Mix Match Benefits

KEN MOODY ATII discusses the taxation of mixed use benefits.

When an employer provides an asset (other than a motor car, van, mobile telephone or living accommodation) for the private use of a director or an employee earning over £8,500, without transferring the property in the asset, a benefit-in-kind arises under section 156, Taxes Act 1988. The director or employee is taxed each year on the annual value of the asset, being, in this instance, 20 per cent of the cost of the asset.

Such benefits are taxed using the basis of availability rather than actual use (as noted in the Revenue's Schedule E Manual at paragraph 21616), although the legislation refers to an asset 'being placed at the employee's disposal' rather than using the word 'available'. Thus if an employer provides an employee with a home cinema system, the employee cannot claim to reduce the annual value on the basis that he uses it only in the evenings and at weekends.

The problems start when there is mixed private and other use by the employee. That other use may occur in three circumstances:

• the employee also uses the asset for the purposes of his employment;
• other employees are also entitled to use the asset for their private purposes;
• the asset is also used, other than by the employee, in the employer's business.

The above categories are not mutually exclusive. Where, for example, more than one employee has private use of an asset, it would be unjust if each employee were taxable on the full cost of the benefit. However, section 156(2), Taxes Act 1988 provides for apportionment where there is mixed use, saying that:

'Subject to the following subsections, the cost of a benefit is the amount of any expense incurred in or in connection with its provision and (here and in those subsections) includes a proper proportion of any expense relating partly to the benefit and partly to other matters.' (My italics.)

The reference to the 'cost' of a benefit to which section 156(5) applies, is to the annual value of the asset and any expense incurred in connection with its provision such as running costs borne by the employer.

Business and private use by the employee

Where the employee uses the asset for the purposes of his employment, as well as for his private use, an apportionment of the cost of the benefit under section 156(2) would appear to be called for, so that the employee is only taxed upon the proportion relating to his private use. However, the Revenue's view is that apportionment does not apply in these circumstances.

Under section 156(8) there may be deducted from the cash equivalent chargeable under section 154, such amounts as would have been deductible if the cost of the benefit had been incurred by the employee out of his emoluments. The Schedule E Manual at paragraph 21626 says:

'When an asset is available for the private use of a director or employee but it also has to be used in the performance of his duties, the chargeable benefit may be reduced. This is done by treating the value of the benefit as if it were expenditure so that the business proportion can qualify for deduction under section 198, Taxes Act 1988.'

The point is then made that this applies where the asset is used at some times exclusively for business, such as a fax machine provided to the employee at home but also used partly for work. An example is also given at paragraph 31617 of how the deduction for business use is calculated, featuring a laptop computer.

The Revenue's view is that an apportionment under section 156(2) is only appropriate if the asset is used in the employer's business in a way other than as the provision of a benefit for the employee and that 'provision for use by the employee in performing his or her duties is just as much a benefit within section 154 as provision for private use' (Tax Bulletin, October 2000 at page 781). Use in the employer's business includes provision as a benefit to other employees. One consequence is that Class 1A National Insurance contributions will usually be payable on the benefit before deductions, whereas if an apportionment were possible under section 156(2), a lower amount would be subject to National Insurance.

Section 155ZA provides that section 154 does not apply to a benefit consisting of accommodation, supplies or services used by the employee in performing the duties of his employment, provided that certain conditions are met. These are that the benefit is provided for use of the employee on the employer's premises in performing the duties of his employment, or where the sole purpose of providing it is to enable the employee to perform those duties, and in either case any private use is not significant. The references in section 155ZA to benefits supports the Revenue's view that provision for use by the employee in performing his duties is a benefit within section 154 in the same way as a benefit provided for private use.

Use by other employees

Apportionment under section 156(2) is, however, required where private use of the asset is shared between two or more employees, or where the asset is also used in the employer's business. The Revenue's Schedule E Manual at paragraph 21625 instructs apportionment of the benefit in those circumstances. The example is given of a yacht which is made available to two directors who agree to share its availability equally. The instruction is to apportion half of the benefit to each of them.

The calculation of the cost of a benefit consisting of the private use of an asset is regulated by section 156(5) which envisages two sets of circumstances:

• where the benefit consists of an asset being placed at the employee's disposal, or at the disposal of members of his family, for his or their use; or
• where the benefit consists of the asset being used wholly or partly for his or their purposes.

As mentioned earlier, the word 'available' is not used in the legislation, although the Revenue considers it to be synonymous with 'being placed at the disposal of'. Since the example referred to talks about availability, this can be presumed to imply that the yacht is placed at the disposal of the two directors. In the case of a home cinema system, there could not be much argument about whether this was placed at the employee's disposal, since it would be installed at his home and it is unlikely that there would be any shared use with other employees or any business use. It is more difficult to regard the yacht as being placed at the disposal of either one of the directors, as both directors are entitled to use it. When one director is using the yacht, the other is precluded from doing so. If an asset is placed at my disposal, that should mean that I can use it whenever I choose, subject only to any practical or general legal restrictions. If its use is restricted, under the terms on which it is offered, then to my mind it is not placed at my disposal.

The Revenue's view in such circumstances may be reconciled by the fact that the benefit for the purposes of section 156(5) is calculated in the first place by reference to the asset rather than by reference to an employee's use of it. Thus where an asset may be said to be placed jointly at the disposal of more than one person, the asset benefit is calculated in accordance with sections 156(5) to 156(7). The cost of the benefit in relation to each employee is then a proper proportion of any expense relating partly to the benefit (to that employee) and partly to other matters (the other employee(s)). Such an interpretation would also preclude any argument that the full cash equivalent is assessable on each employee, and indeed the Schedule E Manual at paragraph 21200 instructs against such an approach.

