Employee benefits and expenses ripe for overhaul
Have you ever thought that the administration of expenses and benefits could be improved or simplified, asks Diana Bruce of the CIPP.
The Office of Tax Simplification (OTS) certainly thinks so and in August they published an interim report which concluded the no surprise news that “the complex system for reporting and taxing employee benefits and expenses is ripe for a complete overhaul”. The OTS gathered feedback from hundreds of people at more than 50 events around the country to find out the issues with the current system. The review is looking to simplify benefits and expenses for four million employees and 300,000 employers.
The report identified some ‘big picture’ issues for further study such as ‘payrolling’ of benefits, abolishing the £8,500 ‘higher paid’ threshold, and smoothing the differences between tax and national insurance rules. The report also lists more than 40 items for possible ‘quick win’ simplifications.
The Chartered Institute of Payroll Professionals (CIPP) and the Association of Accounting Technicians (AAT) have been working together to obtain views on the OTS report from the payroll profession and the accountancy profession. To follow are some of the findings from the report with opinions from CIPP and AAT members gathered from an online survey.
The OTS says in its report that during the research it has been struck by the number of relatively minor things that are causing “grit in the machinery” and there are areas where a small change could make a big difference. Some of the ideas put forward would need legislation (though secondary legislation may be possible for many) and others just a change in the way HMRC works.
- streamlining the administration of the cycle to work scheme
- aligning the tax and NIC treatment of mileage rates over 45p
- HMRC publishing a list of items that automatically qualify for a ‘dispensation’ (meaning no benefit will arise for employees)
- allow home broadband costs to be subject to PSAs (PAYE settlement agreement)
- HMRC not to require retention of fuel VAT receipts for expense claims where only a mileage rate has been claimed
- HMRC to allow all types of expenses claims to be made on one form, or online
- introduce a facility to re-submit forms P11D and P11D(b) online
It was not a revelation that also included in many of the items listed was to improve HMRC guidance. The results of our survey showed that all but one of the quick wins was supported by the respondents, the exception being that a majority didn’t know whether or not to allow car fleet operators to buy multi-year road user licenses. However, this is likely to be because this would not really affect the payroll or accountancy sectors. The full table of possible quick wins is listed in the report on page 23.
Big picture issues
When is a benefit really a benefit?
During its research the OTS received lots of comments from people who question the whole rationale for taxing things that employees don’t think are a real benefit. For example, is it right that the costs of a physiotherapist provided to workers carrying out heavy manual jobs, is taxed as a benefit? CIPP and AAT members both agreed that there are some benefits that shouldn’t be viewed as benefits for tax and or NICs purposes. The most popular cited was any form of health care with reasons including “it should be viewed as a benefit to the government as it helps employees get back to work sooner". Another popular benefit highlighted was gym provision (where paid for by the employer), viewed as encouraging a healthier workforce. Also noted were that incidental expenses when abroad being limited to just £10, as this is insufficient when taking into account items such as laundry costs.
Payrolling and P11Ds
It is no surprise that the report says that “payrolling” of benefits comes up at every meeting the OTS goes to. Employers want to be able to pay the tax on some benefits through the payroll, applying PAYE rather than waiting for the end of the year to file a form P11D. And with the introduction of Real Time Information (RTI) this would make more reporting be in ‘real time’ – the whole point, surely? But with the time constraints for the implementation of RTI, payrolling could not realistically be part of the plan. Nil P11Ds are also a big issue where employers have to report a reimbursed expense that will never be taxable because the corresponding employee expense is allowable. Employers want to be able to operate a “self-dispensation” process where they decide themselves that something does not need to be reported because it is not taxable (by reference to a HMRC list), rather than agreeing this in advance with HMRC.
The CIPP and AAT survey showed that payrolling was supported by both professions, however those represented by the CIPP supported this option by a higher percentage. Nearly 59% of respondents indicated that they would prefer to payroll benefits in kind versus nearly 28% who would prefer to continue with the P11D process. While not significantly different, the views between the payroll profession and the accountancy profession did differ: The majority said they would prefer payrolling; however the AAT majority was 47% versus 32% for current P11D process (21% didn’t know), compared to the CIPP members whose majority was nearly 73% for payrolling versus 27% for the current P11D process.
