Simplification of employee benefits and expensesby
As part of the government’s policy ‘Creating a simpler, fairer tax system’, the Office for Tax Simplification (OTS) started a project in April 2013 looking at employee benefits and expenses, explains the CIPP’s Diana Bruce.
Its initial interim report concluded that “the complex system for reporting and taxing employee benefits and expenses is ripe for a complete overhaul”. That came as no surprise, but what has transpired during the subsequent consultation process and as we near the end of the 2014-15 tax year, what changes are on the horizon?
Several quick win simplifications were recommended in the initial report including streamlining the cycle to work scheme, aligning tax and NIC treatment of mileage rates over 45p, changes to HMRC forms and publishing a list of items that automatically qualify for a ‘dispensation’. These were all areas that as the ‘quick wins’ suggest, were easy to implement. Other areas for simplification are not so straight forward and after a second report was published with further recommendations, the government started consultation in June 2014, on a core package of four measures:
- Abolishing the threshold for the taxation of benefits in kind for employees who earn less than £8,500 a year
- Introducing a statutory exemption for trivial benefits
- Replacing the expenses dispensation regime with an exemption for paid and reimbursed expenses
- Introducing a system of voluntary Payrolling for BiKs
Abolition of the £8,500 threshold for lower paid employment and form P9D
The 2011/12 tax year saw HMRC receive and process some 15,000 P9Ds and it is no wonder that one of the proposals for simplification would be the abolition of the £8,500 threshold which results in the need for a form P9D to be completed.
The consultation looked to identify which groups of employers, employees or ‘office holders’ would be affected and what actions might be taken to mitigate the effects on any vulnerable groups disadvantaged by the reforms. The CIPP survey highlighted charity workers, part time engineers and low paid volunteers as the main employees that would be affected; the main impact being that a benefit that was previously given, would now be subject to tax, especially where earnings were borderline.
One issue that was raised during consultation was regarding the current exemption for late night taxis home which is available on up to 60 occasions in a tax year. This exemption means that the employee will not incur a tax liability and the employer will not have a liability to National Insurance contributions on the first 60 occasions the employer provides a late night taxi to the employee. Some respondents expressed concern that the provision of transport home for those who may be working late into the night in the hospitality sector such as hotel, bar, catering and cleaning staff, may now be taxed.
The government response to this concern was that with the introduction of the National Minimum Wage, the vast majority of those working in the hospitality sector will already be earning at a rate of £8,500 or more annually and so will be unaffected by abolition of the threshold. Therefore any more than 60 taxi journeys will remain reportable and taxable.
Legislation will be introduced in Finance Bill 2015 to abolish the £8,500 threshold from 6 April 2015 and subsequently there will be no requirement for employers to complete form P9D. There will be exemptions for Ministers of Religion who earn, with benefits, less than £8,500 who will be reportable on a P11D but no Class 1A. And carers who are required to board and lodge with the person being cared for will be exempt from tax and Class 1A employer national insurance.
Introducing a statutory exemption for trivial benefits
The concept of a trivial benefit is not new, however it currently requires the employer to apply to HMRC for agreement to exclude certain BiKs on the basis that they are trivial. This consultation looked to seek views on defining what would be considered a trivial benefit and how a statutory exemption should be structured.
In the 2011/12 tax year around half a million P11Ds were completed by employers providing BiKs with a total cost of £100 or less. With an estimated cost of £6.50 for HMRC to process each P11D, the government feel that in many cases the administration cost outweighs the amount the Exchequer receives in tax and NICs.
The outcome of this consultation is that an exemption will be introduced in Finance Bill 2015 from 6 April 2015, with a limit of £50 per trivial benefit, with no annual cap on number or amount. Legislation will allow future increases in this amount. The government will establish the trivial benefit exemption on a principles basis as during consultation stakeholders agreed that this would provide the appropriate framework. The principles are that the benefit:
- must not be cash or a voucher that is exchangeable for cash
- cannot be used in conjunction with any salary sacrifice arrangement or any other contractual obligation
- must not be provided to the employee in recognition of particular services performed in the course of the employment or in anticipation of such services
An issue raised by respondents regarded how “pre-arranged entitlements” would apply within the exemption. The government has decided that for there to be no pre-arranged entitlement, there must not be any contractual obligation to the benefit, including through salary sacrifice. An employer having a corporate policy of providing a benefit at certain points in the year, but without a contractual obligation to do so, would not be caught by this definition.
