Flexible benefit tax changes to cause confusion and unfairness

“UNFAIRNESS AND CONFUSION” could follow the chancellor’s decision to abolish tax breaks for certain salary sacrifice schemes, warn advisers.

On Wednesday, chancellor Philip Hammond announced in his final Autumn Statement that the government would “take action now to reduce the difference between the treatment of cash earnings and benefits”.

From next April employers and employees will have to pay “the same taxes as everyone else” if they chose to use flexible benefits schemes that allow an employee to receive part of their salary in benefits such as healthcare or gym membership.

Arrangements relating to pensions (including advice), childcare and Cycle-to-Work are excluded from the changes.

The government consulted earlier this year on salary sacrifice schemes because it was thought that such schemes were increasingly used to avoid tax.

“The majority of employees pay tax on a cash salary. But some are able to sacrifice salary and pay much lower tax on benefits in kind,” Hammond told parliament in his Autumn Statement.

But tax experts argue that the government could end up with “precisely the uneven playing field” that it wants to abolish

In its consultation submission the CIOT had expressed concern over how the measures would work in practice, and the likely confusion for both employers and employees.

Colin Ben-Nathan, chair of the CIOT’s employment taxes sub-committee, said: “We believe that the government’s proposals to increase the cost of BIKs [benefits in kind] provided under salary sacrifice and certain flexible benefit arrangements will cause significant practical difficulties for employers, and could result in unfairness for employees.”

Ben-Nathan said it could end up that flexible benefits provided to two employees in the same company  are taxed differently because of how they negotiated their salary.

The Association of Taxation Technicians said they were disappointed because it had urged the government to think “long and hard” before rewriting the rules around salary sacrifice.

The planned changes could harm the “competitiveness of UK firms at an already difficult time and not achieve a desired simplification of tax”, it stated.

Yvette Nunn, co-chair of the ATT’s technical steering group, said: “It is really disappointing that despite comments we and other stakeholders made during the consultation period that the Government has decided to plough ahead with the proposals, which will introduce considerable complications to this area and also increase the probability of the employer getting it wrong.

The changes won’t affect existing schemes set up prior to April 2017 but they will only be exempt  from the planned changes for one year until 2018. Schemes involving cars, accommodation and school fees will be protected until 2021.

“We do not believe that these concessions will limit the detrimental impact these reforms could have on UK businesses and their employees,” Nunn said.