Tax Benefits in Need of Overhaul

Office of Tax Simplification recommend changes to benefit and expenses rules

The Office of Tax Simplification (OTS) has recently published ‘Review of employee benefits and expenses:  Interim report’ as part of their remit to report areas of complexity and recommend priorities for further review.

Part of the OTS’s terms of reference tasked the tax body to look at whether tax rules have kept pace with developing practices, the impact on employers and employees and fairness and consistency of treatment of taxpayers.

The OTS wanted to tackle the whole are of employee benefits and expenses because so many people were telling them how complicated it was and there has not been a fundamental policy review of this area since the 1970’s.

Over 50 meetings took place across the country with a variety of employers and a diversity of bodies out of which a number of key points emerged:

• The benefits and expenses system has developed in a piecemeal fashion over the last 65 years and many would say that it is ripe for a complete review. In an ideal world the OTS would recommend a full policy review of the system but they recognise that this could have a significant impact on the resources of both employers and HMRC.
• Underlying much of the complexity are tensions and boundaries in the tax system such as the differing rules for income tax and NIC.
• HMRC administration including the form P11D process and the issuing of tax codes is a major source of concern amongst employers.
• The area which the OTS received most comment was that of travel expenses and subsistence. This is an area which the OTS recommend as a priority for further work.
• Provision of living accommodation for employees and termination payments give rise to significant problems although affect fewer people.

The £8,500 threshold

As a general rule, employees who earn £8,500 or more per annum are subject to tax on benefits-in-kind provided by their employer. Only on three occasions since 1948 has this threshold been increased from its original £2,000 to its current level that was set in 1979.

Indexation of the threshold has been considered over the years but rejected. Had the £8,500 limit been increased in line with inflation it would be £39,139 in May 2013.

In 1979-80 the threshold was 150% of average full time earnings. In 2012-13 it was only 35% of average full time earnings.

Whilst it would be tempting for the OTS to recommend immediate abolishment of the threshold they consider more work needs to be done to assess the impact of such a move.

Travel and subsistence expenses

The rules defining a ‘temporary workplace’ were the source of most comments the OTS received regarding travel expenses.

Employers reported that the 24 month rule is having an impact on the commercial decisions they make. They would also rather have a 24 month cut off point, i.e. a workplace is temporary up to first 24 months of working there and becomes a permanent workplace for time spent at that site thereafter, rather than having to take account of whether or not an assignment is likely to last more than 24 months.

HR teams apparently do not fully understand the temporary workplace rules and often make decisions without regard to the tax consequences.

Phased projects was another issue that vexed employers. An employee may attend a temporary workplace for one phase of a project, go away and work elsewhere on a different project and then return to the first project for a later phase. They may then fall foul of the 40% rule, by attending a workplace for a period of continuous work (for 40% or more of their working time), for more than 24 months. It was reported that some employers have been able to agree with HMRC that for two different phases the workplace is treated as two separate temporary workplaces.

Perceived inequalities were highlighted with regard to subsistence expenses (food and accommodation). For instance, an individual who is out for the day travelling for business can claim a tax deduction for a lunch they purchase on the go but someone who prepares a packed lunch at home to take with them can claim nothing.

The special foreign travel rules which allow deductions beyond the basic travel rules are complicated and very subtle.

Some employers had received some unhelpful decisions from HMRC with regard to workplaces in London, with some being told that all of London (within the M25 perimeter) is one workplace even though two workplaces could be one-two hours apart yet still within the London conurbation.

The OTS were struck by the number of relatively minor things that are proving problematic. If these things were changed they would make a big difference. Some ideas on how to effect change would need legislation but others just need a change in approach by HMRC. With this in mind the OTS have come up with 43 ‘quick wins’ such as:

The OTS will discuss their report with Treasury Ministers over the summer, with plans to publish their recommendations, in stages, some before the end of this year and some in the first two months of 2014.