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Adviser Q&A: The new consultations on employee benefits and expenses

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What are the government’s plans?

The government has published four consultation documents relating to proposed changes to the taxation of benefits and expenses. These have all been generated by ideas from the Office of Tax Simplification (OTS). They cover:

  • voluntary payrolling of benefits;
  • replacement of dispensations with exemptions;
  • abolition of the £8,500 P11D threshold; and
  • exemption for trivial benefits.

In each case, the indisputable goal is to simplify the tax system and, as such, should be of mutual benefit to HMRC and those paying and administering tax on its behalf.

In particular, the general thrust is to reduce the number of P11D forms that have to be completed each year. By extension, it seems likely that allowing for the fact that much is accounted for by coding, this will also cut the number of employees that have to file tax returns.

In the consultation documents, the government says that, from its perspective, each P11D costs £6.50 to process. It would not be unreasonable to surmise that most employers pay a great deal more. One also wonders what HMRC spends per head on tax returns?

What does each plan entail?

Voluntary payrolling of benefits: Under this proposal, companies that choose to do so will be able to dispense with P11D forms and put benefits through the payroll instead. The likelihood is that this will be compulsory for all the employees of an employer that enters the scheme. The consultation seeks opinions as to whether employers will have to include all benefits if they wish to utilise the arrangements.

Replacement of dispensations with exemptions: At present, there is a relatively complex set of rules governing obtaining a dispensation from including certain non-taxable benefits on P11D forms. It is now proposed that a statutory exemption will be introduced covering specific paid or reimbursed expenses.

Abolition of the £8,500 P11D threshold: Nearly all employees now fall within the P11D regime since the lower remuneration limit of £8,500 has been diminished by inflation. Where once it broadly covered employees paying higher rate taxes, now anyone receiving the national minimum wage will exceed it. Therefore, the suggestion is that this should be scrapped.

Exemption for trivial benefits: At present, there is a relatively informal arrangement by which benefits deemed to be trivial can be ignored for tax and NIC purposes. The OTS has recommended that a specific exemption be introduced with clear guidance as to what does and does not qualify.

Are there any hidden negatives?

Some may prefer to get the cash flow advantage of paying tax (or employers’ NIC) via the P11D system and their self-assessment tax returns, rather than through payrolling. This is most likely to be advantageous for new benefits.

It is hard to see why anybody would be disappointed at the ending of dispensations, as long as these are replaced by a new provision that covers all benefits which can currently be taken out of tax. The OTS points out that the withdrawal of dispensations could lead to uncertainty regarding the appropriate application of legislation. However, with sufficient clarity this should not be an issue.

One possibility is that these arrangements will not apply where salary sacrifice is implemented. That could definitely be regarded as a downside by those affected.

Clearly, employees who are currently not within the P11D regime because their rate of earnings is below £8,500 on an annualised basis are likely to lose out through the proposed removal of this limit. The consultation document suggests that those who are disadvantaged might get special treatment, although this would water down the principle of simplicity.

Apparently, there are currently only around 15,000 employees covered by P9Ds (including care workers, ministers of religion and those in the charity sector), so this might not be too much of a concern. In addition, it is pointed out that since the personal allowance is already £10,000, in a significant majority of cases there should be no additional tax to pay.

While many of us would have welcomed an increase in the £8,500 figure to an inflation-adjusted level, which should probably be around £40,000, it is no surprise that this did not appeal to the chancellor of the exchequer.

It might be argued that some taxpayers benefit from the uncertainties and inconsistencies inherent in the current legislation, including those for trivial benefits. However, most would agree that a simple, coherent system for each of these arrangements would be of general benefit.

Could there be some improvements before implementation?

Readers will have their own opinions. Here are a few thoughts.

In several of the proposals, flexibility might be sacrificed in favour of clarity. For the most part, this will not cause too much dissension. However, the general principle of allowing employers a degree of choice should never be forgotten.

The insistence that in order to be trivial, benefits cannot be regular seems petty. Under the current proposals, differentiating between the provision of, say, dental insurance that costs £30 a year and is paid annually, and the same £30 premium that is paid weekly, would appear to determine whether or not it will be included. This aspect could do with rethinking.

The rather vague promises relating to those currently below the P11D threshold could also do with strengthening. Putting a potential additional burden on to the very poorest in society is unlikely to win votes or friends.

Overall, is this good news?

The general answer is ‘yes’. We will have to wait and see exactly how the legislation pans out prior to its introduction in Finance Act 2015, but these measures will genuinely simplify the tax system and are unlikely to lead to any significant cost to taxpayers or their employers. The main benefit to be derived will be in the reduction of irritation for all parties.

All four consultation documents are available on the website. The consultations close on 9 September 2014.