Benefit-In-Kind Bus & Train Passes

Exemption for Monthly/Annual Bus or Train Passes: “Salary Sacrifice” Arrangements

The Benefit-in-Kind Exemption

Section 118(5A) TCA 1997 exempts employees and directors from benefit-in-kind taxation for 1999/2000 and subsequent tax years where an expense has been incurred by an employer on the provision of a monthly or annual bus or train pass for the employee or director.

The bus or train pass must be issued by either:

• CIE or any of its subsidiaries (e.g. Bus Eireann, Iarnrod Eireann, Bus Atha Cliath); or
• A private bus operator holding a passenger licence under Section 7 of the Road Transport Act 1932; or
• A person who provides a passenger transport service under an arrangement entered into by CIE in accordance with Section 13(1) of the Transport Act 1950

Expense of providing Bus/Rail Pass must be incurred by the Employer

For the benefit-in-kind exemption to apply, the employer must incur the expense of the bus/train pass. It will not be sufficient for an employer to purchase a pass and recover the cost from the employee - in such circumstances the expense will have been incurred by the employee. The main purpose of this note is to clarify Revenue's interpretation of the circumstances under which an employer will be considered to have incurred such an expense in relation to an employee in the specific context of so-called “salary sacrifice” arrangements.

Salary Sacrifice Arrangements: General Tax Treatment

The term salary sacrifice is generally understood to mean an arrangement under which an employee agrees with the employer to take a cut in remuneration and in return the employer provides a benefit of a corresponding amount to the employee (in this case a bus/rail pass).

As a general rule (There is an exception to this general rule in the case of Approved Profit Sharing Schemes, provided certain conditions are met), Revenue do not regard salary sacrifice arrangements as reducing the employee's taxable income. If an employee forgoes salary payable under an existing contract of employment in exchange for a benefit, the employee remains taxable on the “gross” income payable. The salary sacrificed will be considered to be an application of income earned by the employee, not an expense incurred by the employer. This interpretation is supported by case law (See, for example, Heaton v Bell [1969] 46 TC 211 and Parker v Chapman 13 TC 677). This is in contrast to the position where an existing contract of employment is bona fide renegotiated so as to provide a mixture of salary and benefits. In those circumstances the employee will be taxed on what he or she gets, i.e. the cash salary plus the taxable value of the benefit-in-kind, provided the new employment contract involves no right on the employee's part to choose between cash and benefits.

Similarly, where remuneration is entirely discretionary and the employee has no prior entitlement to it (e.g. a bonus), the discretionary payment may be made by way of a benefit, and be treated for tax purposes as a benefit, provided such an arrangement precedes any “entitlement” to the bonus etc. on the part of the employee.

Where a benefit is fully taxable in the hands of the employee it generally makes little difference in terms of income tax whether the charge is on the “gross” remuneration or on a mixture of cash salary and benefits. On the other hand where a benefit is not taxable, as in the case of bus/rail passes coming within Section 118(5A), there is of course a tax saving to the employee if arrangements can be put in place under which the provision of a bus/rail pass by the employer can legitimately be classified as a benefit-in-kind i.e. an “expense incurred” by the employer under Section 118(5A).

Salary Sacrifice in the Specific Context of Bus/Rail Passes

In the specific context of the provision of bus/rail passes Revenue are prepared to regard salary sacrifice arrangements which meet the conditions set out below as being effective for tax purposes. Where the conditions are met:

• The employee will not be chargeable to tax on the remuneration sacrificed; and
• The corresponding amount paid by the employer to provide a monthly or annual bus/rail pass will be regarded as an “expense incurred” by the employer for purposes of Section 118(5A) TCA 1997.

The conditions are as follows:

• There must be a bona fide and enforceable alteration to the terms and conditions of employment (exercising a choice of benefit instead of salary)
• The alteration must not be retrospective and must be evidenced in writing
• There must be no entitlement to exchange the benefit for cash
• The choice exercised (i.e. benefit instead of cash) cannot be made more frequently than once a year and then only with the consent of the employer.

Further Information

Further information and advice can be obtained by contacting the Central Telephone Inquiry Office Tel. 01 - 8780 000; or from local tax offices.