City council loses battle with HMRC over bus pass for employee

A Nottingham City Council employee given a bus pass by the authority incurred a taxable benefit, the First-Tier Tribunal Tax Chamber has ruled.

The council in 2012-13 gave employee Thomas Straw the pass and HMRC amended his assessment to include tax as a benefit in kind and issued Nottingham with a charge for Class 1A national insurance contributions on this benefit. 

The council and Mr Straw said the pass was exempt from tax by s243 of the Income Tax (Earnings and Pensions) Act 2003 because it constituted “financial support...for a local bus service”. 

Nottingham also submitted that even were that not the case other financial support it provided to the local bus company satisfied s243. 

Judge Anne Redston said in her judgment neither the bus pass nor the ‘other support’ constituted “financial support...for a local bus service” within the meaning of s243. 

The origins of the dispute go back to 2006 when Nottingham introduced a salary sacrifice scheme under which employees could give up part of their salary and receive a tax-free bus pass based on the fare zones used by the local operators.

HMRC revised its guidance in 2009 and the salary sacrifice scheme ended.

But Nottingham decided to test whether HMRC’s view of the law was correct, and in 2012, implemented a new salary sacrifice arrangement for Mr Straw alone.

This cost the council £420, the same price as would be paid by a member of the public for a bus pass. 

Judge Redston said that the tax-free nature of a bus pass followed from “and is the result of some support given by the employer to the bus company; it cannot itself constitute that support”.

She said that if the “mere purchase of a bus pass were sufficient to constitute ‘support’, all employer-provided bus passes would be tax-free as long as they were for local services”. 

It would need another tribunal case to decide how much support must be given to a bus company for employees to benefit from the tax exemption for bus tickets or passes, the judge added.

She concluded: “Had the council given support to [the bus company] to fund the public bus system used by its employees, a zonal bus pass given free to employees would not have been subject to income tax.  However, on the facts of this case, there is no evidence of any such support: neither the purchase of Mr Straw’s bus pass, nor the other payments, come within s 243.”

A Nottingham spokesman said the council expected costs from bringing the test case to be “zero or minimal at most as it was a test case brought in partnership with a legal firm”.

He added: “The council had argued that people should be able to purchase travel passes at full price directly from their salaries, but before tax and national insurance is deducted, in the same way that they can with childcare vouchers.

“The only other cost to the council will be around £100 in tax and national insurance payments.”

Mark Smulian