THE WAY in which employee benefits are treated to tax is “ripe for overhaul”, according to an interim report produced by the Office of Tax Simplification (OTS).
The review – which wants to simplify benefits and expenses for four million employees and 300,000 employers – is at its halfway stage, but it already seems clear that, having had no review of the system since the 1970s, many of the exemptions and allowances are outdated.
Not only that, but the basic legislation regarding benefits has changed little in 160 years, with only a body of case law and changes to some rates marking any noticeable alterations to the system. Since then, any changes have either been to counteract avoidance or to incentivise particular behaviours, such as the cycle to work scheme. The piecemeal development of the benefits system over the years has resulted in an unwieldy function, lacking in cohesion and clarity, the report suggests.
In particular, ‘payrolling’ of benefits, abolishing the £8,500 ‘higher paid’ threshold, and smoothing the differences between tax and national insurance rules are all flagged up for improvement by the OTS, while HM Revenue & Customs’ administration of the system, including the P11D expenses form, travel and subsistence, accommodation and termination payments, are all earmarked for further study.
Alongside fundamental change, the report makes 43 suggestions for swift simplifications, including streamlining the cycle to work scheme, aligning tax and NIC treatment of mileage rates above 45p, changes to HMRC forms and publishing a list of items that automatically qualify for a ‘dispensation’, meaning no benefit will arise for employees.
“It is clear that the current system for reporting expenses and benefits is simply not working well for employers or employees and also, in many cases, HMRC,” says OTS tax director John Whiting.
“Time and again – through our workshops and in submissions – people have told us that the rules around travel and subsistence, accommodation or HMRC admininstration are causing them problems and costing them time.”
Fundamentally, too, it appears there is a basic lack of knowledge among a significant group of smaller businesses – partly because the PAYE system “encourages employees to feel there is less need to take responsibility for their tax”, the report suggests. It is hoped that lack of awareness will be remedied by the government’s personal tax statements, to be introduced from 2014/15, which will detail income tax and national insurance contributions and how it contributes to public spending.
Despite that, one of the issues that has driven the long-term stasis of the system is the fact that “by and large, people [in mid-to-large businesses] know where they stand”, according to ACCA’s head of tax Chas Roy-Chowdhury.
“The goalposts keep shifting with national insurance changes,” he adds. “It’s complex and it’s administratively bureaucratic, but, by and large, people know where they stand. We don’t want to stop that or create uncertainty”.
As far as an appetite for change is concerned, however, advisers are unconvinced change is afoot, despite widespread acknowledgement of the issues identified by the OTS.
In particular, there are serious doubts about whether parliament has the time or will to give any meaningful consideration to the issue of expenses between now and the next election. Instead, maximising HMRC’s tax take – and more general issues closer to voters’ hearts such as boosting the economy and the crisis in Syria – will take precedence.
“Why would you embark upon housekeeping that no one’s going to see when you could paint the front door?” asks Baker Tilly associate director Lesley Fidler.
“There’s going to be a lot more interest, I would expect, in dealing with unacceptable tax avoidance, collection of outstanding monies and this [system] is working, albeit not perfectly.”
As far as whether the report is likely to lead to any substantive change, advisers point to the OTS’s track record; its sensible suggestions usually receive acknowledgment and little else.
“The OTS has a track record of being thanked and put on a shelf”, notes Fidler. “A good indicator of that would be the recommendations that the OTS originally made for abolishing the hundreds of reliefs they found and how few of those have actually happened”.
It appears, then, that a groundswell of calls from business and its interest groups for substantive change is required if there is to be any movement on this issue, and, at least ostensibly, it does not appear forthcoming. The OTS, though, does not appear perturbed, and is set to press ahead with its suggestions.
“We are now looking to develop workable ideas that will make things easier for everyone, with the aim of significantly reducing the 4.5 million P11Ds completed annually. We will be putting those proposals forward in our final report to the chancellor before the next Budget,” says Whiting.