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DAVID REILLY BA(Hons), FCA, FTII looks at some of the tax reliefs for employees that successive Governments have allowed to erode in value.
DAVID REILLY BA(Hons), FCA, FTII looks at some of the tax reliefs for employees that successive Governments have allowed to erode in value.
'THE ART OF taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.'
Jean B Colbert
That the Inland Revenue does not like to see people being paid without having to account for tax is not new. Indeed, there is an irony, albeit unconscious, in many Revenue statements attacking the so-called manipulation of the tax system by those engaged in perfectly legal tax avoidance, as the ingenuity displayed by Revenue policymakers often gives those they lambaste a good run for their money (lump sum payments on or in anticipation of retirement, anybody?). But the Revenue, quite possibly under pressure from successive Governments, has for many years been engaged in a far more subtle and therefore barely noticed form of tax raising from employers and employees. Call this, if you will, stealth tax. I am referring to the practice of increasing the tax yield by failing to increase tax-free limits. By reviewing some of the employment tax issues with which I have recently helped clients, I have compiled a short list of examples. For many years this has been an income tax based issue, but the imposition of Class 1A National Insurance on most taxable benefits means that the Government is quietly collecting even more money, and the goose hardly seems to notice.
Termination payments
A good starting point is where employers try to ease the pain of redundancies by making non-contractual termination payments. Famously, these payments may be exempt from tax under section 148, Taxes Act 1988 to the extent that they do not exceed £30,000. The fact that so many people know that the limit is £30,000 is significant to me. Not many people can say what the current amount of the annually increased personal allowance is, but that is the point, it goes up every year.
After section 148 exemption was introduced at £25,000 in 1981, it rose to £30,000 in 1988 where it has stuck ever since (and probably will be for evermore unless it is abolished). When the tax-free limit was set at £30,000, Government statistics showed that average full-time earnings were some £11,700 a year. It is a sobering thought that, with average earnings in late 2001 at some £21,800, the comparable tax-free limit would now be £56,000.
Relocation costs
Another even more contentious example concerns the tax-free relocation allowance for employees introduced in 1993-94. Yes, the good news was that, after years of uncertainty about what the Revenue would accept as being a legitimate expense, Schedule 11A to the Taxes Act 1988 set out what costs an employer could meet for an employee without giving rise to a tax liability.
The bad news was that the Government of the day then limited the total tax-free expenditure to £8,000. At the time, there was a strong feeling that this amount was far too low. Hansard for 13 July 1993 makes interesting reading, with Alan Beith (Liberal Democrat) putting forward a spirited argument against the £8,000 limit. He quoted an average cost of relocation of between £20,000 and £30,000 and suggested that even the Treasury accepted that £8,000 was too low as it grossed up the costs above this and paid the tax when civil servants were relocated. Stephen Dorrell (Conservative) for the then Government said that Mr Beith's figure was too high, although he accepted that grossing up of relocation costs did take place in the Civil Service. Mr Dorrell's premise was that relocation costs included an element of betterment and that this should not be subsidised by the taxpayer.
I am not trying to suggest here who, if anyone, was right. My point is that the Government sought to argue that the tax-free limit was based on an economic proposition. As such, it seems indefensible that the limit has remained unchanged since its inception. For the purpose of this article, even if we accept that £8,000 was the correct figure for April 1993, which does seem questionable, had it been linked to the retail price index, it would stand at the end of 2001 at some £10,000; a 25 per cent increase.
Higher paid employees?
It is well known that the so-called P11D legislation in Part V of Chapter II of the Taxes Act 1988 broadly applies to directors and, significantly, employees earning at a rate of £8,500 a year or more. This legislation has enabled successive Governments to raise considerable sums every year by deeming almost every payment that an employer makes to or in connection with affected individuals to be taxable, in the absence of a statutory exemption. When the monetary threshold of £2,000 was introduced by section 39(1), Finance Act 1948, the legislation referred to 'higher paid employees'. The threshold was raised to £8,500 in 1979-80, although it was not until 1989 that the Government of the day realised that the joke that had arisen among junior employees about being higher paid meant that the term was wholly inappropriate. However, instead of increasing the threshold, the Government simply decided to expunge that phrase 'higher paid employee' from the legislation. As the threshold has remained at £8,500 since then, this deletion has saved the blushes of successive Governments. However, we now have the tricky issue of the national minimum wage. The main adult rate for workers aged 22 and over is £4.10 an hour (from 1 October 2001). Government statistics issued at the end of 2001 show that the average full-time worker spends some 38 hours a week at work. With four weeks paid holidays due under the Working Time Regulations 1998, this means that adults must be paid at a rate of £8,100 a year. Any employees currently working a standard 40 hour week must therefore now earn at least £8,500 a year! The national minimum wage is policed by the Revenue, which may now find that a failure by an employer to pay the minimum wage allowed by law will mean that when this has been corrected there will have been a potential failure to apply legislation originally designed to catch the upper echelons, in pay terms, of employees. If, however, the limit of £8,500 had been linked even to inflation since April 1979, it would now stand at some £27,000 and this farcical position would not have arisen.
Extra-statutory concessions
Moving away from legislation into the already dubious area of extra-statutory concessions (in the sense of why so much is covered by concession rather than legislation), we find more examples of tax-free limits that have now become meaningless. Does anyone fancy a 15p sandwich? Back in 1948, when the limit in Extra-statutory Concession A2 was set for meal vouchers, the 15p a day concession was worth £3.30 according to Government statistics, which was a realistic level. The concession is now worth only 75p a week, which was the increase in the state pension back in March 2000 that rightly caused an uproar. The fact that there is next to no comment about Extra-statutory Concession A2 seems to indicate that the stealth process is working.
Another example of a concession that is in real danger of becoming another sad joke is A22 which covers long service awards and allows an employer to reward an employee with a tax-free gift costing up to £20 a year for a minimum of 20 years faithful service. That limit was set in 1984 and should now be £40, taking the Government's inflation statistics into account, but yet again the failure to increase the limit over the past 17 years has in my view made the concession somewhat farcical. This impression is strengthened when I see the zeal with which some Revenue pay-as-you-earn compliance officers police this issue.
I appreciate that we are looking at concessions and that these are allowing a measure of relief from the Schedule E charging rules. My argument is, however, that if we are going to have reliefs, they should be realistic and worthwhile rather than seeming like a cynical sop to the millions of taxpayers subjected to the onerous Schedule E rules.
Any answer?
My question for the Chancellor, which I am happy for any Member of Parliament to ask, is this: how much tax and National Insurance has been raised as a result of successive Governments, say over the last ten years, failing to increase the limited number of reliefs I have highlighted here?
David Reilly is a senior manager in RSM Robson Rhodes employer tax consultancy group, tel: 020 7865 2198, e-mail: david_reilly@rsmi.co.uk.
