OTS Review of Expenses and Benefits – Final Report

At the Autumn Statement of 2012, the Government indicated it was to ask the Office of Tax Simplification (OTS) to review ways in which the benefits and expenses taxation system and employee termination payments process could be simplified.

In April 2013, David Gauke MP, Exchequer Secretary to the Treasury, set out the terms of reference for the review, saying that the vision was to complete the work in three stages:

1. A fact-finding exercise aimed at identifying the main areas of complexity
2. A review of these specific areas with a view to developing recommendations for simplification
3. A study of other areas of the Income Tax (Earnings and Pensions) Act (ITEPA) Benefits Code

Stages 1 and 2 have been completed and have led to changes in guidance and HMRC practice, all with the intention of simplification and modernisation.  Importantly, they have led to four open Consultations on the following:

1. The voluntary ‘payrolling’ of benefits
2. Abolition of the £8,500 threshold
3. Trivial benefits exemption
4. A general exemption for paid or reimbursed non-taxable expenses

We urge people to look at these Consultations and respond to any that they feel are appropriate to them by 09 September 2014.

On 31 July 2014, the OTS published the third part of their expenses and benefits project, looking specifically at ‘other’ areas of the ITEPA Benefits Code, namely:

1. Accommodation benefit
2. Termination payments
3. Other (including removal expenses, long service awards and mileage rates)

The OTS says that there is a definite need for reform in respect of accommodation and termination payments and they point to ways in the areas can be simplified.  They also say that they are probably issues for the next Government to address.  However, there is a general consensus that improvements need to be made to the current system which is outdated and does not reflect what happens in modern working practiced.

We look at these below:

Accommodation Benefit

The report says that the definition of beneficial accommodation is difficult in the first instance.  For example, phrases such as ‘necessary for the proper performance of duties text and ‘customary’ to provide are difficult to apply in order to give employees (and employers) an exemption from a tax liability.  Further, the issue of ‘grandfathering’ some occupations that were exempt prior to 1977 adds to the complexity.  The OTS says:

‘We have now reached a point where the combined effect is a system of rules that are too arbitrary and inconsistent, and difficult to apply.’

Having ascertained that the accommodation is beneficial, the regime for calculating the benefit is complicated, as six steps need to be taken into account:

1. when the property was first made available
2. the rateable value in 1973 in England and Wales, 1976 in Northern Ireland and 1985 in Scotland
3. whether the employee first occupied the property after 30 March 1983
4. whether the employer has held it for more than 6 years
5. whether the property cost plus improvements amounts to more than £75,000
6. the number of employees occupying the property

The report suggests that a revised approach is taken to improve the benefit framework in the following steps:

• define what is beneficial accommodation
• define what exemptions will apply
• define how the benefit will be calculated

The ‘most basic’ accommodation is taken out of the benefit equation completely – for example an employee who stays in bed and breakfast accommodation.  Then, the list of the exemptions needs to be reviewed to differentiate between what is a ‘perk’ and what is actually required by the employee to get the work done.  The OTS suggests that the following should be guidelines that will enable non-beneficial accommodation to be identified:

• Is the employee required by the employer to live in the accommodation in order to get the job done?
• Is the employee required to live in the accommodation to enable the employee to protect the employer’s buildings, people or assets
• Is the employer requesting that the employee uses accommodation because they have very early starts or late finishes?
• Is the employee required to live in the property as a result of regulatory requirements?

These simpler and fairer rules would more clearly define the accommodation that is regarded as beneficial.

With regard to the actual calculation, this will continue to be complicated because of the wide range of accommodation that is made available to employees.  However, a fundamental is that the taxable benefit will be calculated on the basis of what the property would be worth on the open rental market.  These values would have to be reviewed every 5 years or, at least, an inflationary index applied to the value (i.e. RPI / CPI etc).  If the accommodation is not considered beneficial (i.e. it is exempt), the provision of other benefits services would also be exempt (gas, electricity etc) with the exception of Council tax, water and sewage bills.

