Is the taxable value of a benefit for a tax year the amount incurred by the employer in that year or in the tax year the cost was incurred?

In general, unless more specific calculation rules apply, the Benefits Code states that the taxable value of a benefit provided to an employee is the cost incurred by the employer in providing it.

Section 203 of the Income Tax (Earnings and Pensions) Act 2003 states, in part:

1. The cash equivalent of an employment-related benefit is to be treated as earnings from the employment for the tax year in which it is provided.
   
   
2. The cash equivalent of an employment-related benefit is the cost of the benefit less any part of that cost made good by the employee to the persons providing the benefit.

No reference is made to when the "cost of the benefit" is incurred. In contrast, the timing of the tax charge is specifically the tax year in which the benefit is provided. Therefore, where an employer meets the cost of a benefit in one tax year but that cost covers benefits that are to be enjoyed in a future year, only that proportion of the cost that is attributable to the provision of the benefit in the current tax year is taxable for that year. The remainder of the cost is taxable in the future year.

Other than for cars, vans and loans, the Benefits Code is not specific about how the costs incurred by the employer should be apportioned over time. It is most accurately done on a daily basis, but other methods are acceptable if the results are realistic.

Although this is the procedure specified in the legislation, HMRC is willing to accept a simplified approach in the case on ongoing benefits.

The provision of private medical insurance well illustrates this principle. The employer in the following examples provides private medical insurance for employees during the 2007/08 tax year and reports the benefit on forms P11D for each of them.

Example 1: The employer pays premiums annually on 6 April 2007, in respect of the benefit provided in the tax year. No apportionment is necessary. The premium paid is the amount paid to provide the benefit in the tax year.

Example 2: The employer pays premiums monthly, on the first day of the month during which the benefit is provided. The employer must add together

• 25/30ths of the April 2007 payment, the proportion attributable to the benefit from 6 April 2005,
  
  
• all of the payments made from May 2007 to March 2008, and
  
  
• 5/30ths of the April 2008 payment, the proportion attributable to the benefit to 5 April 2008.

Example 3: An employer pays annual premiums under a private medical insurance policy on 1 September each year. In September 2006, the premium per employee is £500; in September 2007, the premium is £550. Rather than apportioning the premiums on a daily basis, the employer decides to use a monthly calculation. The amount reported is the sum of

• 5/12ths of £500, for the period April to August 2007, and
  
  
• 7/12ths of £550, for the period September 2007 to March 2008.

Apportionment, especially if calculated on a daily basis, can be complicated and, where a benefit is provided continuously over a number of years, it does not result in employees paying any more tax than if a more simple approach is taken. HMRC may be prepared to accept, in this situation, for the amount paid by the employer in the tax year to be reported. The employer should seek approval from the tax office if the simple approach is used.

If the simple approach were followed in the examples above, the employer would report

• in Example 2, the total of the twelve premiums paid between 1 May and 1 April inclusive
  
  
• in Example 3, £500 for the 2006/07 tax year, and £550 for the 2007/08 tax year.

There are two related matters that also require consideration.

Earnings rate used for identifying lower-paid employees

Employees with an earnings rate of less than £8,500 are not subject to the P11D reporting requirements. Instead, any liabilities for benefits are reported on form P9D. To determine an employee’s earnings rate for the current tax year, an amount paid by the employer in the previous tax year to provide a benefit in the current tax year should be included if the benefit is calculated by apportionment.

Amounts made good by the employee

The amount reported on form P11D is reduced by any amount paid by an employee towards the provision of the benefit. If the employer reports in the current tax year a proportion of the costs incurred in the previous tax year, the amount reported should be reduced by the same proportion of any contribution made by the employee in the previous tax year.

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