Payments other than ordinary salary
Benefits in kind
A benefit in kind is ‘consideration’ that may be offered by an employer to an employee or office holder (e.g. a director) in lieu of cash. It includes benefits enjoyed by the employee’s or office holder’s family or household. This section is intended to provide some general guidance in respect of benefits in kind, while more detail can be found in GN 40 Benefit in Kind Guide.
Common benefits in kind include provision of a company car, the provision of living accommodation, payment of an employee’s personal liabilities, personal use of an asset made available by the employer and transfer of an asset to an employee at less than the market value.
Certain benefits in kind are exempt from an income tax charge. These are listed in the Benefit in Kind Guide. There is also a general exemption from reporting chargeable benefits in kind if the aggregated value of the benefits for the year is less than £400.
The value of a benefit in kind depends on the type of benefit provided. The three main valuation methods are shown below but are covered in more detail within the specific topics in the Benefit in Kind Guide:
- company cars and fuel are valued by reference to form R22(b) Car and Fuel Benefits 2010/11;
- an asset transferred to an employee is usually valued at the market value at the date of transfer;
- the use of a company asset is valued by reference to an annual value.
An employer is required to complete a form T9 Return of Expenses Payments and Benefits for every person who receives a taxable benefit in kind during the year. One copy of this form should be given to the employee or director concerned to include with their personal income tax return. A second copy should be submitted with the T37 Employer’s Annual Return. Employers should note that, by enrolling for Online Tax Services for Employers, both of these forms may be submitted online. For more information, please see Online Tax Services for Employers.
Normally, when using the services of a consultant, a contract will be drawn up and the consultant will act in a self-employed capacity.
However, if no contract is drawn up, an employee/employer relationship exists, as set out in Am I an employer for the purposes of the scheme?. Alternatively, they may be the holder of an office for the company. In either of these cases, ITIP should be deducted and form T20 Employee Commencing submitted.
Form T20 Employee Commencing should be submitted for all directors and non-executive directors who are in receipt of directors’ fees (except for those meeting the conditions set out in Practice Note 162/10 and Practice Note 163/10). A tax code will then be issued by the Division. ITIP should be deducted in accordance with the code and submitted to the Division using form T35 Remittance Card for Deductions of Income Tax Instalment Payments and National Insurance Contributions together with any National Insurance deductions that may be due. (For information about how to make the monthly remittance online, please see “Online Tax Services for Employers”)
1. Where the director’s fees are paid by a company in respect of a directorship held by a member of a Manx professional partnership provided that
- the directorship is a normal incident of the profession and of the particular practice involved
- the director’s fees form only a small part of the partnerships income, and
- under the partnership agreement, the fees are pooled for division among the partners.
2. Where the director’s fees are paid by an Isle of Man company to another Manx company and the Manx company;
- has the right to appoint a director (cannot be a specific named person) to the board of the Isle of Man company by virtue of its shareholding in, or formal agreement with, the other company, and
- the director is required to, and does, hand over to the company any fees or other earnings received in respect of the directorship.
3. Where the company had no formal right to appoint a director to the board, but the director is nevertheless required to, and does, hand over the fees to that company, provided it is;
- a company that is resident in the Isle of Man for income tax purposes, or , if non-resident, is trading through a branch or agency in the Isle of Man so that its income is chargeable to income tax in the Island and the fees form part of that income, and
- not a company over which the director has control (for this purpose “control” has the meaning given to it by section 119A of the Income Tax Act 1970, but in determining whether the company is controlled by the director the rights and powers of his spouse, his children and their spouses and his parents will also be taken into account).
4. Where the director’s fees paid to a non-resident director they will not be subject to ITIP deductions provided that the director’s duties are performed wholly outside the Isle of Man or the fees are solely in respect of the carrying out of statutory functions performed within the Isle of Man.
5. Where a non-executive director has a 'contract for services' rather than a 'contract of service', in which case the directors fees paid to the non-executive director will be treated as self-employment earnings.
In all other cases the a form T20 should be submitted and ITIP should be deducted from any director’s fees in accordance with the tax code issued by the Division. A form T14 “Isle of Man ITIP and National Insurance Deduction Card” will also need to be completed and included with the T37 Employer’s Annual Return.
Please note that dividends received by directors are not subject to ITIP.
