While the treatment of benefits provided by an employer follows much the same rules for both corporation tax and income tax on trading profits, there are key differences in how the tax deduction is available to the employer in computing trading profits for income or corporation tax purposes and the cash equivalent of the benefit upon which the employee is taxed.
The rules on how to calculate the profits of an unincorporated business for tax purposes are found in ITTOIA 2005, while the equivalent rules for companies are in CTA 2009. The deductions available to the employer have generally accepted accountancy principles as their starting point and the two basic questions that have to be asked in connection with any item of expenditure to test whether it qualifies for a deduction in the hands of an employer are:
is it revenue rather than capital expenditure?
is it incurred wholly and exclusively for the purposes of the trade?
If the answer to both of these questions is yes, then the amount paid by the employer can be deducted in computing the employer’s profits. As most employee benefits are provided with a view to rewarding the employee the test is usually satisfied.
If the expenditure incurred is of a capital nature, the employer cannot deduct it in computing profits, but may be entitled to claim capital allowances in respect of the expenditure. The most common example of the type of benefit where the employer gets capital allowances rather than a deduction in respect of an employee’s benefit is the provision of a company car.
It may be that the employer provides a benefit to an employee but gets no deduction or allowance against profits for tax purposes to reflect the benefit charged. An example is where the employer owns living accommodation that he makes available for use by an employee.
There may also be a timing difference between when the employer can take account of the cost of an employee benefit in computing his profits and when a tax charge arises on the employee in respect of that benefit. The timing of the deduction for the employer depends on generally accepted accounting principles (usually when the expense is incurred) and the tax charge on the employee depends on when the benefit is received or enjoyed.
For VAT registered businesses, the VAT incurred on the cost of any benefits provided to employees can be reclaimed, as long as they are able to obtain a VAT receipt for the expenditure. Usual exempt or partial exemption rules apply for any input VAT claims.
The benefits assessed on the employees are always the VAT-inclusive amounts.