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KEY POINTS * The real value of the 1979 higher paid employee level of £8,500. * Benefits of increasing the £8,500 limit for all. * Bringing the provision of living accommodation to lower paid employees out of benefit charge. * Increasing other tax limits so that they reflect inflation.
MANY PEOPLE READING this article might have come to the conclusion that the completion of forms P11D is rather tedious. Every year, advisers must wish that their clients or colleagues had decided to enter into a dispensation or a PAYE settlement agreement to save them from the hassle of ploughing through piles of records in an effort to track down those elusive benefits in kind.
It can only get worse as computers and mobile phones come back into the system from 2006-07.
How would you feel if you were told that you did not need to complete P11Ds for any employee who was earning under £50,000 a year? Pretty happy might be putting it mildly. However, this was pretty much the position for anyone working in the 1970s.
In 1979, a higher paid employee was defined as one earning over £8,500 a year. Employers did not have to complete form P11Ds for anyone who was earning at the rate of less than £8,500 a year. As an example of earnings at that time, a junior member of the Inland Revenue's staff would have been recruited on about £2,000 a year, while a trainee accountant might have been earning 40 to 50% more than that.
Over the following 27 years, it seems reasonable to suggest that these levels would have increased by a multiple of six; using this figure, the limit for a higher paid employee should be around £50,000.
This makes perfect sense, since according to the latest statistics, the average salary of an English man or woman is £27,300 while even somebody on the national minimum wage working 37.5 hours a week would be considered to be a higher paid employee, based on the old definition of 'higher paid employee'.
Just for good measure, there was a specific provision that stated that the benefit of accommodation would only apply to 'a person employed in director's or higher paid employment'. This would mean, had the £8,500 been increased as mooted, that employees earning the equivalent of below £50,000 a year, could occupy employer-provided housing tax-free in all circumstances.
Contrast that position with the situation as it is today and things could hardly be more different. While there is no longer a definition of a higher paid employee: that went in 1989 when the definition changed to 'employees earning £8,500 or more and directors', the legislators have still missed a trick. Section 217 of the Income Tax (Earnings and Pensions) Act 2003 still has a 'meaning of lower-paid employment'. In reality, this might sensibly be re-christened starvation-level employment. I should add that this article was written before the Budget, but it seems unlikely this will change anything.
Surely the stage has been reached where the Government must decide to take one of two obvious steps. The more likely is to scrap the concept of lower-paid employment completely and charge benefits in kind on every employee. Since this will only be an issue for those who are employed on a part-time basis, it should not prove too drastic. It will also mean the end of the form P9D, a document that few, if any, accountants or payroll operators have seen in the last decade.
It would be nice to feel that as a final gesture before he gives up the briefcase and moves on, Gordon Brown might reconsider the concept of a higher-paid employee and set a new limit of £50,000. If he did so, he would make a lot of new friends, since it is estimated that three quarters or more of all employees are paid at below £50,000. It would also have a knock-on effect in simplifying the year-end processes as fewer forms P11D would be required. It would take pressure off overworked HMRC staff who could concentrate their resources more effectively on catching the perpetrators of real tax evasion schemes.
Accommodation problem
As a short-term fix, however, it would be good to see a change in the rules relating to the provision of living accommodation. This benefit used to be exempt from tax for all employees who were not higher paid. The system is not working properly where, as happened recently in my experience, a group of employees who were earning little more than the national minimum wage but were being provided with accommodation, found themselves hit by a tax charge on the benefit. If the limit for higher paid employees was lifted even to £15,000 or preferably £20,000 and the accommodation legislation reverted to the position in the 1980s so that the Class 1A National Insurance charge did not apply, there would be an immediate benefit. A beleaguered industry that does much to promote the UK abroad and will be needed as a support to turn our Olympic venture into a commercial success, might be given if not a new lease of life then at least a helping hand.
In theory, if anyone had the energy to do the research this could be the first in a number of articles that consider the erosion that inflation has inflicted on many tax reliefs. Now that there is to be a reversion to the link between pensions and earnings, it would be interesting to consider whether some tax limits could benefit from a similar treatment.
Other beneficiaries
The limit for a tax-free termination payment of £30,000 should surely now exceed £100,000. Similarly the employee limits for company share option plans and enterprise management incentives are due for review, having remained at £30,000 and £100,000 for over a decade and since inception respectively.
Best of all perhaps is the restriction on dear old luncheon vouchers. When England won the World Cup in 1966, the old bloke in the office assures us that it stood at three bob. For those under 50, that is 15p, exactly the same figure as today. The difference is that back then, your luncheon voucher would buy you a decent meal every day. In 2007, they might still be tax-free but you have to save for a week just to pay the tip on that lunch.
Vain hope?
We do not yet know who will succeed Gordon Brown as Chancellor of the Exchequer, if and when he departs No 11 Downing Street, but is it too much to hope that he or she will address these issues? It is all too likely that the answer is a simple yes.
Philip Fisher is the employee benefits partner at Chantrey Vellacott DFK and his recent book, Employee Share Schemes is published by Croner.CCH. He can be contacted at pfisher@cvdfk.com.
