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The Finance Bill gained Royal Assent on 19 July 2006 and the various tax changes, as announced in the 2006 Budget, have become law. Some corresponding changes have also been made to the Social Security Contributions and Benefits Act 1992.
The "personal taxation" measures included in the Finance Act 2006 are as follows.
Cars with a CO2 emissions figure
The concept of a "qualifying low emissions car" is introduced from the 2008/09 tax year. This type of car is one that has an emission rating of not more than 120 g/km and that is not electrically powered. The rounding rules do not apply in this case, in other words a car with an emission rating of 124, which would normally be treated as 120, is not a low emissions car.
The percentage charge for a qualifying low emissions car will be 10%. The existing discounts that apply to bi-fuel, hybrid and road fuel gas cars will not further reduce this charge, although they will continue to apply to cars that are not low emission cars. The charge is, however, still subject to the 3% premium for diesel cars (unless the car was Euro 4 compliant and was registered before 1 January 2006).
Also from 2008/09, the lower threshold, at which level the charge for other cars is 15%, is reduced from 140 g/km to 135 g/km.
Mobile telephones
The tax exemption for the provision of a mobile phone is limited, from the 2006/07 tax year, to one mobile phone and the use of one telephone number. The exemption applies to the telephone and to the charges incurred by the employer. The exemption is also extended to the use of non-cash vouchers to provide the mobile phone and the associated charges.
The provision of mobile phone vouchers has also been added to the list of vouchers that are exempt from a liability for Class 1 NICs.
The most important aspect of the new rules is that the exemption continues to apply only to mobile phones that remain the property of the employer. Phones obtained by employees in any other way are not covered by the exemption.
The new rules do not apply to any mobile phone provided for an employee, or for a member of the employee's family or household, before 6 April 2006. So, if an employer provided two or more mobile phones for an employee or family member before 6 April 2006, they are not reportable as benefits for as long as they continue to be provided. This does not apply, however, to a mobile phone that was provided for one employee or family member before 6 April 2006 and, after that date, is provided for another employee.
Computer equipment
The limited exemption that applied to the provision of computer equipment is removed from the 2006/07 tax year.
The change does not apply to any computer equipment provided for an employee, or for a member of the employee's family or household, before 6 April 2006. So, if an employer provided computer equipment for an employee or family member before 6 April 2006, it is not reportable as a benefit for as long as it continues to be provided and meets the conditions for the limited exemption. This does not apply, however, to computer equipment that was provided for an employee or family member before 6 April 2006 and, after that date, is provided for another employee.
Eye care
A new tax exemption, although reflecting HMRC's long-standing concession, for the provision of eye tests and special glasses for employees is introduced from the 2006/07 tax year.
The exemption applies, if the defined conditions are met, to
- an eye and eye sight tests, or
- special corrective appliances that such a test has shown to be necessary.
The conditions are that
- the provision of the test or appliances is required by Regulation 5 of the Health and Safety (Display Screen Equipment) Regulations 1992, and
- such tests and appliances are made available generally to employees for whom they are required to be provided by the Regulations.
Some useful guidance documents on these health and safety requirements are available at http://www.hse.gov.uk/contact/faqs/eyesight.htm and http://www.hse.gov.uk/LAU/LACS/16-3.htm.
The exemption also applies if the tests and appliances are provided by means of non-cash vouchers or the employer's credit card. The provision of eye tests and special glasses has also been added to the list of vouchers that are exempt from a liability for Class 1 NICs.
Vouchers and credit-tokens
Until now, the Government has to use primary legislation, such as the annual Finance Act, to make changes to the circumstances where benefits are exempt from tax when provided by means of vouchers or credit cards. The changes to mobile phones and eye care, as described above, are examples of this. To allow such changes to be made in future by means of regulations, a new section (section 96A) is added to the Income Tax (Earnings and Pensions) Act 2003 (ITEPA).
Notional payments
Where an employer makes a payment of income to an employee that must be treated as a "notional payment", namely,
- readily-convertible assets, e.g. securities
- charges that arise on the provision of employment-related securities
- gains from securities options
- cash vouchers
- non-cash vouchers used to obtain readily-convertible assets
- credit-tokens used to obtain cash or readily-convertible assets
- a payment made by an intermediary
- payments made by a non-UK employer
the employer must operate PAYE on the value of the notional payment and pay all of the tax and NICs due to the Accounts Office on the next payment date. If the employer is unable to collect all of the tax from the employee concerned under PAYE, the employee must pay the tax owing to the employer within 90 days of receiving the notional payment.
The Finance Act 2006 amends ITEPA so that, where a liability for tax on notional payments arises as a result of the introduction of new retrospective tax avoidance legislation, the same PAYE rules apply with effect from the date that the legislation comes into force. This requirement has immediate relevance to a number of tax avoidance measures that are introduced by the Finance Act 2006 and backdated in their application to 2 December 2004.
The following example is provided in the guidance notes to the Finance Act 2006.
"On 31 January 2005, an employer paid £;1m to 20 employees, using a contrived avoidance scheme utilising options over employment-related securities. He contended that the existing legislation at the time meant this amount was not chargeable to income tax. The Finance Act 2006 charges the £;1 million to tax retrospectively and brings it retrospectively within PAYE. On or shortly after the appointed date, 19 July 2006, the employer calculates the PAYE due in respect of each employee using the codes and tax rates applicable for 2004/05.
"The employer then remits the tax due to HMRC by the due date. The employer recovers the tax from the employees' salary in the tax month in which the appointed date falls and the following month. Where this is not possible, the employer seeks reimbursement from the employees. Where reimbursement is not made within 90 days of the appointed date, the sums become employment income chargeable to tax on the individual employees who declare them in their Self Assessment returns due by the following 31 January."
...back to 3 August 2006
Further information:
Finance Act 2006
Finance Act 2006 Explanatory Notes
The Social Security (Contributions) (Amendment No. 4) Regulations 2006
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For Payroll and Human Resource Professionals
