The Office of Tax Simplification (OTS) has published an interim report on restructuring what it dubs the ‘tax minefield’ of employee benefits and expenses report Harris & Co chartered accountants, the specialist small business accountants who provide innovative accountancy services to small businesses.
The OTS Reliefs Review identified a number of complexities around the taxation of employee benefits, including different rules for tax and National Insurance Contributions (NICs), the £8,500 benefits threshold, and some small benefits that are exempt from tax.
Michael Jack, OTS chairman said: ‘HMRC’s administration comes up time and time again as a bugbear. The P11D process is a burden for employers. It is widely misunderstood and often leads to incorrect tax codes.
‘Travel and subsistence is the next biggest issue we’ve found. Most people said they didn’t want radical changes, just some tweaks to bring the rules up to date. We also found that accommodation benefits and termination payments caused problems for a sizeable number of people, and there are issues with other benefits too.’
The report found that the piecemeal development of the benefits code over the past century or so, naturally posed the question of creating an entirely new system.
OTS is suggesting the introduction of a single tax charge combining income tax and National Insurance (NICs) payable by employers, which would include all benefits taxed at source, rather than having employees file a P11D return as happens currently. This is subject to a separate consultation.
In terms of what should be taxed, the report noted that ‘the simplest approach is to tax all benefits and expenses and to do so at the same rate. Any exceptions to this should be kept to a minimum’, but this would call for ‘a fresh look at just what is a taxable benefit or expense’.
The OTS added that any general review should consider the issue of designing a system that ‘only taxes as a benefit something that really is a benefit’, with ‘many revolving round the travel and subsistence rules, with accommodation whilst working at a second permanent workplace probably being the most frequent source of irritation’.
Other cited ‘non benefits’ ranged from employer-provided physiotherapy reimbursed expenses to more complex issues such as professional advice given to a management team during a major business transaction.
It found that in situations where the tax cost ‘is identical regardless of the form of remuneration’, salary sacrifice gives costs with no tax advantage, but disadvantages in relation to redundancy pay and other occasions where actual pay is used, such as the National Minimum Wage and redundancy payments.
The report cited the example of a ‘different and potentially simpler system’ as Australia’s fringe benefits tax introduced in 1986.
‘This sort of radical change has come up in discussions but is not something which consultees have been asking for, perhaps because it is seen as too radical and unlikely to be considered by the government. We have not explored such an idea in detail at this stage, but we think it is worthy of more detailed consideration.’
It also highlighted a number of ‘quick wins’ such as allowing home broadband costs to be subject to the PAYE Settlement Agreement (PSA) and car fleet operators to buy multi-year road fund licences.
Full details of the report can be found HERE. Comments should be sent to the review team at OTS-Employee.Benefits@ots.gsi.gov.uk by mid-September.
The OTS plans to publish final recommendations by the end of 2013.