UK Taxation – report
Objectives and Criteria
To attract employees from the competition, an additional cash salary of 10% has to be paid. However, given the current tax environment in the country, several other initiatives can be taken which affect the total money that a new employee earns or saves as a result of the company’s taxation structures.
The following criteria have been used to evaluate each proposal keeping in mind the profile of the target employees:
Tax efficient: the proposals will save on the tax and not result in the employee paying a higher amount or rate of tax because of the incentives offered.
Will be attractive to the target workers, who are mostly in there twenties and thirties; company incentives which are tax friendly and cater to the needs of this audience.
Should the staff member not want some of the perks, the company will also allow some flexibility for the staff member to opt out or make some changes to the package.
Employee stock option plans to be considered with impact on taxation
In terms of the various options offered by the employers, the company has to work on the assumption that employees need to be informed about how they can save tax on the cash salary that they get. The second section will deal with the company provided perk and a cost benefit analysis of the same.
For the older employees especially those that have been with the company need some help with their tax planning. Such proposals will go a long way in increasing the take home pay for employees. An instance of this can be the tax benefit available as a plus 65 person, could also be applicable for the new experienced hires the company is planning. As pointed out by John Whiting, a tax partner at Pricewaterhouse Coopers for a write-up for the BBC, age is recognised during the tax year. If a person were to turn 65 within the tax year, then the staff can claim the benefits for the entire year.
Savings are a good idea for tax benefits. Tax-free savings are especially applicable for those employees, which either have a lower salary and all who can save via the ISAs’. For incomes under GBP 4800 levels, the income is tax-free and the employee can get a tax break on the interest earnings from their banks.
Withdrawing profits from the company can also be a good option in lieu of salary for the employee. For example for someone earning GBP 15,000 (Redstone Apr 2005 BBC) can partition the earnings into two components of a small tax-free salary of GBP 4500. If the employee qualifies for the “means tested” tax break, there will be no national insurance contributions and there will be no tax on this salary. The balance amount will be subjected to a 10% corporation tax or 105 pounds. This is a significant tax savings. While the deductions at source rules have changed, and 19% must be deducted, this amount will need to be subjected to further tax planning.
Now all these rules are probably something that the employees are already aware of themselves. However, the company may consider deputing the senior accounts staff, over the year to guide staff in planning tax. This would be at no cost to the company as existing knowledge and resources within the company are being utilised. Furthermore this would also benefit the company be aligning the staff and corporation tax planning in the initial years to provide maximum benefit to the employee and the company.
Company sponsored perks and benefits:
One of the ways that the company can directly contribute to the staff salary packages and make them more attractive is to look at the tax benefits provided by the government in the employee benefits.
There are several areas that the company can look at for improving employee benefits. Four of these are:
Food and dining privileges
Loan and purchase of assets such as computers, fax machines etc at the employees residence:
These are discussed individually hereunder:
Food and dining privileges: The government has liberalised the dining privileges for employees and food provided to employees at the company’s premises or vouchers provided for the same. Most of the information is given in the Inland Revenue 2005 Guide to employee taxation and implications.
Meals and food vouchers covered under Section 317 mentioned in the guide states that free or subsidised meals provided on the employer’s business premises, or in any canteen
Where meals are provided for the staff generally, or a ticket or token used to obtain such
Meals are exempt from tax so long as these are not too lavish. Unless undertaken for purposes of entertaining the company’s clients and certain other non-regular events, this is not applicable to eating at restaurants unless again, we have a contract with a restaurant to provide the same. Also these benefits must be universal; we cannot have a specific element in the contract but need to provide this as a general benefit to all employees. As per section 89 mentioned in the document, if we were to provide meal vouchers, these would have to non transferable otherwise that entire benefit will be taxed in the hands of the employee even though the company will be able to claim a tax break from the expense.
Transport cars and bicycles:
The government has provided several tax benefits for environmentally friendly initiatives undertaken by the company. They have drastically reduced taxation for cars with lower fuel consumption as well as for the use of bicycles to travel to work.
A table for calculation is attached at the end. Cars with a low CO2 emission and with a lower engine capacity are exempt from the fuel scale charge (The Automobile Association) used to calculate the private fuel benefit tax. The calculation is explained hereunder:
A fixed amount of 14,400 is multiplied by the fuel scale charge for purposes of calculating the benefit from the use of a company car. So the amount is calculated as £14,400 x fuel scale charge % = total benefit to the employee which is taxed at the applicable tax rate for the employee. So tax rate x benefit = total additional tax to be paid on the benefit of a company car.
