Jet set and taxable benefits

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It is commonplace for employers to provide their staff with benefits. This could be anything from private medical, a gym membership, a season ticket loan to having use of the corporate private jet or yacht.

Where an employer provides a benefit (other than a non-taxable benefit, for example pension or health screening) to an employee (or a member of the employee’s family or household) there will be an ‘employment related benefit’. This employment related benefit is subject to UK tax.

The “cash equivalent” of the employment related benefit is usually treated as earnings from employment for the employee, during the tax year in which the benefit is provided. This cash equivalent is defined in legislation as the “cost of the benefit” less any part of that cost made good or reimbursed by the employee to the persons providing the benefit.

The rules outlined in s.204 & s.205 ITEPA 2003 distinguish the difference between calculating the “cost of the benefit” for assets made available for the employees private use, without the actual transfer of the asset to the employee (s.205) versus “in house benefits”, meaning assets or services that are at the employees disposal (s.204), such as a train company providing free or reduced cost travel, or reduced school fees for the children of teachers.

In this article, we will focus on the s.205 rules and how we might calculate the cost of an asset that is made available to an employee for their private use, but is not transferred into the ownership of the employee.

How is the “cost of the benefit” calculated? 

Calculating the cost of the benefit of assets made available for transfer is done with reference to the fair market value of the asset. The meaning of “market value” is not entirely clear, but the statutory definition is that it means the price which the asset might reasonably be expected to achieve on a sale in the open market at that time.

In the case of most assets, the benefit calculation is relatively straightforward.  For example, the benefit of a computer made available to the employee or his or her family for private use would be calculated as 20% of the fair market value of the computer. An allocation of the days it was available for personal use is then applied.

However, if the same rules are applied to the use of a more expensive asset, then the resulting imputed benefit would likely come as a shock to the employee. Imagine the case where an executive is provided with the use of a corporate private jet for business related journeys. This would normally result in no benefit as the journeys are not for private purposes.  However, if the executive is accompanied by family on any of the flights, there is potentially private use of an asset without transfer.

Under s.205 ITEPA 2003, the “annual value” of the asset is 20% of the market value of the jet and although the value would be prorated for the days of private use, the resulting imputed taxable benefit, even for one trip, would be very substantial.

In addition, any expenses incurred in connection with providing the asset should be added to the 20% market value figure when calculating the benefit for the year (e.g. cost of crew, maintenance and fuel).

In some cases, it may be possible to argue there is no additional cost for the provision of a service.  In Pepper (Inspector of Taxes) v Hart [1992] UKHL 3, concerning schoolmasters’ sons being educated for a reduced fee, the case focused on the “marginal additional cost” which must be taken into account when calculating the benefit.  This is the additional cost to the employer of providing the benefit in question. The schoolmasters paid a reduced fee but because there was no marginal additional cost to teaching the extra children in the classroom, no taxable benefit arose.

If this “marginal additional cost” concept is applied to a flight taken by an executive’s family, it might be argued that there is no additional cost incurred in including additional passengers on the corporate jet. This is because the executive was using it in any event to get to, say, Geneva for a board meeting.  However, HMRC have stated that they do not consider that Pepper v Hart applies to taxable benefits covered by s.205 (i.e. assets made available without transfer).

Not available for private use

The Finance Act 2017 updated ss.204 and 205 and inserted a new s.205A which provides a helpful deduction in certain circumstances. This deduction in the value of the asset is allowed where there is a period that the asset is “unavailable for private use”.

An asset is unavailable for private use on any day if:

(a) that day falls before the day on which the asset is first available to the employee;

(b) that day falls after the day on which the asset is last available to the employee;

(c) for more than 12 hours during that day the asset:

(i) is not in a condition fit for use;

(ii) is undergoing repair or maintenance;

(iii) could not lawfully be used;

(iv) is in the possession of a person who has a lien over it and who is not the employer, not a person connected with the employer, not the employee, not a member of the employee’s family and not a member of the employee’s household; or

(v) is used in a way that is neither used by, nor used at the direction of, the employee or a member of the employee’s family or household; or

(d) on that day the employee:

(i) uses the asset in the performance of the duties of the employment; and

(ii) does not use the asset otherwise than in the performance of duties of the employment.

In light of the above, it is worth considering whether the facts and circumstances are such that the deductions in (c)(v) can be availed of, on the basis that the use by the family of the corporate jet is not at the “direction” of the employee or family. Or alternatively, the circumstances in (d)(i) and (ii) might apply so the day of use is regarded as not being a day of private use.

HMRC would undoubtedly look at the corporate aircraft policy and records of use and it would be helpful if the executive’s use of the jet is restricted to business use and if other employees and executives also travel on the jet from time to time. It is also helpful that no additional cost is incurred to transport the family.

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