Many reward and benefits professionals will have heard in the Summer Budget 2015 that the Office of Tax Simplification (OTS) will be established on a permanent basis.
No doubt some will be wondering: ”What has the OTS ever done for us?”
The OTS has spent a good deal of time looking at employee benefits and expenses. The goal was to achieve both technical and administrative simplifications to the tax system, aiming to help employers and reduce their compliance burdens. As the project progressed, the aim evolved of trying to largely eliminate the need for the 4.5 million P11Ds that are completed annually. Achieving that would save both employers and HM Revenue & Customs (HMRC) a great deal of time and effort.
Three reports on the area, Review of employee benefits and expenses: Interim report (published in August 2013), Second report (published in January 2014), and Final report (published in July 2014), set out six key reforms that, if implemented, would all but eliminate those P11Ds. The reforms comprise:
- Voluntary payrolling: employers will be able to payroll benefits by adding the benefit to salaries and collecting tax via the payroll. Reporting will be via Real Time Information (RTI) and there would be no need for a P11D. The key is that employers will be able to choose which benefits to payroll.
- Introducing an ‘allowable business expenses’ rule so that instead of the dispensation procedure, employers will, in effect, self-assess whether or not expenses are taxable.
- Abolishing the outdated £8,500 ‘higher paid’ limit so there will be no need to monitor whether any employees fall below this level.
- Establishing a standard trivial benefits amount: benefits under £50 can be ignored. There will be some necessary anti-avoidance measures, so cash or a direct reward for services will not qualify.
- Reforms to the travel and subsistence rules: the current framework will be kept but problem areas such as multiple workplaces and the 24-month rule will be addressed.
- Pay-as-you-earn (PAYE) settlement agreements will be expanded, allowing more things to be settled and eliminating the need for prior agreements for PAYE settlement agreements.
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The first three have gone through in the Finance Act 2015 and the related regulations have been drafted. Trivial benefits was dropped from the Finance Bill 2015 but is expected to come back in the Finance Bill 2016 and operate, like the others, from April 2016. Employers will need to decide how they will take advantage of these simpler rules: they may need to communicate implications with employees.
There are consultations moving ahead on travel and subsistence reform.
PAYE settlement agreements have been harder work because HMRC rejected the OTS’s recommendation, but dialogue is continuing.
The organisation also came up with recommendations for reforming the difficult and sensitive areas of termination payments and accommodation benefits. It is good to see the current consultation on simplifying the often-misunderstood rules around terminations.
OTS’s accommodation recommendations are still being considered and it is also awaiting formal reaction to its March 2015 Employment status report. A number of avenues have been suggested for reform but none are quick wins and it will take time for them to be developed further.
Two major new areas where work is currently in progress are simplifying small company taxation, and looking at closer alignment for income tax and national insurance contributions (NICs).
The second of these projects will no doubt catch many readers’ eyes. Essentially, OTS is starting from the premise that closer alignment of tax and NICs is a good idea, but it is going to be really digging into the mechanics, stages, issues, costs, implications, winners and losers. There can be no promises that changes will be made but it is clear ministers are interested. Key themes and questions will be published shortly, and industry professionals will be able to submit their thoughts on the topic.
John Whiting is tax director at the Office of Tax Simplification