If you pay for the repair of an employee’s car damaged on your premises, can HMRC treat the payment as earnings or a benefit in kind?
Taxable transactions
We don’t need to tell you that the rules which determine how an employer should treat a transaction are lengthy and tricky. This can turn what seemed a simple question into a time consuming saga for the bookkeeper and accountant. In this case a cash payment was made to one of our subscriber’s employees to compensate them for the cost of repairing damage to their car while in the firm’s car park.
Damage details
Unfortunately, no one owned up to causing the damage. The cost of repairing it was estimated at £350, which was less than the employee’s insurance excess. Our subscriber told the employee to get it repaired and they would reimburse the cost. So far so good, but the bookkeeper wasn’t sure if the payment should be included in the payroll and subjected to PAYE tax and NI.
HMRC guidance
An extensive search of HMRC’s guidance didn’t provide an answer to the bookkeeper’s question and its helpline predictably took the view that any payment to an employee is taxable. This is nonsense; there are well known exceptions, e.g. for payments made by sole traders to family members who they employ.
Tip. If you can’t find an obvious answer to a specific question it’s probably hiding in plain sight within the basic tax rules. Sometimes looking too closely at a tax problem causes you to lose sight of the bigger picture.
General earnings
The basic rules say payments to or for employees are taxable as earnings if they are:
- salary, wages or fees
- any gratuity or other profit or incidental benefit obtained by the employee if it is money or money’s worth, i.e. something that can be converted to cash or settles an employee’s cash liability, e.g. a personal bill; or
- any other payment that’s a reward for work.
Benefit in kind
Other payments to or for employees which aren’t earnings because they fall outside the factors listed above are treated as earnings (benefits in kind) made in connection with an employment. The scope of this rule is much wider because it doesn’t just cover a reward for work but includes any payment “connected” to the employment.
Vital questions answered
Our subscriber needs to answer these questions. Was the payment salary or reward for employment? Was the payment because of employment? The answer to both is “no”, therefore the payment isn’t taxable general earnings or a benefit in kind. In fact, the payment is compensation for damages caused to personal property while on our subscriber’s premises and therefore outside the employer/employee relationship.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.