Private Use Of Employer Business Assets – A Sting In The Tail?

Lee Sharpe looks at the new rules for an employee’s private use of business assets, and warns that the regime may not be as fair as some might think.

There are many rules about employers providing business assets for private use, where the employer does not transfer ownership of the asset itself to the employee but permits it to be used personally – many readers will be familiar with the benefit-in-kind (BIK) regimes specifically for the private use of ‘company’ cars and fuel, vans, mobile telephones, and living accommodation.

There is a more general ’catch-all’ rule which HMRC will apply for other assets, to be found at ITEPA 2003, s 205 et seq. That part of the BIK regime was updated in Finance Act 2017 (the one that got slimmed down for the general election), and this article will look at the changes and their implications.

New legislation

The principle is that the employee should suffer an income tax charge when the employer allows him or her to use a business asset for private purposes (but the asset is not transferred to the employee – a transfer is another BIK charge). This applies whether that private use is by the employee himself or his family or household.

The charge – on which the employee pays income tax – is based on the higher of:

the annual cost to the employer of providing the asset, including any rental/hire charge; and
20% of the market value of the asset when first provided as a benefit (to any employee).

The rules are slightly different with land, generally, (and remember that living accommodation, like cars, has its own special regime). Many advisers will be familiar with this approach. So, what has changed?

The old definition was where an asset was ‘put at an employee’s disposal’. Now, it is simply where the asset is ‘made available’ for private use by an employee. Given how broadly HMRC interprets this phrase when deciding whether or not a car benefit applies, this may not simply be replacing an old phrase with a modern equivalent.

Restricting/apportioning the charge

There is an outright exception to the general charge, where:

private use is forbidden, and
no private use actually takes place (which can, of course, be difficult to prove).

The new rules also provide for restrictions to the charge for:

periods when the asset is unavailable for private use – e.g. when it starts to be available for private use only part-way through a tax year, or private use/availability is ceased in a tax year;
any day the asset is unavailable for private use because it is not in a condition fit for use, is undergoing repair or maintenance, or cannot legally be used, or is being used by someone else for more than 12 hours that day; and
any day in which the asset is used only for the purposes of the employment.

Where the asset is being shared out amongst several employees simultaneously, then the BIK will be apportioned amongst them on a just and reasonable basis.

Why the changes?

The legislation now sets out how to adjust the charge for periods of unavailability or where more than one employee can benefit at the same time, and it harmonises the National Insurance contributions and tax treatment. This replaces the previously ’ad hoc’ guidance and approach that HMRC adopted for periods up to 5 April 2017, and the formality and consistency should be broadly welcome – particularly in terms of recognising various criteria when the asset may be unavailable.

The new guidance to accompany these changes is currently in HMRC’s Employment Income manual draft sections EIM21873–EIM21895, and gives examples of the new approach to restrictions for unavailability. Notably, the draft guidance focuses only on the market value of the asset as the basis for the BIK charge, and the potentially higher alternative cost of providing the asset (if the employer hires the asset, etc.) has been overlooked. What is even more surprising is how this appears also to have been overlooked in the tax press.

Let’s look at a couple of potential pitfalls.

Pitfall 1 – Availability

The new draft guidance has worked examples including a company helicopter and a company jet (fairly run-of-the-mill items, really…or not!). But having dealt with a client who did, in fact, have a roughly quarter-share in a jet, I think I can see why HMRC likes the new approach.

Assets like this are never really available all year round. For aircraft, there are very important restrictions on flight times and hours of use or ’utilisation’ in a given period. A business jet may be capable of only (say) a few hundred hours of actual flying each year. Likewise, boat engines may be rated for only one or two thousand hours’ use before a major refit.

Example: Calculating the benefit

Fred owns his own company, which has just bought a jet for £20 million. The jet is flown exclusively for business purposes for 20 days in the year – totalling 200 hours of actual flying. The jet is rated for 400 hours’ utilisation a year, so half has already been used for business purposes. If Fred could use the jet privately at any non-business time in the tax year, then it would seem fair that he would be charged on half of the deemed annual cost (20% of market value, in this case) of the jet:

BIK = £20M x 20% x ½ = £2 million.

Surprisingly, HMRC prefers the alternative day-counting approach:

365 – 20 days’ exclusive business use = 340 potentially available for private use

BIK = £20M x 20% x 340/365 = £3.7 million.

HMRC adopts a similar approach to the calculation for a helicopter. No doubt the argument is that, regardless of the overall annual limit on flying time, the aircraft theoretically could be used at any particular time for 340 days in the year.

Pitfall 2 – BIK on transferring the asset to the employee

While the new legislation does not cover transferring the asset to an employee when the business has finished with it, the corresponding BIK calculation on transfer of such an asset is potentially affected by the private use BIK charges along the way. Where the asset has been made available for private use and is at some later point transferred to an employee, then the BIK charge (subject to any payment by the employee) is the higher of:

market value at the time of transfer, and
market value when first made available (to any employee) for private use, less any BIKs charged for private use along the way.

So, if a valuable asset has been used privately/available for private use only sparingly in its working life and the BIKs thereby charged on employees have been quite small, transferring the asset outright to an employee a few years down the line could prove very expensive for that employee.

The way that the legislation for transfers (at ITEPA 2003, s 206) links back to s 205 above is unclear, but the former does not refer to the annual cost of a BIK for private use, and I think that HMRC will interpret the legislation to make the BIK on ultimate transfer of the asset the larger, where they have been ‘generous’ by reducing the year-on-year private use BIK for periods when it was not available.

Conclusion

Employers and their agents should consider the availability of assets to employees – particularly those that are portable/removable from the office, such as laptops, tablets, etc. – to see how to prove that they are not ’made available’ for private use. I imagine that there may be a few company jets with their engines decommissioned for maintenance for weeks (or months) at a time in future tax years (or it may be more convenient to look at insured/legal use criteria).

But before panic sets in, readers might also do well to consider the exclusion for ‘insignificant’ private use afforded for office equipment, etc., used away from the employer’s premises at ITEPA 2003, s 316 (see EIM21611) – which, again, appears to have been overlooked by some commentators. Unfortunately for Fred, aircraft are one of the few item classes that are specifically excluded from s 316 (sorry, Fred!).