| Benefits Code I and Exemptions and Exclusions |
5 |
| impractical, is to tax E on the value of the benefit to E. The impracticality arises from the subjective nature of the assessment. In Simons’ famous example, how does one tax an employee who is given tickets to a Wagner opera, preferably a long one, and who hates any form of opera?7 (2) The second choice, convertibility, taxes the employee by reference to the sums which could be derived by converting the benefit into cash. (3) The third choice is to use the cost incurred by the employer in providing the benefit. |
| The UK currently uses choices (2) and (3)—with extensive statutory glosses. Choice (2), convertibility, was developed by the courts and applies to all employees, subject, of course, to any statutory exclusions or modifications. Choice (3), the cost to R, was introduced by legislation in 1948 and now applies to employees earning £8,500 a year or more and to all directors (see chapter 17 below). (3) applies to a widely defined—but not universal—group of benefits. It has its own set of statutory exclusions or modifications and elaborate rules for determining the cost to the employer. The cost basis is supplementary to convertibility in that it applies only when the latter does not. |
Convertibility is still important because it must be applied before the cost basis. It is not used for NIC.8 A recent review concluded that while the advantage distorted the market, it was not right simply to value benefits in kind for NICs at least on anything like the income tax rules, given that the current NICs use a different pay period basis (ie weekly or monthly, not annually).9 |