Work in progress
The Frost / Black review has called for tax breaks for return to work services - the onus is now on the industry to show it can create a product that will work. Anna Scott reports
Employers are currently disincentivised to deal with sickness absence for basic rate taxpayers, and so the Treasury should offer tax relief on medical treatments and vocational rehabilitation aimed at this group of employees.
This was one of the headline recommendations of the Frost/Black Health and Work - Independent Review of Sickness Absence. The proposal was broadly welcomed by delegates at the Corporate Adviser and AXA PPP Healthcare event, Extending the scope of health, work and wellbeing - an industry response to the Frost/Black sickness absence review in London last month.
Speaking at the event, David Frost CBE, the report’s co-author and former director general of the British Chambers of Commerce, said he wanted the tax system to encourage practices that prioritise early interventions that would help lower earners back to work, rather than penalise them or theoir employers. But while advisers and providers supported the direction of the proposals, some suggested that relief should be offered at the basic rate of tax, not just for basic rate taxpayers, with a straw poll at the event finding 60 per cent of advisers wanting the insurance industry to push for higher rate taxpayers to get tax relief on return to work products.
The report recommends the removal of national insurance contributions paid by employers on the medical insurance they provide for basic rate taxpayers, and the tax paid by that taxpayer on the benefit-in-kind.
As professionals working in the sector are only too aware, NHS waiting lists for certain kinds of treatment hinder a proportion of employees off sick coming back to work.
“If there could have been an early intervention then essentially we could stop someone dropping out of work or get them back that much faster,” Frost said. “But it’s not currently particularly attractive because of tax reasons, so could we somehow incentivise specifically for basic rate taxpayers some form of intervention there?”
Steve Herbert, head of benefits strategy at Jelf Group agreed that the main block for employers at present in offering treatments for employees off sick is that there is “no money on the table from the government in tax breaks to actually put these things in place.
“A medical insurance scheme is a valid business expense so it’s offset in the same way any other business expense would be,” he said. “But this needs something extra to kick-start it. I think the sort of tax breaks we have with pensions, where the employer finds it cheaper to put £1 into a pension pot than into a salary because they are avoiding NICs would work really well for medical protection.”
Axa PPP Healthcare, which has for some time offered a vocational rehabilitation tool for employers to pay for ad hoc medical treatment for employees who are off long term sick, sees reluctance among employers to take it up under current tax structures. “It requires a hardnosed business case calculation by the employer based on how long they think that employee is going to be off work, what sort of sick pay arrangement they are receiving and the likelihood of success of treatment facilitating an early return to work,” said David Prosser, group head of health at Axa PPP. “We’ve somehow as an industry got to get the message out there to employers that there is a business case for doing this.”
“I think we might want to limit the relief to basic rate but there are an awful lot of people these days that are in the higher tax rate,” Prosser added. “The threshold, relatively, has shrunk.”
Furthermore, intermediaries pointed out that when they are talking to senior level staff in HR or finance about new medical products, if the tax break does not apply to them personally they may be less interested. “It might be crass to say it, but greed sells,” said Herbert. “If the employer is not going to make a deal personally, the intermediary may see it as more of a challenge to make the case for everybody else.”
“I can see the logic of basic rate relief, but I can’t see why higher rate taxpayers shouldn’t get anything back and the lower paid should,” he added.
Colin Bullen, head of health consulting at Aon Hewitt, added: “It strikes me that you’d want to give that kind of incentive for plans that would offer cover to all employees without exception, by trying to get the rehabilitation process to work effectively so there are no obstacles to an individual accessing care at the right time.”
But the report argues that higher rate taxpayers often already have some form of medical cover provided by the employer, so they don’t need incentivising in the same way. “Bear in mind who is dropping out of the labour market due to illness,” said Frost. “It’s male workers, in their fifties in semi-skilled and unskilled jobs. Those are the ones we are trying to keep in the market. There are products already there for higher rate taxpayers.”
Frost also indicated that limiting tax advantages to basic rate taxpayers would silence critics who perceived the move as giving tax breaks for private healthcare to rich people, something that would be difficult for a Tory-led government to present. But advisers also pointed out that limiting breaks to basic rate taxpayers would create complexities for advisers, providers and HM Revenue & Customs, as all parties would need data on the tax details of individuals within a group scheme. This in turn would generate cost and could hold back take-up. Pay increases would also leave some people falling out of eligibility for the breaks, creating communication challenges too.
