Employee Benefits and Expenses exemption for paid or reimbursed expenses. Response by the Chartered Institute of Taxation

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1 Employee Benefits and Expenses exemption for paid or reimbursed expenses Response by the Chartered Institute of Taxation 1 Introduction and Summary 1.1 The Chartered Institute of Taxation (CIOT) sets outs below its response to the consultation on replacing the dispensations regime with an exemption for paid or reimbursed expenses. 1.2 The proposal to consult on adopting the Office of Tax Simplification s (OTS) recommendation to abolish the system for dealing with employees expenses (ie dispensations or P11D plus expenses claim to HMRC) and replace it with a statutory exemption for qualifying expenses is welcome. 1.3 Employers do rely on their dispensations not only for assurance that they are applying the tax rules correctly but also in applying the NICs disregard. It will therefore be important if a statutory exemption is introduced for employers to have equal certainty under the new regime. 1.4 We agree that if the new exemption regime is introduced it should apply to all employers and would recommend that there is a single regime that applies equally to one person and small, close companies as it does to large employers. 1.5 As noted above, employer certainty will be a key aspect of the new regime. The provision of models of acceptable record keeping etc will help employers but it is essential that employers can still contact HMRC for assurance (or reassurance) and, where necessary, agreement that the employer is applying the exemption correctly, especially in circumstances not covered by the models. 1.6 We think the focus on salary sacrifice arrangements and the proposal to include a targeted anti-abuse rule is misplaced. While we can understand that HMRC will always want to protect against abuse (and we support HMRC on this), in our view it is not correct to say that the use of salary sacrifice equates to abuse or is otherwise not in the spirit of the rules. And so in relation, for example, to travel & subsistence we do not see why an employer should face criticism for agreeing a reduction in pay

2 for site-based staff in return for an appropriate HMRC benchmark scale rate payment. In doing so this (i) allows the staff automatic tax relief for the site-based travel (which they may otherwise not have claimed and so lost out on or, if they did, would require HMRC effort to process) and (ii) allows employer and staff to benefit from the NIC relief that applies to site-based travel and where benchmark payments are often applied. The legislation specifically provides for relief for site-based workers and, provided their circumstances mean that they qualify, surely it is only right that such relief should be claimed? We elaborate on this point at below. 1.7 A process for obtaining a custom scale rate should be retained. If the employer is to self-certify the custom rates then HMRC will need to provide a model protocol for the employer to follow. Employers should also be able to obtain advice and agreement from HMRC where necessary. 1.8 As noted above, the same rules should apply to all employers, so a one person or small, close company should be able to use scale rates as well. Whilst it may often be the case that smaller companies may reimburse actual expenses there may be circumstances where they also wish to streamline their procedures and we believe they should not be precluded from doing so. 1.9 We can see that employers will want certainty when transitioning from the old regime to the new. However, if the new regime is simply placing the old rules for excluding qualifying expenses from PAYE and NICs on a statutory basis (see paragraph 3.7 of the consultative document), employers should see no real change. We therefore suggest that either sufficient notice of the new regime is given for employers to prepare for it or that there is a grace period after the new regime is introduced during which existing dispensations, agreements and custom scale rates can continue to be relied on. Or indeed that such dispensations etc should be grandfathered and simply accepted as evidence to support exemption under the new regime In terms of overall timescale, if legislation was to be introduced in Finance Act 2015 then we would suggest that it takes effect from the start of the 2016/17 tax year, ie from 6 April NICs disregard 2.1 As the consultation document notes (paragraph 2.7) for Class 1 NIC purposes an employer can disregard certain payments in respect of travelling, relocation and other expenses and allowances of employment (see Parts VIII and X of Schedule 3 to the Social Security (Contributions) Regulations 2001). The employer is expected to decide which payments should or should not be disregarded for NIC purposes and it is true that there is no formal dispensation or approval regime. 2.2 However, employers inevitably rely on the PAYE dispensation agreed with HMRC as a guide to which payments can be disregarded for NICs purposes. As paragraph 2.3 of the consultation document notes, a dispensation allows the employer to reimburse certain expenses without having to deduct tax or NICs. In effect, the dispensation is a means of dialogue with HMRC as to which expenses may be disregarded for NICs purposes as well and the dispensation provides comfort to employers that they are applying the NICs disregard correctly. So whilst the point is taken that the NIC regime of disregards does not incorporate dispensations, the reality in practice is that the dispensation process and the associated dialogue with HMRC also provides comfort for many employers on NICs. P/tech/subsfinal/ET/2014 2

