Travel expenses headache for employers

Recommended changes to benefit and expenses rules

The Office of Tax Simplification (OTS) has published the 'Review of employee benefits and expenses:  Interim report' as part of their responsibility to outline areas of complexity and suggest what should be considered a priority for additional review.

The terms of reference tasked the OTS with considering whether tax rules have remained in line with developing practices, the impact on employers and employees and fairness and consistency of treatment of taxpayers.

The area of employee benefits and expenses has not been fully reviewed since the 1970s, which explains the OTS’s keenness to study it. They held over 50 meetings nationwide, bringing together a variety of employers and bodies. From these meetings some key points emerged:

  • The benefits and expenses system has developed in a piecemeal fashion over the last 65 years and is ripe for a complete review. Ideally the OTS would recommend a full policy review of the system but they understand that this could have a significant impact on the resources of both HMRC and employers.
  • Underlying much of the complexity are tensions and boundaries in the tax system such as the differing rules for income tax and NIC.
  • HMRC administration including the form P11D process and the issuing of tax codes is a major source of concern amongst employers.
  • The area which the OTS received most comment was that of travel expenses and subsistence. This is an area which the OTS suggest is a priority for further work.
  • Provision of living accommodation for employees and termination payments give rise to significant problems although affect fewer people.
Is the £8,500 threshold too low?

Generally employees who earn £8,500 or more a year are subject to tax on any benefits-in-kind provided by their employer. This has been increased just three times since 1948 (when it was £2,000) and the current level was set back in 1979.

Interesting, if the £8,500 limit had been increased in line with inflation it would be £39,139 in May 2013. However, indexation has been considered a number of times but always rejected.

In 1979-80 the threshold was 150% of average full time earnings, but just 35% in 2012-13.

Whilst it would be tempting for the OTS to recommend immediate abolition of the threshold entirely, they consider more work needs to be done to assess the impact of such a move.

P11Ds

Many people that the OTS spoke to felt that the P11D process is too complicated and should be replaced by a less onerous, more modern system.

Employers found the actual P11D form to be too complex because of its layout and references to different types of benefits and expenses.

It can be difficult, not to mention time consuming, for an employer to decide whether a P11D or P9D should be completed in respect of a particular worker. Many simply assume that all employees are earning more than £8,500 a year and therefore automatically complete a P11D.

Travel and subsistence expenses

Most comments regarding travel expenses received by the OTS were about the rules defining a ‘temporary workplace’.

Some employers said that the 24 month rule is having an impact on commercial decisions they make. They said they would also prefer to have a 24 month cut off point, so a workplace is temporary up to the first 24 months of working there and subsequently becomes a permanent workplace for time spent at that site thereafter, rather than having to take account of whether or not an engagement is likely to last more than 24 months.

HR departments apparently do not fully understand the rules and often make decisions without due regard to any tax consequences.

Another issue that confused employers was phased projects. An employee might be at a temporary workplace for one part of a project, work elsewhere in a different role and then return to the original project for a second phase. This may cause them to fall foul of the 40% rule, by attending a workplace for a continuous period of work (for 40% or more of their working time), for over 24 months. Apparently some employers have been able to agree with HMRC that the workplace is treated as two separate temporary workplaces for different phases.

Apparent inequalities were highlighted with regard to subsistence expenses (for accommodation and food). For example, someone who is out for the day travelling for business can claim a tax deduction for lunch they purchase on the go, whereas an individual who takes a packed lunch from home can claim nothing.

A number of employers had received some rather unhelpful decisions from HMRC with regard to workplaces in London, with some being told that all of London (within the M25) is one workplace even though two workplaces could be up to two hours apart, yet still within the London area.

The special foreign travel rules which allow deductions beyond the basic travel rules are subtle and rather complicated.

Termination payments

There exists amongst both large and small employers a misconception that the first £30,000 of any payment following termination of employment is automatically tax free.

The £30,000 limit was last updated in 1988 and at today's prices would be £71,000.

It is the OTS’s view that the whole policy behind this exemption has become unclear and the Government should undertake a policy review of exactly what it wants to tax and what it wants to exempt.

The OTS were struck by the number of relatively minor issues that are proving problematic and if these things were changed they would make a significant difference. Some changes would require legislation, but many just need a different approach by HMRC. With this in mind the OTS have come up with 43 'quick wins' such as:

Area

Proposed solution

Needs Legislation?

Trivial benefits

HMRC should publish a list of benefits they consider to be trivial, presumably with limits on the amounts.

No

Mileage rates

Align tax and NIC treatment of mileage rates over 45p.

Yes

Mileage rates

HMRC should not require retention of fuel VAT receipts for expenses claims where only a mileage rate has been claimed.

No

Subsistence rates

HMRC should give better guidance on what qualifies for subsistence expenses.

No

Subsistence rates

HMRC should reinstate the practice of having a 'friends and family' scale rate.

No

Travel and subsistence

HMRC should commit to revising and updating the booklet 490 to fit better with modern working patterns.

No

Travel expenses

HMRC to publish guidance on temporary workplace rules for projects carried out in phases.

No

Travel expenses

HMRC should stop treating London as one workplace regardless of travel time.

No

Benefits - broadband

HMRC to allow broadband costs to be subject to PSAs.

Yes

Benefits – car fuel

Allow reimbursement of car fuel where employee contributes by 6th July.

Yes

HMRC administration

Improve guidance and design of form P11D.

No

HMRC administration

HMRC to improve guidance on allowable expenses.

No

HMRC administration

Allow dispensations to be made for a tax year by 6th July of the following year.

Yes

The OTS will discuss their report with Treasury ministers over the summer, with plans to publish their recommendations in stages. Some will be released before the end of this year and some in the first two months of 2014.

The full OTS report can be found here

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