at the end of Step 2 states explicitly what was formerly implicit. See item B of Note 17 in Annex 2.

627.     Subsection (2) focuses primarily on the employee whose tax liability is being calculated, rather than on all the shared vans and all the participating employees in relation to those vans. See item A of Note 17 in Annex 2.

Clause 162: Shared van: meaning of "participating employee"

628.     This clause defines the term "participating employee", which is used in clause 161. The clause derives from paragraph 5(2) and (3) of Schedule 6A to ICTA.

629.     Subsection (1) applies when only one van is involved.

630.     Subsection (2) applies when more than one van is involved.

631.     Subsection (3)(a) and (b) extends the clause to private use of a van by a member of the employee's family or household.

Clause 163: Shared van: basic value

632.     This clause provides for the calculation of the basic value of a shared van. The clause derives from paragraph 6(1), (2), (3) and (4) of Schedule 6A to ICTA.

633.     Subsection (1) sets out the steps involved in the calculation using a method statement. The value that is calculated is applied at Step 4 of clause 161.

634.     In subsection (1) the formula at Step 3 provides for adjustments to the basic value for periods when the van was not a shared van and for any period of 30 days or more when it was incapable of use. The formula uses "Y" for the number of days in the year instead of "365" in the source legislation. This is the same change in principle as that described in paragraph 596. See item A of Change 28 in Annex 1.

635.     Subsections (2) and (3) identify the days that must be excluded at Step 3.

Clause 164: Value of shared availability: alternative calculation

636.     This clause provides for an alternative way to calculate the value of the shared availability of a van. The clause derives from paragraph 8(2), (3) and (4) and parts of paragraph 8(1) and 9(1) of Schedule 6A to ICTA. Paragraph 8(1)(a) of Schedule 6A to ICTA has not been rewritten, as it is no longer necessary.

637.     Subsection (1) applies the clause only when an employee makes a claim for it to apply instead of clause 161 (value of shared availability: normal calculation).

638.     Subsection (2) sets out the steps involved in the calculation using a method statement. Step 1 (b) excludes vans other than vans made available to the employee and the employee's family or household. That is because subsection (3)(b) defines relevant days, an essential part of the calculation, by reference only to vans made use of privately by the employee or a member of the employee's family or household.

639.     Subsection (3) identifies the days that must be counted in the formula at Step 3 of subsection (2).

640.     Subsection (4) provides that a claim under this clause is treated under section 95 of TMA 1970 as a claim for relief. Section 42 of TMA 1970 applies to this claim.

Clause 165: Deduction for payments for private use

641.     This clause provides for an adjustment to the value of the shared van availability to take account of payments the employee makes for the private use of a shared van. The clause derives from paragraph 9(2) and (3) and part of paragraph 9(1) of Schedule 6A to ICTA.

642.     Subsection (1) provides that a deduction is to be made in the calculations in clause 161 or clause 164 if the employee is required to pay, and does pay, for private use. The words "(whether by way of deduction from earnings or otherwise)" avoid any doubt about whether a deduction from earnings can amount to a payment. This follows the approach that is used in clauses 144(1)(a) and 159(1)(a).

643.     Subsections (2) to (4) state how to calculate the deduction. The wording of these subsections closely follows that of the source legislation. The possible argument that subsection (4) operates to prevent any deduction at all where a global sum is paid for private use of any of the vans was considered. Such a restrictive interpretation would be unreasonable. It is better not to complicate further these already complex provisions by seeking to address this subtle point. It can be dealt with using the "care and management" provisions in section 1 of TMA 1970.

644.     Subsection (5) extends the clause to private use by a member of the employee's family or household.

Clause 166: Vans: limit of cash equivalent

645.     This clause sets a maximum cash equivalent on an employee's van benefit for a tax year, in particular circumstances. The clause derives from paragraph 11 of Schedule 6A to ICTA.

646.     The limit applies only if no more than one van is available, for private use, to the employee or the employee's family or household at any one time in the tax year.

Clause 167: Pooled cars

647.     This clause determines how pooled cars are treated under the benefits provisions. The clause derives from section 159(1), (2) and (3) of ICTA.

