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Major changes to employment taxation proposed
30 January 14 | By: Jas Jhooty
The Office of Tax Simplification’s second report in their ongoing review of employee benefits and expenses was published on 29th January 2014. It contains a number of recommendations to simplify benefits and expenses legislation. In this article we take a brief look at the report’s main proposals.
Voluntary payrolling of benefits
The report’s main recommendation is to introduce a legislative framework for the voluntary payrolling of certain (or all) benefits by employers.
The stated aim of this proposal is to reduce the total volume of P11Ds submitted to HMRC annually by 99 per cent by a set date.
At the moment, all taxable benefits have to be reported by employers to HMRC after the end of the tax year. This involves employers sending in around 4.4 million forms P11D every year which have to be processed by HMRC and used to amend PAYE tax codes.
This process is seen as being archaic resulting in many employees being underpaid in tax due to amount of time it takes for their benefits information to be submitted, and then subsequently processed by HMRC.
Most employers would like the ability to payroll selected benefits in real-time. The OTS report recommends that employers be allowed to payroll certain benefits but then that type of benefit must be payrolled for all employees who are in receipt of it.
Employers would be able to continue to pay Class 1A NICs in respect of the payrolled benefits after the end of the tax year, but legislation should be introduced which would permit them to pay the Class 1A NICs on a monthly basis, as part of the payrolling process. The report also argues the case for applying Class 1 NIC on payrolled benefits.
This simplification would lead to employers having to complete and submit fewer P11Ds and HMRC having to process fewer P11Ds. The new process would be easier for employees to understand as it is a natural complement to Real Time Information (RTI).
For more information read Chapter 1 – Payrolling of benefits of the OTS report.
Broadening PAYE Settlement Agreements
The OTS report recommends that the scope of PSAs should be widened to permit employers to settle any tax liability on benefits and expenses. Also the process for employers entering into PSAs should be streamlined, by adding PSAs to HMRC’s PAYE Online service for employers and offering standardised categories of expenses and benefits which are capable of being included in a PSA. There should be no need for employers to seek HMRC’s prior approval for what can be included in a PSA.
For more information read Chapter 2 – Broadening PAYE Settlement Agreements of the OTS report.
The OTS report recommends the introduction of automatic dispensations in the form of an exemption being added to the legislation for qualifying business expenses paid for or reimbursed by an employer. The aim is to replace the dispensation process with a more modern, practical approach. The exemption should be written to cover all the routine business expenses that can currently be included in a P11D dispensation. The exemption should apply to all employers and employees who meet the minimum record keeping requirements. Employers would no longer need to apply for a P11D dispensation.
Employees who do not have their business expenses paid for or reimbursed by their employer should still be allowed to claim a deduction as allowed by current legislation.
For more information read Chapter 3 – An exemption for qualifying business expenses of the OTS report.
Abolition of the £8,500 threshold
Unsurprisingly the report calls for the abolition of the £8,500 threshold and the form P9D. Most employers simply ignore them and there is no justification to continue to have two differing sets of rules for benefits taxation.
Only 15,000 P9Ds are received by HMRC and the report outlines some potentially mitigating actions to prevent truly low paid employees from being adversely affected.
For more information read Chapter 4 – Abolition of the £8,500 threshold of the OTS report.
Trivial benefits and other administrative burdens
The report recommends redefining in law a short, easy to understand ‘principles based’ definition of a trivial benefit, incorporating a per item cap (e.g. £50). A ‘principles based’ definition could, be something along the lines of “infrequent provision” to guard against any risk that employers might start to avoid tax by giving repeated small benefits.
For more information read Chapter 5 – Trivial benefits and other administrative burdens of the OTS report.
Travel and subsistence
HMRC’s Booklet 490 is roundly criticised for being contradictory and unclear in many real-life scenarios. This will be updated as a matter of priority in conjunction with relevant stakeholders from industry.
The report firstly suggests that employees only have one permanent workplace, but then goes onto say if this proves to be too expensive to the Exchequer the current 40% of the working week rule for determining a permanent workplace be reduced to 30%.
On the plus side the report recommends allowing a full deduction for the first 24 months of travel to a temporary workplace regardless of the intended length of the assignment.
A new specific code for homeworkers is proposed where if there is a genuine business need to work from home full relief for all business related travel expenses is allowed. The report also recommends removing the facility for employees to claim the cost of expenses in working from home not covered by employers e.g. telephone bills, internet, utility bills, but provide an uplifted tax-free homeworking allowance (to £10 a week for example).
Finally a radical new solution is mooted whereby all travel and subsistence expenses could possibly be allowable if reimbursed by the employer. This radical departure to the status quo is on the table for more discussion.
For more information read Chapter 6 – Travel and subsistence of the OTS report.
The report criticises the necessity of having two types of NIC applicable to benefits i.e. Class 1 NIC & Class 1A NIC. The report is advocating removing Class 1A NIC and only applying Class 1 NIC on benefits as a simplification measure!
Also the report points out that the differing rules for tax and NIC applying to benefits require unification.
For more information read Chapter 7 – Simplifying NICs – what more can be done? of the OTS report.
A fundamental policy review
The report finishes with a discussion on the widespread confusion caused by the current system applying different tax treatments to the same benefit simply as a result of the underlying mechanics used to provide the benefit. An example of this is the treatment of training costs. Why are they allowable if funded by the employer and disallowable if funded by the employee?
The report calls for a fundamental review of the government policy on what is and what is not a taxable benefit.
For more information read Chapter 8 – A fundamental policy review? of the OTS report.
The report has now been submitted to the Chancellor and other Treasury Ministers for their consideration and decisions on how to proceed. Initial responses are expected in Budget 2014.
We at emTax welcome these proposals and view them as a positive measure to try to bring more clarity to some of the contradictory areas of current employment tax legislation.
If you require any more information on how these proposals may affect your business please do not hesitate to contact us.