3 3 The Exemption 3.1 The Government has accepted the OTS s recommendation that the dispensation regime be replaced by an exemption for qualifying expenses. The scope of the exemption is outlined at paragraphs of the consultation document and we would agree with the conclusion at 3.10 that the exemption should apply to all employers. 3.2 However, a concern that we have is that employers may lose the certainty they feel arises from a dispensation and the associated dialogue that many employers have with HMRC at the same time. This is acknowledged at paragraph 3.13 of the consultation document. We therefore think it will be important to retain a means of dialogue on what is/is not agreed to be exempted for (a) those employers that want it, and (b) those employers HMRC want to check, if employers and HMRC are to remain confident that the correct tax treatment is being applied to expenses payments. 3.3 Also, where there is no dispensation and the expenses have to be reported on a P11D, the employer will often outsource this task to an agent. In such circumstances, the employer does not need to engage with the tax rules. This provides the employer with certainty that expenses are being correctly reported and it then becomes up to the employee to make whatever claims they choose to make on their tax returns (or in appealing a PAYE coding). An exemption regime will however mean that the employer will have to decide whether or not each and every expense is tax relieved and it is unlikely that this responsibility is something which the employer could pass over to an agent. 4 Assurance 4.1 As noted above, an exemption regime will require that both the employer and HMRC are pretty clear that a payment or reimbursement of an employee s expenses are or are not liable to tax and NICs. This is both to prevent situations where employers take a view and get things wrong by not including an amount on a P11D, or on the contrary are unduly cautious and include an amount when in fact there is no need. As noted above, there are often cases where employers do need to talk about whether eg a travel expense qualifies for relief or if an expenses payment is wholly, exclusively and necessarily incurred in the performance of the duties and so we think that maintaining a two-way dialogue with employers will be very important. 4.2 Q1: If the Government were to prove models of acceptable record keeping and checking processes would this be helpful for employers? Where the models are not appropriate for employers, would those employers feel disadvantaged, even if it is made clear that they are not exhaustive? 4.3 We agree that models or toolkits (similar to the Expenses and Benefits from Employment Toolkit, for what employers need to do to evidence that they had taken due care in applying the income tax exemption and NICs disregard, and not reporting the payments on a P11D, is a good idea. It will need to be clear that the models are not comprehensive or prescriptive but are intended as a guide. 4.4 Although we do not think the models need to be included in legislation, they would need to be reviewed regularly to ensure that they remained up to date and relevant. Also, employers will rely on the models and HMRC should accept that if an employer P/tech/subsfinal/ET/2014 3

4 has followed a model then there is a legitimate expectation that the employer has got it right. We suggest that the models might be given the force of law as tertiary legislation. 4.5 Where the models might not be appropriate for any reason, we think employers would clearly feel disadvantaged. If those employers are to have the certainty that they are operating the exemption correctly then, as we have said, HMRC will need to allow employers to have a dialogue with them. 4.6 A concern we would have is where the rules are not sufficiently easy to follow or the employer cannot easily verify with HMRC that the exemption applies. In this scenario then some employers may be minded to pay an all-inclusive salary and cease to reimburse employee expenses, leaving the employee to claim tax relief direct with HMRC. This is the reverse of salary sacrifice and both employees and employers could lose out as regards otherwise available tax and NIC reliefs and/or otherwise there would be more work for HMRC. 4.7 Q2: Are you aware of any types of arrangement that seek to replace taxable pay with payments of non-taxable expenses which the Government should focus on in particular when tackling this issue? Are you aware of any types of these arrangements where tackling them might disturb business practices that are not tax or NICs motivated? 4.8 We can understand that the Government would want to protect an exemption regime from abuse and would support the Government in doing so. At present, HMRC can oversee employer practice through the granting of dispensations by asking questions etc. This monitoring of employers would be lost with an exemption regime and therefore it would be right to ensure that the new regime is not abused. However, we do not believe that the introduction of a Targeted Anti-Abuse Rule (TAAR) preventing qualifying expenses being used in conjunction with salary sacrifice is the right approach. 4.9 We understand that when the travel and subsistence rules were changed from April 1998 some employers agreed arrangements with HMRC under which the employee would receive, free of tax, reimbursements of travel and subsistence expenses as a substitute for taxable pay in circumstances where the employer did not reimburse qualifying tax deductible expenses We gather that the agreements with HMRC were aimed at removing the need for the employee to make a claim for tax relief to them, eg on Form P87, after the end of the tax year and that there was no tax avoidance motive to them. Rather this was a means of ensuring that employees obtained the tax and NICs relief that was due in their particular circumstances. It also allowed the employer to get corresponding relief for employer NIC. It seems to us that such arrangements should not be disturbed as, for a small amount of additional administration on the part of the employer, they remove burdens on employees (and HMRC) Furthermore, if an employer becomes aware that all-inclusive salary or a taxable travel allowance can be replaced by a tax-free reimbursement for actual travel expenses and a reduced salary/allowance, we do not consider it follows that this is not in the spirit of the rules (paragraph 4.17 of the consultation document). The employer is simply following what other employers are doing and providing tax relief at source for qualifying expenses incurred by employees and to which they are entitled under the legislation. P/tech/subsfinal/ET/2014 4