648.     Subsection (1) applies the provisions to a car that is a pooled car.

649.     Subsection (2) treats pooled cars as not having been available for private use of any of the employees concerned. It also prevents them from being treated as an employment-related benefit for the purposes of Chapter 10 of Part 3. See Note 18 in Annex 2.

650.     Subsection (3) sets out the conditions for a car to be treated as a pooled car.

651.     Subsection (3)(b) uses the term "the employee's employment". Generally use of that term has been avoided but here it helps clarity.

Clause 168: Pooled vans

652.     This clause determines how pooled vans are treated under the benefits provisions. This clause works in relation to vans as clause 167 works in relation to cars. This clause derives from section 159AB of ICTA.

653.     Subsection (1) applies the provisions to a van that is a pooled van.

654.     Subsection (2) treats pooled vans as not having been available for private use of any of the employees concerned. It also prevents them from being treated as an employment-related benefit for the purposes of Chapter 10 of Part 3. See Note 18 in Annex 2.

655.     Subsection (3) sets out the conditions for a van to be treated as a pooled van.

656.     Subsection (3)(b) uses the term "the employee's employment". Generally use of that term has been avoided but here it helps clarity.

Clause 169: Car available to more than one member of family or household employed by same employer

657.     This clause removes a car or car fuel benefit charge on an employee who would otherwise be taxed on the car benefits relating to a member of his or her family or household. The clause derives from paragraphs 1 and 2 of ESC A71. See items A and D of Change 27 in Annex 1.

658.     Subsection (1) states the circumstances in which the clause can apply.

659.     Subsection (2) removes the tax charge on the employee in two specified cases.

660.     Subsection (2)(a) specifies the first case, which is when the family or household member is chargeable on the benefit in his or her own right.

661.     Subsections (2)(b), (3) and (4) specify the second case, which is when the family or household member is not chargeable on the benefit in his or her own right and the car is provided for reasons that do not arise out of the family or household relationship.

Clause 170: Orders etc. relating to this Chapter

662.     This clause provides the Treasury with powers to make regulations affecting the legislation in this Chapter. It brings together various provisions from various individual sections dealing with different aspects of car and van benefit charges in the source legislation. The clause derives from sections 158(4), 168C(5), 168D(6), 168F(11) and 168G(2) of ICTA and from paragraphs 4(2) and 5E of Schedule 6 to ICTA.

663.     The wording of subsection (2) has not been aligned with subsection (6). The clause accurately reproduces the legislation from which it derives and further internal alignment could, in certain cases, work against the taxpayer's interests, as for example in clause 132(3)(b) and clause 147(1)(b).

Clause 171: Minor definitions: general

664.     This clause gives definitions of terms that are used widely in this Chapter. The clause derives from parts of sections 168(5) and (5A), 168A(9), 168AA(3), and 168AB(3) of ICTA and from paragraphs 5A(5), 5B and 5D(3) of Schedule 6 to ICTA.

Clause 172: Minor definitions: equipment to enable a disabled person to use a car

665.     This clause brings together the definitions that relate specifically to a car available for use by a disabled person. The clause derives from section 168AA(1) and (2) of ICTA.

Chapter 7: Taxable Benefits: Loans

Overview

666.     This Chapter deals with the benefits that may arise from loans obtained by reason of an employee's employment. These benefits may be due to a low rate of interest charged on the loan, or the writing off of a loan. The cash equivalent of the benefit of a loan is treated as earnings of the employee's employment.

Clause 173: Loans to which this Chapter applies

667.     This clause describes the loans to which the Chapter applies. It derives from section 160 of ICTA.

668.     Subsection (1) applies the Chapter to loans if they are employment-related and subsection (2) defines "loan" and sets out what is meant by making a loan.

669.     Subsection (3) is a reminder that clauses 288 and 289 (limited exemption for certain bridging loans connected with employment moves) may mitigate the charge under these provisions.

Clause 174: Employment-related loans

670.     This clause sets out the basis on which a loan comes within the provisions of this Chapter. It derives from sections 160 and 161 of and paragraphs 1 and 2 of Schedule 7 to ICTA.

671.     Subsection (1) describes loans which are employment-related. The fact that the loan is made to "an employee or a relative of an employee" indicates that at the time the loan is made there must be an employment.