All expenses incurred by an employee and repaid by their employer must be treated as remuneration and put through the payroll in the normal way. The employee should then claim any allowable expenses as deductions against the appropriate income on their personal income tax return.
It has been the Division’s practice to grant dispensations allowing employers to reimburse certain payments without deducting ITIP e.g. reasonable subsistence payments to cover living expenses whilst off the Island on business.
If a dispensation has been granted to an employer, the following reimbursements need not be treated as remuneration:
- employees who use their own private motor vehicle for business use (not including home to office travel) and are reimbursed by a fixed ‘pence per mile’ rate which does not include any profit element;
- reimbursements made in respect of exact expenditure where receipts are provided.
All expense claims must be independently checked and authorised within the company. Dispensations are not normally granted if employees or directors authorise their own expenses. Further details on expenses and dispensations can be found in Practice Note 28/90 Section 3 and Practice Note 28/90 (Supplemental) Section 1, while for information regarding how to apply for a dispensation, please refer to section 3 of GN 40 Benefit in Kind Guide.
Holiday pay, sick pay and back pay
If an employer is about to make a payment of holiday pay to an employee before they leave employment the employer should add the holiday pay on to the normal remuneration and allow free pay for one pay period only.
Any amount of sick pay paid by an employer for a period in which the employee was absent due to sickness must be subjected to ITIP. Any monies recovered from the employee in respect of that period, e.g. the whole or part of the statutory sick pay received by the employee or recovered by way of a pay-out under an employee sickness insurance policy, must be recorded as a trading receipt. If sickness benefit is paid to the employee under the National Insurance Act, the employer should not treat it as remuneration.
Any payments of back pay should have ITIP deducted at the Higher Rate (20%) and the amounts paid and deducted should be included on form T14 Isle of Man ITIP and National Insurance Deduction Card.
Pension scheme contributions and the taxation of pensions
This section concerns the treatment of contributions made by the employer and/or employee to the employee’s pension fund and the taxation of pension payments made to the employee once retired.
The following contributions may be allowed as a deduction via the payroll:
- an employee’s ordinary annual contributions to an occupational pension scheme which has been approved by the Assessor of Income Tax (it should be noted that schemes which have been approved or provisionally approved in the UK also require approval in the Isle of Man);
- any special regular or one-off contributions to an occupational scheme paid in order to secure permitted additional benefits (e.g. 'added years', 'back service', or 'improved benefits');
- any contributions to an in-house additional voluntary contributions scheme (AVC scheme) which runs alongside the main scheme.
After deducting the appropriate amount of employee contributions from the gross pay, ITIP may then be calculated in the normal way. National Insurance Contributions should be calculated on the gross pay before deducting the appropriate amount of employee contributions from the gross pay. The total figure for the employee’s scheme payments during the year should be inserted in Box B (Superannuation) of the T14 Isle of Man ITIP and National Insurance Deduction Card at the year end to enable the employee to receive the matching tax relief in their assessment.
If an employer has any doubts as to whether the pension scheme has been approved by the Assessor, they should contact the Division before allowing tax relief on any of the contributions described above.
There is a maximum contribution that can be made to a pension scheme. The total contributions, both regular and special, that can be made by an employee to an occupational pension scheme in any tax year must not exceed the annual allowance. For 2010/2011 and subsequent years the annual allowance is £300,000. If the employee contributes to the main scheme and also contributes to a free standing or group AVC, their total contributions similarly must not exceed the annual allowance.
If an employee, who belongs to an occupational pension scheme, leaves the employment, the following treatment should be applied;
- if the employee has been in the scheme for more than two years, their contributions cannot be refunded to them. However, they may transfer the contributions to an occupational pension scheme provided by the new employer or, if no such scheme exists, they may transfer the contributions to a personal pension plan. Alternatively, the contributions can remain in the original scheme where they will continue to build up until the employee reaches pensionable age.
- if the employee has been in the scheme for less than two years, the scheme administrator may refund the contributions made by the employee. This refund is, however, subject to tax at 7.5% on the full amount. The tax deducted should be sent to the Division with a covering letter and kept separate from any ITIP/NI remittances.