5 4.12 In particular, we do not think that employers and employees should be prevented from benefiting from reliefs or exemptions that have been enacted precisely to prevent them from paying too much tax and NICs in particular circumstances. 5 Scale rates 5.1 Scale rates (benchmarked or custom) can reduce time spent by employees and employers on dealing with subsistence claims. Although evidence must be retained that the expense has been incurred there is no requirement to evidence the actual cost. 5.2 Q3: In what circumstances would an employer currently apply for a custom scale rate? Other than the expenses covered by the benchmark scale rates, which expenses do employers commonly request a scale rate for? 5.3 Generally, an employer will seek a customised scale rate where they think the actual costs involved will exceed HMRC s benchmark scale rates but not by enough to warrant a reimbursement of actual cost, or where the numbers involved would result in an excessive amount of time being spent verifying and reimbursing actual costs. 5.4 Q4: Are there any examples of particular industries or types of employer who would be affected if custom scale rates could not be used with the proposed exemption? What would the impact be on those employers? 5.5 We do not have direct evidence on this question but understand anecdotally that there may be a number of employers in the construction, logistics and transport sectors who may have agreed customised rates. We imagine that HMRC would be able to ascertain those with whom it has agreed customised rates. 5.6 Q5: Would employers be disadvantaged if a process to apply for custom scale rates were not retained? If such a process were retained, would it be seen as additional complexity by those employers who do not need it? 5.7 Further to 5.5 above, we think that some employers may be disadvantaged if it were not possible to agree a custom scale rate. We suggest that a set procedure be retained for agreeing custom scale rates with HMRC. 5.8 If a custom scale rate process was retained it is unlikely to increase complexity for employers who do not need it, as they can simply ignore it. 5.9 Q6: Would employers welcome the ability to self-certify the sampling exercise undertaken to support a custom scale rate? If so, would a sampling process set out in guidance or regulations provide sufficient certainty for employers that wish to use a custom scale rate? 5.10 We think that HMRC would need to set out a model protocol they would expect employers to follow if a self-certification regime for custom scale rates was to be introduced. The model would not have to be included in the legislation but employers would need to be able to rely on it. Employers would, of course, still need to be prepared to justify their approach even if they followed the model. Equally, employers should be able to request help or confirmation for HMRC if required Q7: What are the reasons for one person companies and very small, close companies paying scale rates to directors in respect of expenses? Would such employers be P/tech/subsfinal/ET/2014 5

6 disadvantaged if they were not permitted to pay scale rates to their directors under the proposed exemption? If so in what way? 5.12 Paragraph 5.21 of the consultation document suggests that it is difficult independently to check that a director of a one person or small, close company is actually incurring an allowable expense. However, whilst we understand the point we also think that most such companies will inevitably retain an accountant or similar to help them on administrative matters and can therefore provide an independent check in relation to expenses. For example, this might be in relation to preparing the P11D or company tax return etc. And, as HMRC s Employment Income Manual notes at EIM30059 There is no reason why a dispensation including actual expenses, bespoke or benchmark scale rates should not be approved where the expenditure can be independently vouched The use of scale rates in small or one person companies is generally a matter of administrative convenience: in a similar way as for employees of larger employers it may be simpler to evidence that an expense has been incurred than to keep track of the actual amounts. Also, in small, close companies, the use of scale rates avoids disagreements with other directors over the amount of a claim We think that some employers would be disadvantaged if one person and small, close companies were not permitted to use scale rates for their directors. As noted above, often it is much more convenient to use a scale rate. Furthermore, we would ask that if the company and director is trusted by its clients, suppliers and bank, why should it not also be trusted by HMRC? 6 Implementation and transitional arrangements 6.1 Q8: Would employers welcome being able to continue to rely on their existing dispensation for a transitional period, or would this be a source of unnecessary complexity? If so, how long would the transitional period need to be to be useful? 6.2 At present, employers will have a variety of dispensations and agreements with HMRC in relation to reimbursed expenses, scale rates, work-related benefits, working rule agreements, flat rate uniform expenses, etc. These are geared at their either being no P11D reporting or no PAYE to be deducted. 6.3 If everything that is presently allowed as a deduction is simply to be included in the new exemption for paid or reimbursed expenses, there would be no change for the employer, except that they would no longer need the dispensation (see paragraph 3.7 of the consultative document). Consequently, it may be that no transitional period as such would be required. 6.4 If changes are in fact proposed then HMRC needs to be clear with employers and representative bodies what these changes are and discuss in advance what the changes will mean for employers. 6.5 We can see however that it may help some employers if HMRC provided a grace period of, say, one year during which employers could continue place some reliance on a dispensation or other arrangement previously agreed with HMRC. That said, if as noted above, the move to exemption heralds no substantive changes relative to the current dispensation regime then could not all dispensations etc simply be grandfathered and simply serve as evidence to support the corresponding exemptions available under the new regime? P/tech/subsfinal/ET/2014 6