672.     Subsection (2) defines "employment-related loans" and the working of this subsection is illustrated by the flow diagram on page 2.

673.     Subsection (3) derives from paragraph 2 of Schedule 7 to ICTA so that if a loan is made to an employee in anticipation of the employment commencing it is an employment-related loan provided the employment is taken up.

674.     Subsection (4) provides that loans made by a person who was not the original lender or who facilitates the continuation of an existing loan fall within the clause.

675.     Subsection (5) excludes from the charge certain loans of a personal or domestic nature.

676.     Subsection (6) defines what is meant by a "relative" for the purposes of the clause.

Clause 175: Benefit of taxable cheap loan treated as earnings

677.     This clause brings within the charge to tax the benefit arising on certain employment-related loans on which no interest is paid or interest is paid at a low rate (referred to as a "taxable cheap loan").

678.     Subsections (1) and (2) provide that the cash equivalent of the benefit of a taxable cheap loan is treated as earnings from an employment and describe the circumstances in which an employment-related loan is a "taxable cheap loan". They derive from section 160(1) of ICTA. Subsection (1) sets out for which year the cash equivalent is to be treated as earnings. See Note 7 in Annex 2.

679.     Subsection (3) gives the broad rule for computing the cash equivalent of the benefit and subsection (4) provides that in considering whether a loan falls within this Chapter it must be looked at separately from any other loan. They derive from section 160(4) and paragraph 3(1) of Schedule 7 to ICTA.

680.     Subsection (5) is a signpost to clause 180 (threshold for benefit of loan to be treated as earnings) which sets out the £5,000 threshold and clause 186 (replacement loans) which makes an exception to subsection (4).

Clause 176: Exception for loans on ordinary commercial terms

681.     This clause deals with employers whose business includes the lending of money by preventing loans made on ordinary commercial terms from being taxable cheap loans. It derives from section 161B of, and Schedule 7A to, ICTA.

682.     Subsection (1) provides that a loan on commercial terms is not a taxable cheap loan and subsection (2) provides a definition of "loan on ordinary commercial terms" which includes three conditions.

683.     Subsections (3) to (7) set out the conditions and define terms used in the conditions.

684.     Subsection (8) provides that certain incidental expenses are to be ignored in determining, for the three conditions in subsection (2), whether loans are made or exercisable on the same terms or conditions.

685.     Subsection (9) requires that certain amounts arising from variation of a loan are ignored for the purposes of ascertaining, for the second and third conditions, whether loans are held or exercised on the same terms.

Subsection (10) defines "member of the public" for the purposes of this clause.

Clause 177: Exceptions for loans at fixed rate of interest

686.     This clause exempts certain types of fixed interest loan. It derives from section 161(2) and (3) of ICTA.

687.     Subsection (1) applies to loans made on or after 6th April 1978 at fixed rates for fixed periods. It applies when there is an increase in the official rate of interest for a year subsequent to that in which the loan was made. When that happens a calculation under clause 182 or clause 183 might show that the interest paid on the loan was less than what would have been paid if the official rate of interest applied to the loan. In such a case, provided nothing other than the official rate of interest has changed, and provided the condition in subsection (2) is met, the loan is not to be regarded as a taxable cheap loan.

688.     Subsection (2) provides as a condition for subsection (1) that the interest paid on the loan for the year in which it was made was not less than what would have been paid at the official rate for that year.

689.     Subsection (3) exempts fixed rate loans from being taxable cheap loans if they were made before 6th April 1978, when there was no official rate of interest, and the condition in subsection (4) applies.

690.     Subsection (4) sets out the condition for subsection (3), that the interest should be at an arm's length rate when the loan was made.

691.     Subsection (5) defines "fixed rate loan".

Clause 178: Exceptions for loans where interest qualifies for tax relief

692.     This clause provides that loans which would qualify for tax relief in a tax year if interest were paid on them are not taxable cheap loans for that year. Paragraphs (a) to (d) set out the types of interest. It derives from section 161A(2) of ICTA.

Clause 179: Exception for certain advances for necessary expenses

693.     This clause provides that, where certain conditions are met, small temporary advances of expenses by an employer to an employee for necessary expenditure are not taxable cheap loans. It derives from Inland Revenue Statement of Practice 7/79. It is a minor change to law. See Change 29 in Annex 1.