The report recommended products that encourage early intervention and vocational rehabilitation, but it excluded group income protection. “We thought it was not going to cover the group that we were particularly interested in because employers are not particularly interested in insuring that group,” said Frost. “Secondly it creates an additional cost for business.”
However, 100 per cent of delegates felt tax breaks for group income protection should have been recommended. Delegates pointed out that the report included some misconceptions with regard to group income protection, such as the assertion that a GIP plan can increase an employer’s wage bill by between 1.5 and 5 per cent.
Katharine Moxham, spokesperson for Group Risk Development, said: “The level of price we feel is overstated at 5 per cent. We typically quote a figure of 1 per cent without it being gold-plated. We can get the figure down to 0.25 per cent.”
Herbert added: “The IP part of the report I must admit I felt was slightly outdated. The market has moved on in the last few years and is getting a wider spread at a lower cost.”
Providers felt that the role of GIP of picking up the consequences of severe ill health for those who can’t be rehabilitated back into the workforce within a six-month period could be central to supporting the role of the IAS. Those with GIP “won’t claim state benefits to the extent that they would otherwise and they are taking some of the heavy lifting away from the IAS, so it strikes me that there would possibly be grounds for incentives here,” said Bullen.
Those incentives would be better off being targeted at the employer, however, with the suggestion that there may be a better case for incentivising the employer only suggested some advisers. “I don’t see many employees actively turn away medical insurance plans because of the P11D benefit,” said Herbert. “They are normally happy to take it regardless.”
Having a tax break for employers on both medical insurance and income protection could encourage employers to offer both kinds of benefit. Removing the incentive for basic rate taxpayers and giving it to employers providing income protection would not vastly change the estimated cost to government of £150m a year in tax relief, and take a step significantly towards the predicted savings to business of £250m a year, it was suggested.
However this is not a cure-all solution, because employees who require expensive one-off treatment for illness will not want to be stung with an expensive tax bill. “If an employee is not able to be an employee at that point, and wants to come back to work, and the employer wants this person back, there is an argument to intervene now and get the treatment done,” said Mike Tyler, managing director at Buck Consultants. “But there might be a huge tax burden for the individual.”
So how should a return to work product that qualifies for such tax relief look? Frost suggests that ad hoc, one-off treatment that the NHS is often not good at delivering, such as treating musculoskeletal problems, could be considered eligible for tax relief.
Advisers suggested that both an insured solution and more ad hoc early intervention vocational rehabilitation-type products could work, possibly where the employer’s money is ring-fenced as theirs until it is spent. “Maybe a new product that is tightly defined around certain conditions, such as musculoskeletal disorders or psychological ill health, with a six-week rule that says if you can get treatment on the NHS in under six weeks the insurance doesn’t cover it, could be developed,’ said Prosser.
Either way, if the focus is on the product being an employer benefit, rather than an employee benefit, the employer can treat the intervention as a tax-deductible business expense meaning neither company nor individual gets hit with a tax burden.
Axa PPP’s health rehabilitation product is marketed as an employer business service, said Prosser. “It’s not an employee benefit, it’s an organisational performance product,” he added.
Stephen Hackett, head of employee benefits at Bluefin, suggested that any product needs to encompass a range of return to work solutions, such as EAPs and health screenings, for example. “The whole subject matter needs widening and expanding and if we can give employers more tools we can make it a little bit more granular and I think they will buy into it,” he said. “The subject matter is just too narrow at the moment.”
This also applies to how employers measure and record absence, said delegates. “Too often we fall into the trap of measuring what the cost of the person being absent is and turning that straight into numbers of days absent times their pay rates,” Tyler said. “For most businesses the destructive effect of those absent in the short and long term is significantly greater.”
Some employers’ approach to measuring absence is to “make a leap of faith into the wellbeing space”, to stop measuring absence and instead focus on wellbeing strategies to improve general health and wellbeing thereby minimising absence, Hackett suggested.
But before any of these recommendations are taken forward, the industry needs to consider where any tax breaks could potentially be abused. While the system would need to be in place before any wrinkles are noticed, many providers considered that benefits that come under the wellbeing umbrella - such as gym membership - could be used by employers to get tax relief.
“This is not all about my employees being healthier and therefore I am going to have less days off through absenteeism,” Frost said.
So far, the review has had a positive response from government, Frost reported, with the only real criticism coming from Labour’s shadow health front bench, quoted in the press suggesting tax relief on private healthcare could undermine the NHS.
But as Frost concluded: “This is not about undermining the NHS. We’ve got a service that’s under huge, ever-growing strain. If someone came to me and said they could take some of the weight off I would jump at it.”