Percentage charge relative to CO2 emissions (before discounts) (Source the AA)
2005/06 CO2 Petrol Diesel
140 0.15 0.18
145 0.16 0.19
150 0.17 0.20
155 0.18 0.21
160 0.19 0.22
165 0.20 0.23
170 0.21 0.24
175 0.22 0.25
180 0.23 0.26
185 0.24 0.27
190 0.25 0.28
195 0.26 0.29
200 0.27 0.30
205 0.28 0.31
210 0.29 0.32
215 0.30 0.33
220 0.31 0.34
225 0.32 0.35
230 0.33 0.35
235 0.34 0.35
240 + 0.35 0.35
It is interesting to note that the charge is zero for environmentally friendly vehicles with low CO2 emissions. So if the company were to provide small cars like the small models from Japanese manufacturers, there could be substantial savings as the entire cost of the car is eligible for a 100% depreciation claim in the first year. For a small car costing GBP 7000, I believe the company can negotiate a bulk discount of 10% with the total capital outlay per employee for the purchase being £6,300.00. Given the group insurance policy (to be renegotiated) the cost of insurance and maintenance for the year will amount to GBP 750. Costing the capital’s opportunity cost at 4.75% as per applicable rules, there will be an annual interest cost of GBP 300, however allowing for a tax shield on the interest the company will have a net Interest cost of £209.48 with the total cost of GBP £959.48. However, as in this example, the company can claim back 100% of the value of the car, the total benefit to the company will be GBP 5340. In addition, the staff has the use of company car for personal use. The company may, if we so wish may charge the staff a fixed amount for the personal fuel to defray a part of the cost.
Purchase Price £ 7,000.00
Company Price@ 10% Discount £ 6,300.00
Insurance £ 350.00
Maintenance £ 400.00
Interest Rate 4.75%
Interest cost £ 299.25
Tax Shield @ 30% £ 89.78
Total Interest Cost £ 209.48
Total Cost to Company per annum £ 959.48
Depreciation Allowance 100% £ 6,300.00
Net benefit £ 5,340.53
Bicycles can be purchase by the company and loaned to the staff free of charge provided they are used for transport to and from the place of work. Given the profile of the people the company proposes to hire, this would be an additional expense saving exercise and the company will get the depreciation benefit as applicable to equipment. The company may consider going in for a GBP 300 multipurpose bicycle for employees and claim back 25% of the cost as annual depreciation (Brodie 2004).
Transfer of used assets:
Items like bicycle and computers / fax machine can be loaned to employees and the company can enter into a buy-back agreement with the employee. During the life of the asset, there is not tax on the loan of asset to the employee and the company can claim depreciation each year. At the end of the life of the asset or when the company decides to upgrade or if the employee leaves employment, the asset can be sold back to the employee at the current market value of the asset without incurring any tax liability (Inland revenue 2005).
Particulars Bicycle Computer
Purchase 300 1000
Maintenance 20 20
Interest cost (cost of capital @ 5%) 15 50
Tax shield on interest payment 4.5 15
Total Annual Cost to company 30.5 55
Standard Life of asset 4 3
Depreciation 75 333
Net Annual Benefit to company 44.5 278
Residual value after 3 years 75 0
The company can set up a scheme for providing child care vouchers to employees to a value of GBP 50 per week tax free in the hands of the employee. This amount can be adjusted against their salaries so there is no cost to the company and the employee saves to the extent of their tax rate on their salary. For an employee earning GBP 20000 per year, this can be as high as GBP 572 (details table below). Tax savings will be higher for employees in the higher tax bracket.
Tax free voucher 50
Weeks paid 52
Total Amount 2600
Marginal Tax rate 22%
Tax saved 572
These tax saving options are known to the software industry and as such, depending on circumstances, can be adopted by the competition to retain their employees or lure them back with higher salary packages and benefits. The other option the board might consider is ESOPS (employee Stock Option and Plans). These can relate to an option issued to the employee, the company shares themselves and “phantoms” or scheme where simple price changes in the company share price is netted out and paid to the employee (HMRC 2005).
The first consideration under the existing rules is the cost of setting up such a scheme. While the company can claim all costs as expenditure for setting up the scheme, the same have to be added to the taxable income of the beneficiary employees. The assumption here is that all the activity has to be priced as if it were provided by a third party hence for a phantom plan a share purchase and sale is implied, and the other stock option and share preferential purchase is treated as a regular stock market transaction with the relevant accounting costs and brokerages payable.
Furthermore, the value of the benefit must also be fair market value (of the share or option) and for taxation purposes, the benefits such as the share option have to be adjusted for their fair market value as well. So if compensation were designed to include ESOPS, the employee would have to pay tax the price difference between the applicable and current market price of the option. On exercise of the option any gain would be treated as a normal market exercise of the option.
Actual cost of the exercise can be computed depending on the structure of the option as well as the exercise time. Overall, they would have to bear the cost of the ESOP structure however there is a tax break available on this. Employees will bear the cost however for an Exercise time of 3 years, there can be a substantial gain for them as well.