Termination Payments

The OTS start by saying that there is ‘confusion’ and ‘uncertainty’ around termination payments as a whole and certainly about the £30,000 exemption that applies in certain situations.  They say that this is leading to incorrect tax liabilities and payments being met as a result.  Therefore, one of the headline proposals is that the concept of the £30,000 exemption should be scrapped.  Instead, a new relief should be introduced and should only apply in the cases of statutory redundancy only.  The new relief could be a multiple of the statutory redundancy payment or it could be a flat amount.

In the short-term, the OTS recommends that HMRC looks at its stance on the tax and NICs status of non-contractual payments in lieu of notice (which would, by definition, not be subject to either).  Specifically, the issue here is that HMRC needs to look at the circumstance in which they consider a non-contractual PILON to represent a payment that is subject to tax and NICs.  Further short-term benefits for employers and HMRC include updating and reviewing guidance and the way that it handles queries.

 ‘Other’

This section is a follow-up to their interim report from August 2013.  It looks at three issues in particular.

With regard to removal expenses (in relocations), it says that the current £8,000 is outdated and simplification would suggest that all removal expenses are classed as qualifying, provided there is a clear business case for the costs in the first place.  The excess over a revised threshold would qualify for settling via the PAYE Settlement Agreement.    Further, is there a case for tax-free allowances that relocating employees could spend as they wish?

With regard to long service awards, again, the system does not reflect current workplace trends and the OTS suggests reducing the current 20-year rule to 10 years.  Further, additional awards should be allowable without the 10-year interval rule and employers should be allowed to give vouchers.

With regards to the Approved Mileage Allowance Payments (AMAPs), the OTS says that the feedback they are getting suggests increasing these, as they do not reflect the running cost in private vehicles.  Further, where the employer pays over the AMAP rates, the tax should be collected via the PSA if the employer wants.

Comment Bravo to the OTS for raising the issue that accommodation is probably the benefit that causes the most headaches for employers.  It is good that this is highlighted, plus the fact we have to work with a regime that does not reflect modern working.  Short-term fixes are suggested as HMRC reviewing their guidance and the provision of a checklist or tool that will enable employers to understand when accommodation meets the ‘customary’ test.  I am not sure that the outdated and complicated guidance is in a fit state to be reviewed, so I say let’s go all out for a simplification consultation and announcement at Autumn Statement 2014.  Of course, we agree with the OTS when they say that there is going to be a need for transitional arrangements to apply, where people are in non-beneficial accommodation that may become beneficial after any reform. We do agree that there is a lack of clarity around termination payments and reviewing the non-contractual PILON is welcomed.  Plus, in my experience; managers are more than willing to apply this £30,000 exemption in situations where it is not applicable, therefore a review here is also appropriate. It is Section 401 of ITEPA that deals with the taxable status of ‘payments and benefits on termination of employment’.  Very broadly, this states that a payment or benefit that is received is treated as income from employment and, therefore, subject to tax.  However, it is Section 403 that provides the £30,000 exemption and it is this that the OTS says needs to be reviewed.  The thought of losing the age-old exemption of the first £30,000 of qualifying termination payments does sit uncomfortably at first; however, remember the remit of the OTS is all to do with simplification and making the tax system fairer.  Removal of the £30,000 relief and applying a different relief does meet these objectives, regardless of whether we like it or not. The OTS says it is ‘illogical’ that the tax treatment differs from the NICs treatment re termination payments.  They say that any reform of termination payments could be a ‘test bed’ in the tax and NICs treatment of such payments plus, further, a moved towards cumulative NICs.  The prospect a uniform treatment for tax and NICs on termination payments (and other payments) is welcomed; however, a move to cumulative NICs would be more complicated and involve changes to a raft of different Social Security legislation.  Let’s do one simplification at a time! There are plenty of ‘other’ items that need simplification and review.  The overriding opinion I am getting from this report is one that I have felt for a long time.  The system is over-complicated, out of date and out of touch with current working practices.  Let’s see where this report leads towards the Government’s objective aim of creating a simpler, fairer tax system.

Further Information

• Gov.UK – Review of Employee Expenses and Benefits: Final Report