REVIEW OF EMPLOYEE BENEFITS AND EXPENSES: DRAFT LEGISLATION Response by the Association of Taxation Technicians 1 Introduction 1.1 The Association of Taxation Technicians (ATT) is pleased to have the opportunity to respond to Review of employee benefits and expenses draft legislation published by HMRC on 8 July 2015. 1.2 We are being asked to review and provide comments on the following four sets of draft regulations:- (i) (ii) (iii) (iv) The Income Tax (Pay As You Earn) (Amendment No *) Regulations 2016 concerning the abolition of the 8,500 threshold for benefits-in-kind and therefore the removal of a requirement to file a form P9D as forms P11D will be required instead. The Income Tax (Pay As You Earn) (Amendment No *) Regulations 2016 setting out the framework to allow authorised employers to payroll many benefits-in- kind and removing the need to file forms P11D where benefits-in-kind are payrolled. The Income Tax (Approved Expenses) Regulations 2016 concerning the approved rates that an employer may use when paying meal allowances. The Income Tax (Pay As You Earn) (Amendment No *) Regulations 2016 concerning the removal of the requirement for employers to report expenses paid to employees (whether deductible or not) on forms P11D. 1.3 We provide our comments on each set of the regulations in section 2. Registered in England and Wales Registered Office: 1st Floor, Artillery House, 11-19 Artillery Row, London SW1P 1RT A company limited by guarantee: Number 2418331 Registered as a charity: Number 803480 VAT Registration: Number 497539090
2 Our comments 2.1 The regulations removing the requirement for employers to make end-of-year returns on form P9D 2.1.1 As the main purpose of these regulations is simply to remove all references to P9D and excluded employment, both of which will become redundant terms from 6 April 2016, we have no comments to make on the regulations themselves. 2.1.2 However, we would like to make some comments regarding point 10 of the Explanatory Memorandum that accompanies these regulations. Point 10 concerns the impact of the removal of the 8,500 threshold and suggests that the reduction in administration for employers will more than outweigh the cost of having to now submit forms P11D for the small number of benefits in kind received by employers [sic] whose earnings are below the threshold. We are not sure how HMRC has come to this conclusion that the number affected will be small. Have figures been collected to support this statement and if so, would it be possible to see them? 2.1.3 When we responded to the initial consultation on this issue, we commented that it was not easy to identify beforehand all cases that would be affected by the abolition of the 8,500 threshold as these are cases that currently go unreported because there is no requirement to report. It is possible to look at the number of forms P9D being submitted currently and consider that this is a low figure. However, this does not cross correlate to there being only the same low number of cases affected by this measure as the form P9D only requires the reporting of a few select benefits-in-kind. 2.1.4 If HMRC has managed to gather figures on who will be affected wider than those who previously received a form P9D then we would be interested to review such statistics. However, we still consider that the situation needs to be kept under review. HMRC has identified two clear cases where an exemption from this measure is required and we would ask that HMRC continues to review whether there any other cases that may come to light where unnecessary hardship is occurring due to the removal of the threshold and consider whether a similar exemption is required. 2.2 The regulations allowing authorised employers to payroll many benefits-in-kind and removing the requirement to complete a P11D for those benefits 2.2.1 Section 61H Modification of the general rule: continuing benefit where employment has ceased We believe there are some issues with the legislation under this section of the regulations and further thought may be needed to address them. (i) If an employee does continue to receive a benefit-in-kind once they have ceased to be employed then our understanding is that, in most cases, it ceases to be a benefit-inkind as there is no longer an employment relationship. Therefore, the remaining value of the benefit does not need to be taxed at all in accordance with guidance provided at EIM20040. However, if it does still qualify as a benefit-in-kind after employment has ceased (such as the waiving of a loan) then when looking at step 4 determining the P/ATTTSG/Submissions/2015 2
number of remaining main relevant payments to be made in the employment the most likely figure here would be just one remaining payment, being the final one. We would expect that the 50% rule would apply here in many instances if the employer attempted to collect the remaining value of the benefit for the rest of the tax year in just one pay period. (ii) Where an employment ceases mid-year and the benefit also ceases at the same time there would be a need to recalculate the cost of the benefit to the employer to reflect that the benefit was only made available for part of the tax year. However, as the revised benefit will be recalculated based on the number of pay periods the benefit was actually made available for and the initial amount of the monthly taxable benefit was also calculated by considering the number of pay periods in the tax year then the answer to step 3 should always be Nil. We cannot think of a benefit where this would not be the case. 2.2.2 Section 61I Modification of the general rule: in-year adjustments: change to the benefit during the year. It was discussed during the roundtable meeting held on 14 August 2015 that section 61I does not account for changes made to benefits mid-month. We would suggest that to try to factor in changes mid-month would add too much complexity to the system and that it is adequate to consider for how many complete pay periods a benefit will be made available when recalculating the taxable amount to include in an employee s monthly pay. 2.2.3 Section 61J Modification of the general rule: in-year adjustments: other There appears to be an error at step 4. We think that it