Section 79 Finance Act 1986

Section 79 of the Finance Act 1986 introduced a significant change to the taxation of company cars and other benefits in kind provided to employees in the United Kingdom. Before 1986, the taxation of such benefits was often based on a notional benefit, which was often significantly lower than the actual cost to the employer. Section 79 aimed to address this discrepancy by aligning the tax charge more closely with the actual benefit received by the employee.

The core principle of Section 79 was to determine the cash equivalent of the benefit. For company cars, this was achieved through a formulaic calculation based on the list price of the car and a percentage linked to the car's engine size. This percentage was determined annually by the government. The higher the car's original market value and the larger the engine, the higher the taxable benefit. This targeted more expensive, polluting vehicles, subtly encouraging companies and employees to opt for more fuel-efficient options.

The legislation also addressed other car-related benefits, such as the provision of fuel for private use. This was calculated separately and added to the overall taxable benefit. If an employee reimbursed the employer for some of the private fuel costs, this was deductible from the fuel benefit charge. This provision incentivized partial contributions from employees to reduce their tax liability.

Furthermore, Section 79 extended beyond company cars to cover other benefits in kind. The general principle was to assess the cost to the employer of providing the benefit and then apply that value as the taxable benefit for the employee. This applied to a wide range of perks, from private medical insurance to accommodation. There were, and still are, specific rules and exemptions for certain types of benefits, requiring careful consideration of individual circumstances.

The introduction of Section 79 was met with some resistance, particularly from companies that had previously offered generous car benefits at little cost to their employees. However, it gradually led to a shift in company car policies. Businesses began to consider the tax implications of different car models and to encourage employees to choose more economical options. It also prompted a rise in salary sacrifice schemes, where employees effectively traded salary for benefits, potentially leading to tax and National Insurance savings for both the employee and the employer (although later legislation has restricted the advantages of these schemes).

While the specific percentages and calculations used under Section 79 have been modified and updated over the years, its fundamental principle – that benefits in kind should be taxed based on their real value – remains a cornerstone of the UK's tax system. The legislation significantly increased tax revenue from benefits in kind and played a role in shaping company car policies and employee compensation packages. It also paved the way for future legislation designed to discourage environmentally damaging practices by linking tax charges to vehicle emissions and fuel consumption.