The system for reporting and taxing of employee benefits looks set for a comprehensive shake-up after an interim report from the Office of Tax Simplification put forward almost 50 ideas for reform.
The report, published today, suggests “payrolling” benefits so tax is paid as benefits are awarded rather than through a tax return at the end of the year. It is also examines the idea of either abolishing or substantially increasing the £8,500 “higher paid” earnings threshold above which employees other than directors are taxed on benefits, though it does not make a firm proposal.
The report also suggests smoothing the difference between tax and national insurance rules on benefits, changes to HM Revenue & Customs forms and the publishing of a list of items that automatically qualify for a “dispensation” and so are not taxed.
It also makes 43 suggestions for quick simplifications including aligning tax and national insurance treatment of mileage rates over 45p, changes to the Cycle to Work scheme.
OTS tax director John Whiting says: “It is clear the current system for reporting expenses and benefits is simply not working well for employers or employees and also, in many cases, HMRC.
“Time and again, through our workshops and in submissions, people have told us the rules around travel and subsistence, accommodation or HMRC admin, are causing them problems and costing them time.”
The current “higher paid” threshold of £8,500 was set in 1979 and according to the report was based on the “level at which a married man started paying tax at the higher rates”. It says if the threshold had increased with inflation it would have been at £39,139 in May 2013, but warns that raising it to that level would result in “considerable” drop in revenue, though it has not tried to estimate the cost.
While collecting evidence for its review, the OTS was told many firms simply ignore the threshold.
It says: ”It is tempting to include the abolition of the £8,500 limit on our list of ‘quick wins’ but we think more work needs to be done to assess the impact of abolition. It does seem, though, that life has moved on since the last time that abolition was considered.”
The OTS and Treasury will agree the areas the review will continue to focus on for its final report over the summer. Final recommendations will be published before the Budget in March.
The OTS was set up by the Government in 2010 to look at ways of streamlining the UK’s tax system.