Loans to employees

payrollpro

Got an odd one here which could do with an airing.

My client makes loans to employees for the purposes of season tickets or to purchase a bicycle. No problem with that and in all cases the loan is capped at £4,999 in order to avoid a reporting problem.

However, in every case the payment is made directly to the supplier and that has given rise to a question.

Even though it is a loan, the fact that the payment is made to the supplier gives rise to a potential BIK at section B, payments made on behalf of. The reason I am being given is that the purchase is being made by the employee and the invoice is in the employees name but the payment is made directly by the employer so it looks like the employer meeting the employees pecuniary liability.

The reason it is done this way is because the employer wants to make sure the funds are used for the purpose intended.

My immediate reaction was, what a load of rubbish but now I've calmed down I can see why the enquiry is going that way.

Anyone got any ideas and comments on this one?

Payrollpro

Monsoon

You're far more well placed to advise on this than I, however:

I do see their point. Arguably its in the wording of the loan agreement? What are the terms of the loans, is there a major timing difference between loan advance and repayment?

I would maybe go substance over form on this one, in that yes the 'form' is pecinuary liability but the 'substance' is a loan as that's the intent. Though - I am sure that is argued the other way round as well.

Sorry, not much help!

payrollpro

On the contrary, this is a lot of help because that's what I think has been happening over the years. The true purpose of the transaction is a loan and everything about it, the agreement, the deductions etc, are all above board.

However, the actual practice is then the employer meeting the employees personal bill.

The question is, which one takes precedence?

If we treat is as section B, Payments made on behalf of the employee then the finasl tax bill depends on the timing. For example a £1,100 loan made in April or May would be repaid by February or March meaning the entries in B would be £1,100 cost, less £1,100 amount made good.

Bad news if the payment is made in February when the entires become £1,100 cost and only £200 made good. The problem is, that is not a fair way of looking at it.

Both CIPP and myself have examined the definitions in booklet 490 and in the EIM pages but none of them cover this scenario, all they talk about is the "loan" without considering the possibility that the employer is doing something different. All the definitions and scenarios seem to assume that a sum of money is paid to the employee.

I think I am going to pursue this as an "arrangment" by the employer which results in a debt owed by the employee and which is recovered over an agreed period and described as a loan. I also think it may be time to post this on the ATT website and see what ATT and CTA members can come up with.

Payrollpro

Monsoon

Glad it was some help! Please do let me know how you get on, this is an interesting one! Good luck

payrollpro

My research seems to have confirmed my worst fears. One friend of mine went as far as to say that he would be embarrassed to approach HMRC for approval because he thought it was wrong.

What I am proposing to do is approach HMRC, anonymously, and put to them the fact that at its heart the scheme is a loan and the payment process is less relevant. I have contacts at CIPP who can deal with it from a policy point of view and keep me out of it.

Who said payroll is boring?

Payrollpro

deanshepherd

Very interesting.

I would be sticking to your guns on this one for two reasons:

1. If the employer has settled a pecuniary liability of the employee then the employee's 'net worth' should have increased (hence the charge to tax). The employee's net worth in this scenario is unchanged as the provision of an asset is matched by the existence of an equal liability. HMRC cannot tax an employee where he has received zero financial gain.

2. In my opinion, a pecuniary liability never arises, let alone has been settled by the employer.

If the employee bought the season ticket on his credit card and the employer paid off the credit card OR if the employee bought the bike on store credit and the employer paid that off then maybe HMRC have a point (although a moot one given point 1 above) but in this scenario the employer made a loan to the employee by provision of an asset under which the employee retains no legal ownership. As it was paid for at the time of purchase then at no time did the employee have a liability other than to the employer.

Cannot see a tribunal taking HMRC's side on that one but stranger things have happened!

payrollpro

Thanks Dean,

This one has actually switched round quite dramatically. After consulting a variety of colleagues I approached HMRC on the basis that at its heart the arrangement is one of loan and that there is a very robust agreement to that effect. The fact that the payment is made directly to, or in the name of the supplier of the service is incidental to the spirit of it.

Despite this contravening the benefits code and their established guidance on the matter HMRC accepts that this is common practice and they are quite comfortable with it. As long as the employer can produce the loan agreement and evidence that repayment of the loan actually occurs they wont question it.

My concern is that if it offends the benefits code where is there authority for treating them this way and why doesn't the manual include a scenario which covers such events, particularly when they admit to being well aware of such a common arrangement?

I take your point on this Dean but in fact the employee does in fact take ownership of the asset or facility and the loan allows them to do so. The arrangement is not one of a loan of a bicycle, its the lending of cash for them to buy it. The payment is made in such a way that the employer has some guarantee the funds are actually used to buy the bike/season ticket or fund study. It is that which caused me to have a few problems with the whole arrangement.

Not that it matters now as I have the answer and I am comfortable with it.

Payrollpro

deanshepherd

payrollpro wrote: »

I take your point on this Dean but in fact the employee does in fact take ownership of the asset or facility and the loan allows them to do so. The arrangement is not one of a loan of a bicycle, its the lending of cash for them to buy it.

That is exactly my point.

I think it is quite rare for an employee to buy their season ticket directly - I know I never had to.

I'm glad to hear HMRC are taking a pragmatic approach to this.