If the employer does not operate an occupational pension scheme, the employer can make contributions to the employee’s pension scheme, provided that the total of both employee and employer contributions does not exceed the annual allowance. The employer can claim these contributions as a trading expense but the employee cannot claim relief for their employer’s contributions.
Although the employer may be making contributions in respect of their employees, these schemes are not occupational pension schemes and the employees’ contributions cannot be treated as superannuation payments. The employer should therefore apply an employee’s tax code to their gross pay before deducting the amount of the employee’s contributions from the pay. This means that the employee’s contribution to the personal pension plan should not be shown in the Superannuation box on form T14. Instead, the employee or employer (see the item below) should notify the Division of the contributions so that the appropriate adjustment can be made to the tax code. This treatment also applies in the case of executive personal pension plans where the principal contributor is the employer and the employee only makes occasional top up contributions to the arrangement.
Note however, that if an employer pays the employee’s own contribution, they are providing a benefit in kind as the employer is meeting a pecuniary liability of the employee. The employee can still claim relief for these payments but the employer must supply details of the contributions on form T9 Return of Expenses Payments and Benefits.
By concession, the Division does not tax the benefit which can arise from the payment of relocation expenses by an employer to an employee provided that:
- the payment arose as a direct result of a person moving to the Island to take up employment;
- the payment was reasonable in amount.
Removal expenses paid directly by an employer when an employee takes up residence in the Isle of Man will not be assessed as a benefit in kind provided they do not exceed £20,000 in total.
If the total exceeds £20,000, the employee will be subject to a BIK charge in respect of the amount exceeding the £20,000 limit. This amount must be reported on form T9 Return of Expenses Payments and Benefits.
In addition, certain travel expenses and temporary accommodation are also exempt from charge, subject to certain time limits. Please refer to Practice Note PN 193/16 for further details and conditions of the exemption
Salary sacrifice arrangements
Under a salary sacrifice arrangement, an employee voluntarily gives up the right to receive part of the salary or wages due under their contract of employment. Usually, the sacrifice is made in return for the employer agreeing to provide the employee with a non-cash benefit of similar value for example, child minding facilities, pension contributions, etc.
To enter such an arrangement the employee’s terms and conditions of employment relating to their pay must be changed, making this a matter of employment law rather than tax law.
The National Insurance contributions paid by both the employee and employer will be reduced to reflect the reduction in salary or wages, as will the tax paid by the employee.
In order to enter into a salary sacrifice arrangement the following conditions must be met:
- the contract of employment between the employee and employer must be changed well in advance of the date on which the first payment under the new arrangement is due to be made to the employee in order to demonstrate that the employee has agreed to give up the right to receive the original higher amount; and
- the revised contract of employment must show that the wage or salary has been genuinely and permanently reduced in exchange for the provision of a benefit; it cannot allow the employee to opt in and out of the arrangement.
Before entering into an arrangement approval must be obtained from the Income Tax Division who will require proof that the above conditions have been met.
Should the employee and employer wish to cancel the arrangement, the Division should be contacted in order to clarify the income tax position.
Share option and similar share schemes
This section concerns the various types of share schemes that can be provided to a company’s employees.
Under the Isle of Man Income Tax Acts, an employee is liable to income tax on any income derived from the ‘annual profits or gains of or in respect of or from any employment’. This refers to benefits capable of being converted into money such as share options. Share schemes therefore qualify as benefits in kind and form T9 Return of Expenses Payments and Benefits should be completed for each employee within the scheme.
However, since 6 April 1989 benefits arising from share option and similar schemes on or after that date are, by concession, exempt from income tax. To qualify for the concession, the schemes must conform to the United Kingdom legislation on the subject and each scheme must be approved by the Assessor of Income Tax in the Isle of Man.
To obtain approval, the following information should be forwarded as appropriate:
- a copy of the rules of the scheme;
- a copy of the trust deed under which the scheme has been established;
- a copy of the form of contract under which the options will be granted;
- a copy of any documents which will be issued to participants in connection with the scheme; and
- a copy of the Inland Revenue/HMRC approval, if appropriate.
In addition, in order to gain approval the scheme must be open to all employees, not just senior managers or key employees.
If a scheme has received approval, then provided that the scheme rules are met, the employee remains employed and the shares are retained for the required period, no tax liability will arise.
However, even though the scheme may be approved, there can be tax implications when an employee ceases to be employed, fails to retain the shares for the required period of time or the scheme rules are not complied with.