should read divide the revised value of the cash equivalent to be brought into account by the number obtained from step 3. It currently says divide by the number obtained at step 2 but this is the revised vale of the cash equivalent so you would be dividing it by itself based on the current wording of step 4. We would also comment that the way the steps are set out in this section are more long- winded than they need to be. It would be much simpler to just say:- Step 1: Determine the cash equivalent of the revised benefit. Step 2: Work out how much of the original cash equivalent has already been taxed to date. Step 3: Deduct the answer to Step 2 from the answer to Step 1 and divide it by the number of remaining pay periods to arrive at the new monthly payroll amount. Step 4: if the amount at Step 3 is positive add it to the pay / if it is negative deduct it from the pay. 2.2.4 Section 61K Modification of the general rule: insufficient income We foresee problems arising when an employee has insufficient income in some months so that the monthly deduction for benefits is nil, but then the income increases again and the monthly deduction is recalculated over a much shorter time period. It is likely that in many cases the rule which prevents more than 50% of an employee s salary to be taken in tax will apply and therefore P/ATTTSG/Submissions/2015 3
the whole of the benefit cannot be payrolled in that year. We would suggest that in such cases it might be wiser to remove an employee from the payrolling of benefits system and complete a form P11D for that tax year, even where the employer knows that the pay will increase again later in the tax year. Where a number of benefits are being payrolled, the legislation in this section is not clear whether in the case of insufficient income to collect tax on all of them, tax on some of the benefits could be collected through the payroll (up to the amount that would not breach the 50% rule) or whether it is an all or nothing situation. Clarity is needed on this. 2.2.5 Sections 61L & 61M Modification of the general rule: making good & failure to make good fuel benefit We do not understand why an employee is allowed, under section 61M, 30 days after the end of the tax year to make good a fuel benefit but must make good any other benefit within the tax year. We can see no reason why the deadlines are different. We believe that both sections of the regulations should have the same deadline to make good the benefit and that it would be fairest for this deadline to be the same as the submission deadline for the form P11D(b) (which will still be required by even those employers operating voluntary payrolling). There is a precedent for this in that HMRC did confirm recently that it would accept payment of private fuel made up to the P11D(b) submission deadline. There are compelling practical reasons supporting this. Quite often employees rely on the employer to keep track of what needs to be paid back in order to make good on the benefit provided. It is practically easiest for employers to look at the position after the end of the tax year and as part of preparation of the annual P11D(b) form. Removing this easement would place a significant extra administrative burden on employers. 2.2.6 Additional comments (i) (ii) It appears to us that some sections of the regulations could lead to some complex situations, especially for an employer whose workforce has fluctuating pay or irregular pay periods (for example, farmers) such that operating a payrolling of benefits system may create more practical difficulties for that employer than continuing to complete forms P11D. However, it could put professional advisers and payroll bureaus in an awkward position if they can foresee that payrolling might not be suitable for their client but the client is adamant they want to do it. It would be much easier if HMRC could highlight in guidance that payrolling of benefits might provide some employers with greater challenges than others and offer them a check-list of things to consider when deciding if payrolling of benefits is suitable for them. Considering the comments made by other attendees at the roundtable meeting held on 14 August 2015, it would appear that there will be some initial problems in having third party payroll software that is ready to payroll benefits (according to the regulations) available by 6 April 2016. It will therefore be important for anyone who does decide to operate voluntary payrolling (or indeed already does this and continues to do so) that the compliance approach by HMRC is flexible as employers P/ATTTSG/Submissions/2015 4
may not be able to fully adhere to the regulations until software providers have had time to develop the correct programmes. We were pleased to hear during the roundtable meeting that HMRC will be removing penalties for getting this wrong for the first two years. We agree that this is a sensible move. We think many employers will be reticent to be the first to sign-up to payroll benefits and will want to wait until flaws in the system are ironed-out. If employers can be assured that no penalties will be incurred for the first two years then this should encourage them to come on board early. We think it will be important for HMRC to publicise as early as possible the decision to remove penalties so that this can act as an inducement. Presumably, employers who sign-up to payrolling benefits after the first two years would not be granted a similar easement on penalties yet would still go through a learning curve stage initially. It would seem preferable to go through this learning curve with the protection of no penalties but employers need to know about this in order for it to influence their decision on whether and when to sign-up to voluntary payrolling. 2.3 The regulations setting out the approved rates that employers can use to pay meal allowances under the new exemption for qualifying business expenses. 2.3.1 We suggest that 5 is a very low amount to provide a simple lunch consisting of a sandwich, a drink and maybe a piece of fruit. We believe that an employee would struggle to buy these items for under 5 from a café or coffee shop. Indeed, many employees when travelling are restricted to picking up what they can from motorway services where prices are usually higher. We think this allowance for 5 hours or more of travel ought to be increased to something in the region of 7-8 and the 10 allowance for 10 hours or more of travel increased similarly. 