This is the second stage of the OTS’s journey of exploration and discovery in the world of Employee Benefits and Expenses. Like any good set of explorers, after a time of making new discoveries, we have moved on to bringing back ideas for how to use them to make improvements. That is the aim of this report: it builds on the interim report1.
Taxable benefits generate more than £3.3 billion of tax and NICs for the Exchequer; but that takes some 4.4 million P11Ds and a huge administrative effort all round. Over 4 million individual benefits were reported to HMRC; but the number of employees concerned with Employee Benefits and Expenses will be much greater as all those who claim travel expenses are in the ambit. Everyone we have spoken to on this project knows and accepts that giving someone a benefit means there will usually be a tax liability: that is fair and just. The trick is to get to that liability (or an exemption) quickly, efficiently and with certainty. of August last year and develops recommendations in some of the main areas.
The current system doesn’t really pass those criteria and our aim in this report is to improve matters. HMRC have a significant part to play and we want to see employers supported in their efforts to get things right. Employers have constantly told us that their goal is to settle their liabilities and get on with their businesses: they want to reward their people properly, not to manipulate rules for seeming gain. We want to help them, though we know that there must be appropriate, balanced safeguards against possible abuse.
We now present what we see as the way forward in three of the main areas of this project:
• ‘big picture’ ideas – longer term, structural reforms;
• HMRC administration; and
• travel and subsistence.
In doing this work, we have been challenged by all those who are interested in our project – Ministers, businesses, advisers and HMRC – to be radical in our thinking so as to try and make a real difference to the administrative burdens in particular. We have done that and this report does point up some radical thoughts: for example, Class 1 national insurance contributions (NICs) on all benefits, a significant widening of PAYE settlement agreements (PSAs) and a general exemption for qualifying business expenses.
But we have not been radical just for the sake of it: on travel and subsistence we have sought and tested radical options to get to a new system that would be better for all concerned. But that philosopher’s stone does not seem to exist; whilst we have pointed up one possible route that we think is worth further exploration, our conclusions accord with what most businesses and commentators have said: that the current system does work reasonably well and what is needed is to improve that, not to go through the disruption and uncertainty caused by junking and starting again.
One thing to stress is that the recommendations that follow blend together to achieve our goals: our report is broken down into chapters to make it easier to follow, but there is a good deal of overlap and meshing together across chapters and themes. For example, payrolling, the qualifying business expenses exemption and a standard trivial benefits rule all push in the same direction: less reporting and more streamlined processes. NIC reforms would also facilitate this.
In framing our recommendations we have responded to the evidence we have found in another wide ranging set of meetings and workshops and the many comments and submissions received (for all of which we are very grateful): We found that we have had views from almost all of the FTSE 100 companies, directly or indirectly; at the other end of the scale the ideas we had from a third year group of students at the University of Central Lancashire, developed during their degree course, were creative and valuable. We think our recommendations provide a balanced, progressive, modernising package which can be summarised as a goal of reducing the current number of P11Ds from around 4.4 million a year to a much smaller figure; perhaps a target of a 99 per cent reduction?
That gets us to an overriding point we need to make about our conclusions. We think there is a need for HMRC to take a more facilitative, encouraging and constructive approach in these areas. In a number of areas we have suggested there is a need for HMRC to develop guidance and illustrations – and then commit to keeping those examples and helpsheets up to date as new points come up. The current rules have a tendency to put the entire onus on the employer to research rules and take decisions on what is to be taxed. That only works up to a point: Employee Benefits and Expenses needs to be seen as an area for joint responsibility and working. We are not in any way saying that HMRC has been shirking its responsibilities, but there has been a tendency (perhaps influenced by pressure on HMRC resources) to revert to a passive, checking and controlling stance. We think that investment of modest resource in producing more live and current guidance may cost some HMRC time and money initially but it will lead to a real payback in a short timeframe.
Click here to download the full report.