7 6.6 In terms of overall timescale if legislation was to be introduced in Finance Act 2015 then we would suggest that it takes effect from the start of the 2016/17 tax year, ie from 6 April Q9: Independently of whether existing dispensations may continue to be used, would employers welcome being able to continue to use any custom scale rates they had agreed as part of their dispensation for a transitional period? If so, how long would the transitional period need to be to be useful? 6.8 We would again suggest a grace period of, say, a year in which to either prepare for the new regime or during which existing agreements can continue to be used. At the very least there would be practical difficulties if existing custom scale rates suddenly ceased to be valid. We have commented on the overall timescale for change at 6.6 above. 6.9 Q10: Are there any specific situations or circumstances in which employers would not feel confident paying expenses because of a lack of clarity in HMRC s guidance? Which changes could HMRC make to its guidance what would have the biggest impact on employers confidence in paying these expenses? 6.10 In an exemption/disregard regime it will be essential for HMRC to provide guidance as to what payments and reimbursements are exempt/can be disregarded for tax/nics purposes. Without clear HMRC guidance employers will be left on their own (or relying on their advisers) to interpret the rules. HMRC are clearly very familiar with the rules and therefore they would seem to be best placed to provide clear guidance that will help employers to interpret the rules correctly. We suspect that the pinch points will be around circumstances such as travel & subsistence, board and lodging, club memberships, uniforms etc which have always been difficult areas in deciding deductibility Of course, the downside to guidance is that employers have to read it, understand it and rely on their understanding of it. There is no HMRC safety net to confirm that they have understood it correctly. And one only has to look at Booklet 490: Employee Travel ( 7/490.pdf) to see how complicated matters can get. Hence, left on their own our concern is that employers could very quickly become uncertain whether or not a particular expense was a qualifying expense. As we have said at a number of points above, we think that the ability to speak with HMRC to clarify the position, for those that wish to do so, is important We would expect that HMRC s Employers Helpline will have an increasingly important part to play in helping employers understand the rules and that does means that HMRC will need to ensure that the Helpline is adequately resourced to meet the demand Q11: Would employers and other affected parties welcome the exemption not coming into force for a period of time after the legislation is in place? If so, how long would employers and other affected groups need to prepare for the new exemption coming into force? 6.14 Once the new regime has been settled on, we agree that it may help employers if there was a period for everyone to become familiar with the new regime before it applies. As we have suggested above we suggest legislating for it in Finance Act 2015 but deferring implementation to 6 April Time will be needed for HMRC to provide guidance, for employers to prepare their systems and software developers to P/tech/subsfinal/ET/2014 7

8 update their software. And, of course, the new regime should start from the beginning of a tax year If there was a delay in implementing the new regime then we think the statutory need for existing dispensations would then naturally fall away at the start date in a controlled fashion. Although, as we have said, we think that HMRC should give consideration to grandfathering existing dispensations so that their substance remains valid to support exemptions under the new regime. At any rate this aspect should be covered in guidance Q12: How should dispensation applications that are made in the intervening period be handled? 6.17 We think that HMRC should continue to process P11D dispensation applications as they do now. But applicants should be advised that there is a new exemption regime which it is anticipated will be introduced from 6 April 2016 (?) and that the dispensation will cease to apply t on the introduction of the regime. In particular, because a dispensation will no longer be required to justify not reporting what will then be exempt expenses and benefits on P11Ds. 7 The Chartered Institute of Taxation 7.1 The Chartered Institute of Taxation (CIOT) is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it taxpayers, their advisers and the authorities. The CIOT s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer. The CIOT draws on our members experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work. The CIOT s 17,000 members have the practising title of Chartered Tax Adviser and the designatory letters CTA, to represent the leading tax qualification. The Chartered Institute of Taxation 2 September 2014 P/tech/subsfinal/ET/2014 8