Lee Sharpe looks at the principle of ‘money’s worth’ from the perspective of persons in business on their own account.
I was asked a deceptively simple question the other day: ‘I have a client who wants to take on a sales consultant on a self-employed basis. Part of the reward package will be a car. How will it be taxed?’
Most readers will be familiar with the ‘company car’ provisions, which tax employees on the ‘benefit-in-kind’. Employers also suffer, thanks to Class 1A National Insurance contributions. However, please put all such thoughts out of your mind, because the question is about a self-employed individual, and not an employee. This is easier said than done.
Confusion
Many commentators will tell you that such a transaction – the provision of a vehicle – is a taxable one in the hands of a person in business on his or her (or ‘its’ if a company) account. If so, I should ask one simple question:
‘What is the taxable amount? When I pay tax on it, how much am I paying tax on?’
Therein lay the rub. Instinctively, I found myself gravitating towards the benefits-in-kind legislation – CO2 emissions, list price when new, etc. – which is, of course, wrong (I did say ignoring company car benefits was easier said than done!).
I knew that there was a tax case on this (there is a tax case for pretty much everything) and, eventually, I tracked it down. It is a very old case, but the principle still holds good.
Ye olde tax case
The 1892 case Tennant v Smith (HL, 1892 3 TC 158) was ultimately heard at the House of Lords, and therefore has precedent value. The case involved an agent who was engaged by a bank. Part of the conditions of the engagement required him to ‘live in’ at rooms in the ‘bank house’ so that he could work after normal office hours as and when necessary.
Mr Smith of HM Revenue and Customs (HMRC) (then called a ‘surveyor of taxes’) tried to argue that the provision of the accommodation was taxable under either (what is now) employment income or self-employed income rules.
Fortunately for Mr Tennant, the Lords found that the provision of accommodation was not taxable:
‘To put the case very simply, the question depends upon what is Mr Tennant’s income. This is an income tax act, and what is intended to be taxed is income’ (Lord Halsbury).
The reason for this decision is that the provision of a service such as living accommodation was not ‘money, or money’s worth’:
‘I come to the conclusion that the [Income Tax] act refers to money payments made to the person who received them, though, of course, I do not deny that if substantial things of money value were capable of being turned into money, they might for that purpose represent money’s worth and be therefore taxable.’
Money, or money’s worth?
That, in a nutshell, is the ‘money, or money’s worth’ principle: if what is received is either money, or convertible into money, then its value is taxable. If the trader cannot convert it into money, then it is not taxable income of the trade. This principle still applies to a certain extent in relation to employment income, although we now have the ‘benefits-in-kind’ legislation to contend with. People in business on their own account, however, are not caught by the benefits rules.
Three key points to consider:
- In the above case, Mr Tennant was unable to sub-let the living accommodation with which he was provided. He was therefore unable to convert the accommodation he received into money.
- The case was considered broadly on what are now the employment tax code, and the self-employed or business tax code. HMRC lost both arguments.
- However, we now have specific rules governing the provision of living accommodation to employees as a taxable benefit in kind, which apply regardless of ‘money’s worth’ principles. Nevertheless, these rules do not apply to income, etc., received by people in business on their own account.
HMRC’s position
HMRC’s Business Income manual (which relates to the taxation of trading income) states (at BIM40051):
‘Money or Money’s Worth?
You should remember that to be a taxable receipt of a trade, unless specifically brought into charge by statute, income must be in the form of money or money’s worth... ...[in Tennant v Smith,] the value of the house was not money or money’s worth in the agent’s hands and could not be turned into money... ...There is no equivalent for traders of the 'benefits in kind' legislation for employees. This means that when a trader receives, for example, as a reward for being a good customer of a particular supplier a non-transferable holiday there is nothing to include in the taxable trade profits.’
This was basically borne out in a telephone conversation that I had with one of HMRC’s technical officers who confirmed that if the self-employed sales consultant in my original question were unable to hire out or otherwise turn the provision of the car into money, it would not be taxable on the individual.
Interestingly, all of the section of HMRC’s Enquiry manual that deals with contra or barter transactions (EM2732) has been redacted!
Traps:
There are some pitfalls to beware in terms of money or money’s worth, including:
- If HMRC were successful in re-categorising the individual in my original query from being self-employed to being an employee, then of course the provision of a company car would fall to be taxed as a benefit-in-kind. Employment status would be high on a tax inspector’s list of potential challenges.
- The rules are different for VAT because basically, any form of supply which is given in return for consideration from the other party will be subject to VAT, if it can be valued in monetary terms. So for instance, the value for VAT purposes could perhaps be established by reference to the corresponding market value of renting a similar car and, in the original scenario, this value would then need to be included in any VAT invoice raised by the self-employed sales consultant.
Practical Tip:
It could be argued that, these days, there is a market for almost anything, so the ‘value’ of the ‘money, or money’s worth’ principle is increasingly limited. Nevertheless, this old tax case and HMRC’s corresponding guidance for business tax purposes does raise some quite interesting questions for the taxation of services in consideration, insofar as they relate to people in business on their own account. As mentioned above, care is needed with any VAT implications, and professional advice is strongly recommended where any consideration, of substantive value, is involved.