On the last principle, consideration was given to the kinds of circumstances in which employers currently provide trivial benefits – these are intended to be related to personal events or to the welfare of the individual, outside of the performance of their duties as an employee. An example that HMRC use is a bunch of flowers for an employee who is unwell, as it is connected with their welfare and it is a small cost. So a trivial benefit will be defined as one which is provided by an employer to support their employees’ welfare and not in recognition of particular services.
Replacing the expenses dispensation regime with an exemption for paid and reimbursed expenses
The proposal outlined in this consultation explains that employers would no longer be required to choose between applying to HMRC for a dispensation and reporting expenses payments to HMRC at the end of the year on form P11D. Instead all employers would need to determine themselves whether the expenses they pay are subject to tax relief or not, and treat them accordingly. This would remove the current disparities that exist at both employer and employee level where one employer has a dispensation and another does not, along with any differences caused by employers having different expenses included in their dispensations. This change would also mean that all employees would automatically get the tax relief they are due on qualifying expenses payments, instead of just those paid under a dispensation.
The outcome of the consultation is that the new exemption will apply from 6 April 2016 and will be introduced in Finance Bill 2015. The exemption will apply to those expenses where the employee would have been eligible for tax relief had they met the costs themselves. HMRC will remove the current practice of those who allow employees to salary sacrifice expenses, not that this is commonplace. They will also continue to allow employers to have custom scale rates but employers will need to seek approval from HMRC based on random sampling.
Real-time collection of tax on benefits in kind and expenses through voluntary payrolling
Payrolling is certainly not a new concept to the profession. The CIPP has produced research papers in the past and has for many years lobbied for payrolling – and each and every time, the majority of the payroll profession has said, get rid of P11Ds and put BiKs through the payroll. However this was never going to be a simple transition, hence the proposal to start with a voluntary system.
This consultation looked to collect evidence on employer and agent views on whether payrolling would be supported, and in what capacity, as the proposal would allow employers to report some or all of their BiKs through the payroll. The proposal is to introduce a framework for a voluntary scheme for payrolling so that employers would account for the tax on their employees’ BiKs through the payroll in real time. So where an employer operates payrolling they would no longer be required to report such BiKs on forms P11D and have HMRC adjusting employees’ tax codes at a later date.
The government has stated in its consultation response that it recognises the importance of flexibility for employers and that ‘locking-in’ to a scheme of payrolling might deter some employers from opting-in. So they will develop a scheme that is entirely voluntary, to ensure that an employer that has started payrolling can choose to opt-out with effect from the start of a tax year. Legislation will be laid in Finance Bill 2015 to allow employers to use this new process from April 2016.
There are some practical issues should an employer decide to opt-out, such as reinstating benefits in employees’ PAYE tax codes. HMRC will work on these to support employers who may decide to opt-out.
Initially car, car fuel, medical insurance and subscriptions such as gym membership will be included in the scheme as these benefits have a high degree of certainty about their cost at the start of a tax year, so naturally lend themselves to payrolling. They are also the most popular benefits provided to employees by employers. Once payrolling is established, the government will consider how other benefits can be payrolled.
This was never going to be a cut and dry consultation so there are a number of detailed questions that HMRC will discuss further with stakeholders on the detail of how a scheme will be designed and operate effectively. These include:
- The extent to which in practice some employers would decide to payroll some, but not all, of the benefits proposed for payrolling
- The extent to which in practice an employer would need to exclude certain employees from payrolling
- How to avoid confusion for employees where an employer has discretion over the benefits it can choose to payroll and/ or might choose to exclude some employees
- The payment of Class 1A NICs in real time
Consultation is ongoing and the CIPP are of course involved. HMRC is currently engaging with employers who are already payrolling to share their experiences and to help HMRC develop their thinking on the technical aspects of this change.
It is safe to say that the Office for Tax Simplification will achieve its aims in many areas but there will be numerous changes along the way before the administration of expenses and benefits becomes anywhere near ‘simple’.
Diana Bruce is a senior policy liaison officer at the CIPP.