Tax implications may also arise where a scheme fails to obtain approval from the Assessor.
In these cases, employees are charged to income tax on the value of the shares granted by the scheme. The charge will be raised for the tax year in which the share option was granted and will be based on the market value of the shares at the time of granting.
By concession, the Assessor will agree to defer the income tax charge to the tax year in which the shares vested, the charge being based on the market value at the time of option or vesting, whichever is the higher.
All taxable proceeds received by employees from share schemes must be reported by the employer using form T9 and sent to the Division with the T37 Employer’s Annual Return. Failure to comply with the rules of the scheme or to meet the obligations of an employer in reporting taxable proceeds can result in the approval of the scheme being withdrawn. This would make the employees liable to income tax on all transactions under the scheme.
If an employer is uncertain how to treat shares provided to employees, they should contact the Division for clarification.
For more detailed information regarding share option and other similar share schemes, please refer to GN 40 Benefit in Kind Guide.
Termination payments and compromise agreements
Tax should be deducted from the whole of a lump sum payment made to an employee on cessation of employment, unless the payment is a termination payment made on cessation of employment. A termination payment, or the total of these payments if more than one is made, should only be treated as remuneration if it exceeds £30,000 and then ITIP should only be deducted from the amount by which the payment exceeds £30,000 (for example, if the total payment was £35,000, only £5,000 would be subject to ITIP). The balance in excess of £30,000 should be included in the final pay period and ITIP deducted as normal. The payment over and above £30,000 and the ITIP deducted must be included in boxes A and C respectively of the T14 Isle of Man ITIP and National Insurance Deduction Card.
It is important to note that a termination payment can be made up of various distinct payments and that not all elements may be treated as non-taxable, even where the total payment does not exceed £30,000. Guidance as to what qualifies as a termination payment is given below.
A termination payment includes:
- compensation for loss of office;
- a redundancy payment;
- an ex-gratia payment on termination of employment where there is no contractual right to that payment.
A termination payment may also be made to compensate for significant changes in the duties or remuneration structure of a continuing employment. If an employer is not sure whether a payment qualifies as a termination payment, they should clarify this with the Division before the payment is made without the deduction of ITIP.
Generally, any payment which would otherwise be taxable under the Income Tax Acts, including benefits in kind, would not be treated as a termination payment. For example, if any of the following payments are made as part of a termination agreement, they would not fall within the definition of a termination payment:
- accrued holiday pay;
- bonuses payable at the termination of a fixed duration contract;
- any payment made as compensation for losing the right to a payment or bonus that would otherwise have been taxable;
- pay in lieu of notice, whether contractual or not (for example, where an employer gives notice of termination to an individual but informs them that they need not work to the termination date and pays the wages due up to the notice period);
- benefits in kind (for example, the transfer of a company asset such as a car or private residence).
Any payments of this nature should not be included within the £30,000 termination payment limit.
Compromise agreements are treated in the same way as termination payments. Again, it is important for the employer to clarify how each component part should be treated for tax purposes, as they could be held liable for any ITIP which should have been deducted from payments made.
It is important for an employer to know when tips provided for their employees should be subject to ITIP in order to avoid being liable for any tax that should have been deducted.
An employer should add the amount of any tips to an employee’s gross pay and subject them to ITIP in the following circumstances:
- if the employer operates a scheme that pays their employees tips or service charges from customers;
- if the employer decides or influences, directly or indirectly through another person, how tips should be distributed amongst their employees;
- if there is any distinction between the way in which directors and employees take their gratuities;
- if the employee has a contractual entitlement to a share of the tips.
In these cases employers should maintain records of any tips that have been subject to ITIP deductions. The records may be required for inspection and failure to provide them may render the employer liable to a £250 penalty.
However, if an employee receives a tip without ANY involvement or influence from the employer, it is not subject to ITIP. In this case, the individual employee must record the total of these payments on their personal income tax return at the end of the year. This applies to the following tips:
- those paid directly by a customer;
- those left on a table by a customer after a meal;
- those paid through a gratuity put into a staff box or group pot.
If an employer is unsure of how to treat any tip or gratuity, they should contact the Division to clarify whether or not it should be paid via the payroll and subject to ITIP.