2.3.2 We do not see why it is a requirement of the 25 allowance that travel should be ongoing at 8pm. This might make sense for workers engaged on normal shift patterns. However, an employee could be required to start travelling at 3am and only finish travelling at 6pm. Their traveling is not ongoing at 8pm but they have still travelled for 15 hours. We see no reason why they shouldn t be entitled to the 25 allowance in the same way that an employee who starts travelling at 7am and finishes travelling at 10pm would be. We believe the 8pm rule can and will lead to some strange results as identified in 2.3.3 and 2.3.4 below. 2.3.3 We would like to clarify the position regarding the additional meal allowance of 10 as mentioned at paragraph 11(3). This seems to suggest that if an employee has travelled under 15 hours so has either received 5 already for 5 hours or more of travel or 10 for anywhere between 10 and 14 hours of travel and is still travelling at 8pm, an additional meal allowance of 10 would be available. So, an employee who may be travelling in the evening for an early morning meeting the next day might set out at 3pm and arrive at their destination at 8.30pm, so 5 ½ hours of travelling entitling them to a 5 allowance. As travelling was ongoing at 8pm and an allowance under 11(2)(a) has already been paid, an extra 10 is also available. This would make sense in the P/ATTTSG/Submissions/2015 5
scenario where someone is travelling to a hotel for an overnight stay so they can attend an early morning conference or meeting and so needs an extra allowance to get an evening meal. 2.3.4 However, if the same employee is travelling home after the meeting or conference and again sets out at 3pm and arrives home at 8.30pm it does not seem to make sense that the employee is entitled to two meal allowances totalling 15 when they are only travelling for 5 ½ hours and are at home that evening and could get themselves an evening meal. In addition, this does not seem to compare fairly with the example from 2.3.2 above of an employee travelling for 15 hours but not travelling at 8pm who, according to the current drafting of the regulations, would only be entitled to a 10 allowance for food in those 15 hours but someone travelling for 5 ½ hours would be entitled to more just because they were travelling at 8pm. 2.4 The regulations removing the requirement for employers to report expenses paid to employees (whether deductible or not) on forms P11D 2.4.1 As regards the regulations, we have no comments to make and welcome the removal of the need to report expenses on forms P11D. 2.4.2 However, we do wish to make some comments regarding the application process to apply bespoke scale rates, in particular the position regarding existing bespoke scale rates. Prior to the roundtable meeting held on 14 August 2015, the ATT were not aware that employers who are currently using agreed bespoke scale rates, with time to run on these agreements until the 5 year anniversary, will be required to apply to HMRC before 6 April 2016 for permission to continue to apply the same, already agreed, scale rates. It was evident from the reaction of other attendees that this was also news to them so we expect it will be news to the many affected employers. 2.4.3 This development is very concerning as the time left between now and 6 April 2016 is rapidly reducing. Based on HMRC s current turnaround rates of dealing with post, it is very likely that to have an agreement in place by 6 April 2016 an employer would need to be submitting their application around about now. However, we are yet to hear from HMRC on (i) the final details regarding the application procedure and (ii) when the relevant guidance will be published. Delays in getting these two important details out to employers is already denying them time in which to apply. 2.4.4 However, most concerning is the lack of publicity surrounding the need for employers to re-apply and this is something HMRC needs to address immediately. Given this lack of publicity and lack of available information and time in which to re-apply, we believe it is highly likely that many employers will remain unaware of their obligations here and will continue to apply a bespoke scale rate after 6 April 2016 without further agreement from HMRC. Where this does occur, HMRC needs to be mindful of the hand they have had in creating this situation and apply a light-touch approach when dealing with related compliance issues. P/ATTTSG/Submissions/2015 6
3 Summary 3.1 We have provided our comments on the draft regulations issued on 8 July 2015. We hope these comments are of use to you in finalising the legislation. 3.2 Contact details: Should you wish to discuss any aspect of these comments, please contact our relevant Technical Officer, Alison Ward, on 07762 947 910 or at award@att.org.uk. Yours sincerely Paul Hill Chairman, ATT Technical Steering Group 4 Note 4.1 The Association is a charity and the leading professional body for those providing UK tax compliance services. Our primary charitable objective is to promote education and the study of tax administration and practice. One of our key aims is to provide an appropriate qualification for individuals who undertake tax compliance work. Drawing on our members' practical experience and knowledge, we contribute to consultations on the development of the UK tax system and seek to ensure that, for the general public, it is workable and as fair as possible. Our members are qualified by examination and practical experience. They commit to the highest standards of professional conduct and ensure that their tax knowledge is constantly kept up to date. Members may be found in private practice, commerce and industry, government and academia. The Association has over 7,700 members and Fellows together with over 5,600 students. Members and Fellows use the practising title of 'Taxation Technician' or Taxation Technician (Fellow) and the designatory letters 'ATT' and 'ATT (Fellow)' respectively. P/ATTTSG/Submissions/2015 7