Taxation of employee expenses

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Samantha Mann, the CIPP’s senior policy and research officer, asks whether the rules for taxation of employee expenses are fit for purpose in a modern world.

Consultation by the government can take many forms – it can be formal or informal, a white paper, a green paper – together with varying levels of documents with specific proposals, discussion papers and calls for evidence.

An example of the latter was published in March following an announcement in the 2016 Autumn Statement by our previous Chancellor that a call for evidence was needed to enable a better understanding of the use of income tax relief for employee business expenses, including both situations where employers do not reimburse business expenses and those situations where they do.

In 1853, the rule was introduced that an expense must be ‘wholly, exclusively and necessarily’ incurred in the performance of an office, which included the expense of keeping and maintaining a horse for work purposes. Hang fire on the trip to the annual Appleby horse fair, though, because the horse is no longer a feature here - but only since 1998 thanks to the Tax Law re-write committee.

Following the suspension of all government department activity during the period of general election purdah, the call for evidence deadline was extended from 12 June to 10 July to allow for discussion and debate to continue after the election, which suggests (with as much confidence as anyone can have in these uncertain times) that the new government will progress this work.

Objectives of the call for evidence

The call for evidence makes clear in its opening pages that there are no plans to remove the tax relief on employee business expenses. Its main objectives are to enable the government to better understand:

  • whether the current rules or their administration can be made clearer and simpler

This follows Office of Tax Simplification (OTS) recommendations to establish, or re-establish, some general principles.

  • whether the tax rules for expenses are fit for purpose in the modern economy

OTS recommendations called for new general principles that recognise how significantly working practices have changed since the 19th century guiding principle currently stated in section 336 of ITEPA as: “the employee is obliged to incur and pay it as holder of the employment and the amount is incurred wholly exclusively and necessarily in the performance of the duties of the employment”.

  • why the cost of tax relief to the Exchequer has increased

The cost of tax relief on business expenses granted directly to employees for whom expenses are not reimbursed by their employers rose by 25% between 2009-10 and 2014-15. The government would like to understand why and also why employees have begun to make greater use of third party agents rather than claim directly from HMRC. Data relating to the cost of tax relief where employers have reimbursed their employees directly is less visible to HMRC because there is no reporting requirement and the questions within the call for evidence look to gather more data to enable this tax relief to be better quantified.

Previous consultation work

Let us pause for a moment to review how previous consultation work has led us to this point.

In September 2015, the government published a discussion paper about changing the rules for tax relief on travel and subsistence expenses (T&S). This paper outlined a potential framework - once again building on OTS recommendations - and sought to establish stakeholder views on the case it made for change.

There were a number of areas covered in the paper, which ranged from:

  • issues experienced with the current rules
  • asking stakeholders whether they agreed with certain principles; for example, that tax relief be available for business travel but not ordinary commuting
  • that any tests should be objective and based on measurable facts as far as possible and that relief should not be available for subsistence where this is essentially akin to a private expense
  • that any change should not come at an additional cost to the exchequer.

The clear message from stakeholders in response to the proposed framework was that the current T&S rules work well for ‘the majority of employers and employees most of the time’. Although it was agreed that some rules remained difficult to understand, replacing one complex system with another was not the way to achieve simplification in the future.

The work that HMRC had carried out to revise and improve the guidance in booklet 490 was also praised and stakeholders wanted time for these improvements to bed in before considering whether further change was needed.

From that paper there were a couple of responses from the government that caught our eye and thus are at the back of our mind as we approach the current call for evidence.

Homeworking – The government continues to support the view that tax rules should provide neither an incentive nor a disincentive for working from home; the majority of respondents accepted this view.

Day subsistence – The discussion paper suggested that in order to be ‘cost neutral’ to the Exchequer, the more generous proposals would need to be funded by removing tax relief for day subsistence, which government believes to be (essentially) a private expense. There were many criticisms of this belief, and for many reasons. Respondents were also critical of the fact that, whilst stating that savings could be made, there was no quantifiable evidence to support such a claim.

2017 Call for evidence

And so back to the 2017 call for evidence on the taxation of employee expenses. Through this consultation, the government wants to “collect evidence on expenses practices to ensure that taxation of expenses keeps pace with the modern workplace”.

In order to do this, it asks 17 questions. I will attempt to provide an overview of what the Treasury seem to be looking to establish from stakeholders, of all employer sizes and across all sectors, with this consultation.

Bearing in mind the criticism levelled at the government following its previous discussion paper on the subject, it is particularly interested in gathering quantative data where possible.

The impact of the modern workplace

Many of the current tax rules were laid down when the manufacturing sector provided significant employment and it was commonplace for massive numbers of employees to have a job for life at a local workplace within an easy commuting distance. But today we see far greater numbers employed in the service sector, home-to-work travel has substantially increased both in time and cost, and home/flexible working is becoming more common.

And the Treasury are looking to establish how tax policy for the modern workplace impacts on employers’ payment of expenses and consider whether it plays a part in the setting of expense policies and payments. Establishing how historic practice and different sectors play a part is important within this work and looking also to establish whether employers provide direct support or education to enable their employees to make a benefit from a claim for tax relief?

Spotlights once again turns towards guidance to consider whether it is fit for purpose for the individual employee. Indeed I do wonder could this be the reason why an increasing number of employees are turning to third party agents for help.

Examples of employer expense policies together with quantitative evidence of employee expectations are encouraged in this call for evidence.

The future direction of travel as regards employees expenses

Space is also given to consider whether there should there be more expenses eligible for tax relief in the modern workplace, and if tax relief was restricted would this impact on an employer’s expense policy or an employee’s decision to work in that job?

Quantifiable evidence and examples of how tax relief affects an employer’s expense policy and decision-making is called for within this consultation.

This call for evidence is about quantity and not quality and so the longstanding challenge (which some have suggested is almost impossible to achieve) for an expense to be incurred ‘wholly, exclusively and necessarily in the performance of the duties of the employment' is, we think, safe for the time being.  

About Samantha Mann

CIPP

CIPP senior policy and research officer

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