694.     Subsection (1) provides that advances by an employer to an employee for necessary or incidental overnight expenses are not taxable cheap loans where certain conditions are met and subsection (2) sets out those conditions.

695.     Subsections (3) and (4) provide that the limits for two of the conditions can be extended.

696.     Subsections (5) to (7) define terms used.

Clause 180: Threshold for benefit of loan to be treated as earnings

697.     This clause prevents a tax charge on small amounts by providing a £5,000 threshold which applies in two circumstances. It derives from sections 161 and 161A(1) of ICTA.

698.     Subsection (1) sets out the circumstances in which the cash equivalent is not treated as earnings.

699.     Subsection (2) provides that all taxable cheap loans are aggregated to find whether the normal £5,000 threshold is exceeded for the purposes of subsection (1)(a).

700.     Subsection (3) describes how the alternative threshold in subsection (1)(b) is calculated. This applies when the loan is a non-qualifying loan, and total taxable cheap loans exceed the threshold. If qualifying loans are deducted and the total is then less than £5,000 the cash equivalent of the non-qualifying loans is not treated as earnings.

701.     This reflects the Inland Revenue practice of ignoring excepted loans and is a minor change to the law. See Change 30 in Annex 1.

702.     Subsections (4) and (5) define "non-qualifying loan" and "qualifying loan".

Clause 181: The official rate of interest

703.     This clause provides for the setting of the official rate of interest under section 178 of FA 1989 and allows special rates to be used for foreign currency loans. It derives from section 160(5) of ICTA.

704.     Subsection (1) defines "the official rate of interest".

705.     Subsection (2) allows regulations made under section 178 of FA 1989 to specify a different official rate in the case of loans in another currency. "Normally lives" and "has lived at some time" are not defined in section 160(5) of ICTA. They therefore take their normal meaning. SE 26105 of the Inland Revenue Schedule E Manual provides guidance on this.

706.     Subsection (3) provides that the power given under subsection (2) does not affect the general power under section 178 of FA 1989 to make different provisions.

Clause 182: Normal method of calculation: averaging

707.     This clause sets out the normal method for calculating the amount of interest that would be payable at the "official rate for a tax year" by the averaging method. It derives from paragraph 4(1) of Schedule 7 to ICTA.

708.     This method of calculation does not explicitly apply in deciding whether a loan is within sections 160(1) or 161(2) of ICTA, although it is applied for those purposes in practice. Stating that the methods of calculation are used for all purposes of this Chapter legislates the practice. This is a minor change to the law. See Change 31 in Annex 1.

709.     A method statement sets out how to do the calculation, which applies the average official rate for the period to the average amount outstanding to arrive at the notional interest for that period.

Clause 183: Alternative method of calculation

710.     This clause allows the use of a more precise method of calculating the interest at the official rate on a loan than the method given in clause 182. It derives from paragraphs 5 and 5A of Schedule 7 to ICTA.

711.     Subsection (1) allows either the Inland Revenue or the employee to choose this method of calculation. This is for the purposes of the Chapter and not confined to the calculation of the cash equivalent. See Change 31 in Annex 1. For the reference to the Inland Revenue see Change 158 in Annex 1.

712.     Subsection (2) sets out the time limit for making the election. This is different from the way the limit is expressed in paragraph 5(2) of Schedule 7 to ICTA which provides that the election must be made "before" the end of the period of 12 months beginning with 31 January following the end of the tax year. This subsection allows it to be made "on or before" that date. This is a minor change to the law. See Change 32 in Annex 1.

713.     Subsection (3) shows the calculation as a method statement. This arrives at the precise amount of interest on a day-to-day basis using the exact amount of the loan outstanding for each day. In paragraph 5(3)(c) of Schedule 7 to ICTA the total is divided by 365 days. As in a leap year the daily total would be based on 366 days, this subsection divides the total by the number of days in the tax year. This is a minor change to the law. See Change 28 in Annex 1.

714.     Subsection (4) requires that the alternative method applies in certain circumstances where the cash equivalent of the benefit on the same loan is treated as the earnings of two or more employees.

 
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Prepared: 17 February 2003