Paragraph 21625 of the Schedule E Manual directs apportionment under section 156(2) where an asset is also used in the employer's business. That therefore brings into play the second set of circumstances in section 156(5), where the asset is not placed at the employee's disposal but where he does in fact use it wholly or mainly for his purposes. However, that also means that in arriving at a 'proper proportion' of the cost of the benefit for the purposes of section 156(2), it is not necessary to take account of availability.

Marginal cost basis

The Revenue's Tax Bulletin October 2000 addressed inter alia the circumstances in which the decision in the House of Lords in Pepper v Hart [1992] STC 898 applies to 'mixed use' benefits. It states:

'The House of Lords decision in Pepper v Hart (that the expense of providing a benefit was the marginal additional expense of its provision) was based on the opening words of what is now section 156(2) "the amount of any expense in or in connection with" the provision of a benefit. Our view is that the decision also applies to the similar words in section 156(5)(b). So if the employer's sole motive for the purchase and continued ownership of an asset is for use in its business, other than by provision as a benefit to an employee or employees … the Pepper v Hart marginal additional cost principle will apply to "running" expenses within section 156(5)(b). The chargeable cash equivalent of the benefit for an employee to whom the asset is provided will therefore be a proper proportion of its annual value plus marginal additional running expenses relating to its provision as a benefit.'

Presumably if the sole motive is not use of the asset in the employer's business, the marginal cost basis does not apply.

Proper proportion

What is a proper proportion is not defined in the legislation. Westcott v Bryan 45 TC 476 concerned the occupation by a director of a house which he was required to occupy by his employer in order to entertain customers' buyers when visiting the company's factory nearby. The house and the company's premises were in North Staffordshire, whereas the director would have preferred to live in a smaller house in London. The company rented the house on a yearly tenancy and paid the cost of services, while the director made a contribution towards the rent and also paid the rates. The General Commissioners found as a fact that there was genuine business use of the house and that the director's occupation of it was restricted in that he was not free to discriminate as to his guests. They allowed one-quarter of the total expenses for business use. The Revenue argued in the Court of Appeal that as no part of the house was used exclusively for business purposes, the director should be assessed on all the costs paid by the company without any deduction for expenses. The Court took the view, however, that since some part of the expense were for the company's benefit, albeit not a severable part, there should be an apportionment under what was then section 161(6), Income Tax Act 1952, being the forerunner of section 156(2), Taxes Act 1988 and worded almost identically.

It was stated by Mr Justice Pennycuick in the High Court and approved by Lord Justice Sachs in the Court of Appeal that the apportionment must necessarily be on a rough and ready basis.

In arriving at a proper proportion in such circumstances, I would argue that since availability should not be a factor, the calculation of the cost of the benefit must be based upon actual use. For this purpose I would ignore, in the case of an aircraft, time spent in servicing, positioning or exercise. What we are trying to get at for the purposes of section 156(2) is how much of the cost of the benefit inures for the benefit of the employee and how much of it inures for the benefit of the employer. With an aircraft I would calculate the employee's benefit as the annual value multiplied by the hours flown by the employee over the total number of hours flying time (ignoring servicing flights, etc.), plus the marginal cost of the employee's use.

The Revenue apparently agrees that some fixed costs may be ignored. The Revenue press release dated 21 January 1993 (following the Pepper v Hart decision), states that 'Some fixed costs (e.g. the road tax for a fitter's van) will no longer need to be taken into account where the private use of the asset is incidental to its business use. The cash equivalent is the additional expense incurred in or in connection with its provision... together with a proper proportion of the annual value of the asset …'. The Schedule E Manual is silent on the matter, although Tax Bulletin of October 2000, quoted above, does refer to 'the marginal additional running expenses'.

Certainly, that is my understanding of what is meant by marginal cost. I would not therefore include insurance or licences or other standing costs, except to the extent of any additional expense specifically occasioned as a result of the employee's use. Repairs and maintenance should be apportioned based upon actual use, likewise fuel costs, although with aircraft it is not unusual for the employee to pay for his own fuel for private purposes.

VAT aspects

The VAT aspects must not be overlooked since, when goods are put to a private purpose, a taxable supply takes place. If no consideration is given, then output tax is due on the full taxable costs. Further comment on the VAT position is beyond the scope of this article, except to say that full taxable costs include depreciation (whereas I would not include this in my marginal cost calculation), and that the output VAT calculation is based upon taxable costs multiplied by the period of non-business use over period of total use. In other words, the calculations of the marginal cost for Schedule E purposes and the value on which output VAT is due, differ in some respects.

P11D reporting

A calculated benefit will be conspicuous in the form P11D, and it would be sensible to attach any necessary workings to show how the figures are arrived at and the assumptions upon which the calculations are based. If the employee pays a full commercial rate, then arguably no P11D entries are required, but that would be a high-risk strategy. If it is proposed therefore to charge a commercial rate, or at least a rate which is expected to cover any benefit, then an approach to the Inspector seems indispensable.

Too many questions

It is virtually impossible to answer all the questions raised in this article, and the only probable way in which they will be answered will be by a decision of the courts or Special Commissioners. Given that the potential benefit charges in such cases could be very substantial, and given also that ownership (often via limited companies) of light aircraft, helicopters, etc. is becoming more widespread, that would seem to be only a matter of time.

Ken Moody is tax manager at RST Watson Wheatcroft, Sheffield, tel: 0114 262 1251, e-mail: info@wwheatcroft.demon.co.uk. The views expressed are the author's and not necessarily those of the firm.

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