Comments from both professions included:
- The P11D process is time consuming for employers and often generates tax code queries to the payroll office
- Benefits are viewed as income and therefore should be processed as such through the payroll
- If you currently payroll benefits in kind, it is an irritant that you must also process P11Ds with a nil tax value
- If payrolling were a voluntary option, the impact on an employee’s tax affairs could be substantial leaving them exposed to the prospect of double taxation occurring where the employee moves between jobs where one employer “payrolls” benefits and the other does not. (The CIPP and AAT support this concern)
The OTS report’s vision is that payrolling is the future, and will eventually lead to the abolition of P11Ds, by a combination of:
- payrolling benefits where the amounts are effectively fixed
- dispensations, facilitated by clear HMRC listings/criteria and effected on a self-assessed basis to eliminate many sundry items
- PAYE settlement agreements (PSAs) for the rest of the benefits given
Class 1A NICS
We asked in our survey that if payrolling were to be introduced, would members like to see the Class 1A employer only NICs abolished and see all benefits subject to Class 1 NICs? Abolition was supported by just over half of the respondents but if Class 1A NICs were to remain in place then 76% felt it should be processed via the payroll rather than be a separate transaction. The main comments made in respect of abolition of Class 1A was that any Class 1 should be an employer only contribution, with the suggestion that the percentage rate could be lowered. This opinion was shared by both professions however concerns were noted in respect of the capabilities of payroll software as the change would require setting up payroll elements to ensure only the employer paid NICs, which might be more of a burden.
This £8,500 benefits threshold has not changed since 1979 where the value was chosen as being broadly equal to the level at which a married man started paying tax at the higher rates. Indexation of the threshold has been considered over the years but never implemented and the reason for not abolishing the threshold was what the additional cost would be to HMRC of handling the additional filing for all employees. However, HMRC states that fewer than 20,000 P9Ds (the equivalent of P11Ds for those earning less than £8,500) are filed each year so a drop in the ocean compared to the submission of around 4.5 million P11Ds each tax year.
The threshold causes complications as there are different taxable values either side of it. For example, a media company purchases two identical TVs and gives one to a higher earner and one to a lower earner. The lower paid employee will be taxed on the market value of the TV whereas the higher paid employee will be taxed on the original cost, if higher.
The results of our survey showed that just over half of respondents supported abolition of the £8,500 threshold but of those who did not, 37% said the limit needed to increase. This view was shared by both professions but those responding as AAT members were much more divided between supporting abolishment and increasing the limit over those who responded as CIPP members. Many of those who provided additional comments stated that they believe the current threshold is outdated and that it should either be brought in line with the personal allowance (due to increase to £10,000 in April 2014), or higher.
Others commented that most employees would earn above the rate of £8,500 so it is no longer relevant, with some stating they do not complete the P9D process anyway and issue P11Ds to all. This correlates with findings from the review as the different rules are frequently ignored in practice with employers treating everyone as “higher paid”.
The results and comments from our survey support the OTS’s view that this area should be consulted on further. The report says that as tempting as it is to include abolition of the £8,500 limit on their list of ‘quick wins’, more work needs to be done to assess the impact of abolition.
The CIPP and AAT support the findings of the OTS report and both are willing to support future consultation work in order to influence government to implement its recommendations. The OTS proposed to focus on four core areas in the months after the report was published, namely: HMRC’s administration of the system including the P11D form, travel and subsistence, accommodation, and termination payments.
Details of the next stage of the review are being agreed with Treasury Ministers and final recommendations will be reported ahead of Budget 2014. In the meantime the OTS remains open to views from anybody, which can be submitted via email at [email protected].
Diana Bruce is the senior policy liaison officer for the Chartered Institute of Payroll Professionals (CIPP).