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OTS issues second report on employee benefits and expenses
The amount of P11D forms submitted to HMRC should be reduced “substantially”, advises the Office of Tax Simplification (OTS) in its latest briefing to the government.
Review of Employee Benefits and Expenses: Second Report recommends applying class 1 National Insurance (NI) to all worker remuneration, whether cash or benefits in kind, with the cost to employees offset by a reduction in NI rates.
The document also moots a legislative framework to permit employers to have some or all benefits and expenses taxed through payroll on a voluntary basis.
Firms would be able to continue to pay class 1A NI contributions in respect of ‘payrolled’ benefits after the end of the tax year, but rules could be introduced to allow bosses to pay the NI on a monthly basis as part of the payroll process.
The proposed measure would lead to employers having to submit fewer P11Ds, claims the OTS document, which makes suggestions summarised below.
- Broadening PAYE settlement agreements. The scope of PAYE settlement agreements (PSAs) should be widened to permit employers to settle tax liability on benefits and expenses – and the process for employers entering into PSAs should be streamlined by adding them to the Revenue’s PAYE online service for employers and offering standardised categories of expenses and benefits that are capable of being included in a PSA.
- Exemption for qualifying business expenses. Replace the dispensation process with a more modern, practical approach. The exemption should be written to cover all routine business expenses that can currently be included in a P11D dispensation. The change could be by way of a simple piece of legislation that refers to the sections of the law that already allow a deduction for qualifying expenses. The exemption should apply to all employers and employees who meet the minimum record-keeping requirements.
- Abolition of the £8,500 threshold. With the personal allowance due to rise to £10,000 in April 2014, the reason for retaining the threshold is even less relevant.
- Trivial benefits. A short, easy-to-understand, principles-based definition of a trivial benefit should be introduced, incorporating a per-item cap – which would reduce the number of P11Ds employers are required to submit, and the amount HMRC need to process.
- Travel and subsistence. Create a rule that says an employee can have only one permanent workplace, being that where they spend the greatest part of their working time. Or ITEPA 2003, s 339 could be amended to redefine “permanent” and “temporary” workplace by introducing a statutory percentage test. There should also be a specific code for homeworkers, with one clear definition of homeworking for all tax purposes. A further recommendation is to remove the facility for employees to claim the cost of expenses in working from home not covered by employers – such as telephone bills and internet access – but provide an uplifted homeworking allowance that would be payable free of tax/NICs where the employee meets the definition of a homeworker.
Finally, the OTS recommends a fundamental review of the government policy on what is a taxable benefit and what is not. It should look at whether or not the way a benefit is provided should determine how much tax is paid on it, and whether or not a principle could be developed to enable items that ought not to be treated as taxable. The taxman’s guidance would be reviewed every ten years.
KPMG partner Matthew Hunnybun claimed the OTS’s recommendations would reduce reporting burdens on employers, and he welcomed the acknowledgement that travel and subsistence rules need to be simplified.
“This can be a complex area for businesses, and the guidance provided by HMRC has not kept pace with current working practices. The recommendation by the OTS that guidance should be reviewed every ten years, to ensure it reflects changes in work patterns, should help to address this,” added Hunnybun.
