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OTS calls for review of UK tax regime for employee benefits and expenses

The entire UK tax regime for employee benefits and expenses should be reviewed, the Office of Tax Simplification (OTS) has said.

In an interim report into the tax system that applies to employee benefits and expenses, (115-page / 790KB PDF) the OTS said that "piecemeal" framework is complex and should be brought up to date.

"We would recommend a full policy review of the whole benefits and expenses system to re-establish some general principles and ensure these are in line with current employment practices and government policies," the OTS said in its report.

Tax law expert Heather Self of Pinsent Masons, the law firm behind Out-Law.com, said that the existing employment tax system does not reflect modern methods of working.

"The underlying issue is not the way benefits are taxed, but the way the whole system fails to recognise that the working world has changed," Self said. "IR35, zero hours contracts, portfolio careers all fundamentally challenge the idea that someone is either an employee or self-employed."

"The PAYE system was designed in about 1945 for a world where employees worked in factories or offices, and the self-employed were tradesmen or professionals. It is no longer fit for purpose. The OTS is doing a thorough and painstaking job, but it is woefully under-resourced to bring about real change to the tax system. Real simplification would bring dividends in encouraging investment and discouraging aggressive avoidance"

In its report the OTS said that tax rules that apply to travel and subsistence expenses, accommodation benefits and  termination payments should be the subject of further study. It also recommended that the administrative procedures established by HM Revenue & Customs should also be studied more in depth, with a view to them being simplified. It said that different procedures could be set up for small and large companies to follow.

"There may be a case for different tax rules for large and small businesses, rather than the current 'one size fits all' approach," the OTS said. "We would propose further investigation into how the system could be made to work better for business generally and, in particular, for small business, considering not only the application of the underlying tax rules but also HMRC’s administration of the system."

One area of particular concern raised by the OTS was in relation to the 'P11D' form that employers must complete at the end of each tax year to notify HMRC of the benefits and expenses payments they have made to staff earning more than £8,500.

"Feedback from our meetings indicates that the obligation to file a separate form in respect of each employee or director involves excessive administration for employers, particularly as the P11D is so complicated," the OTS report said. "Its layout and references to different types of benefits and expenses make it difficult to complete and hard for employees to understand. Employees are often confused as to why a P11D is even needed, for example in salary sacrifice schemes where, from the employees’ point of view, they should not be given forms that suggest they have to pay tax on benefits which they have 'bought'."

"Big companies tell us that they manage the process: it is something ‘we just have to do’. They devote necessary resources to the work. Smaller companies find it more difficult (many will outsource the work). Those that use the HMRC guidance on completing the P11D often say it is inadequate (for example, the form does not make clear that the P11D must be filed in relation to all directors even if they earn less than £8,500) and it does not cover all types of benefits and expenses," it said.

The OTS said that there were a number of "quick win" solutions that could be implemented to improve the employment tax framework. Amongst the potential solutions, OTS said that "voluntary payrolling of benefits" could replace form-based reporting and that exemptions from tax on benefits issued by businesses to staff to reward them for long service should be extended.

In addition, OTS said that businesses should be able to resolve "straightforward employee tax issues" with HMRC directly where individuals staff members have consented.

"Difficulties are exacerbated by a general failure for there to be effective communication between the employer, the employee and HMRC," the OTS's report said. "When the employee queries his code HMRC often directs him back to his employer, rather than taking ownership and entering into a three-way dialogue in order to collectively resolve the issue. Some employers wanted to be able to sort out simple issues on behalf of employees, for example ringing up HMRC to ask them to issue a form P87 to allow the employee to claim expenses, or to report a benefit that needed a coding change."

The OTS is due to make final proposals on reforming the benefits and expenses tax regime in a report to the Chancellor before his next Budget.

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