Employers will soon have to prepare themselves for the reporting of benefits-in-kind they have provided for their employees in the year to 6 April 2005. The deadline for reporting the benefits to the Revenue is 6 July. This time, however, there is a significant new twist, with implications for:

• the benefits it has to report
• the tax payable by its employees.

As of April last year, ‘transfer pricing’ adjustments have to be made between large, related businesses, even where both are in the UK. This could have unexpected consequences where benefits-in-kind are provided by (say) a subsidiary company for employees of its parent company. For the first time, the parent could have a sizeable benefit-in-kind to report to the Revenue on which employer National Insurance is due, and its employees will be taxed on that benefit. This could affect a wide variety of businesses and will come as a shock both to them and to their employees, who may not be aware of this new situation.

Alison Haynes, tax partner at Deloitte comments:
“As a consequence of non-discrimination regulations within the EU, transfer pricing adjustments that had to be made between UK and non-UK related entities now have to made between UK related entities as well. This has implications for larger companies that provide facilities for their staff at a low marginal or nil cost.

“As an example, a bus operating subsidiary may provide free bus passes to its operatives and, because there’s no marginal cost of carrying an extra passenger on a bus, no benefit in kind is chargeable. This continues to be the case.

“The subsidiary may also provide free bus passes for the managerial and administrative staff employed by the parent, without charging the parent for this facility.  Again, because there was no cost to the parent in providing the free travel, no benefit-in-kind was previously chargeable on the parent’s staff. As a consequence of the new UK-UK transfer pricing legislation, however, the subsidiary is faced with the possibility of charging the parent a full market price for the facility. This will mean there will be a full cost to the parent of providing the free travel. The parent will therefore have to report a sizeable benefit-in-kind to the Revenue on which it will pay National Insurance, and its employees will be taxable on it for the first time. The parent will face a penalty if it fails to report such benefits.

“Businesses can, however, act to mitigate the situation: instead of the subsidiary charging the parent, the tax adjustment could be made in the companies’ tax computations.  In other words, the computations would be drawn up as though the charge had been made through the accounts, even though it hadn’t.  Deloitte has had confirmation from the Revenue that this will avoid a benefit-in-kind for the employees.

“Time could quickly run out, so the wide variety of businesses that could be affected (see Note to Editors) should examine the consequences for themselves and their employees and take any necessary action.  There are two particular deadlines to be aware of: 6 July 2005 for the reporting of benefits and, in the case of companies with 30 June 2004 year-ends, 30 June 2005 for submitting their accounts and corporation tax computations.”

Ends

Notes to Editors

Transfer Pricing
Transfer pricing refers to the price at which goods and services are provided between related entities where one of them is a company or partnership. For a long time, transfer pricing adjustments have been required for tax purposes where there have been charges on a non arm’s length basis between two entities, but only where transactions with an overseas entity has artificially reduced the profits of a UK entity. 

From April 2004, however, transfer pricing adjustments have also had to be made between UK entities.  Small-sized enterprises are exempt. Medium-sized entities are also exempt but the Revenue has the right to withdraw the exemption from them, even retrospectively, where a significant amount of tax is at stake.  (Enterprises having fewer than 50 employees and whose turnover and assets come to no more than 10 million euros are regarded as small-sized.  Other enterprises having fewer than 250 employees and whose turnover and assets come to no more than 50 million and 43 million euros respectively are regarded as medium-sized.)

Businesses and benefits that may be affected

These include:

• retail clothing outlets
• car manufacturers
• group discount schemes
• hotel accommodation (which can be difficult to value, depending on time of day)
• travel concessions
• provision of food and drink
• vouchers for in-house gift or award schemes
• leisure time facilities on business trips and conferences.
   

About Deloitte
In this press release references to Deloitte are references to Deloitte & Touche LLP.

Deloitte & Touche LLP is the UK's fastest growing major professional services firm based in 21 UK locations, with over 10,000 staff nationwide and fee income of £1,246 million in 2003/2004. It is a member firm of Deloitte Touche Tohmatsu, a leading professional services organisation, delivering world class audit, tax, consulting and corporate finance services, with around 120,000 people in over 140 countries. Deloitte Touche Tohmatsu is a Swiss Verein, and each of its national practices is a separate and independent legal entity.

Deloitte & Touche LLP is authorised and regulated by the Financial Services Authority.

The information contained in this press release is correct at the time of going to press.