UK benefits: Accommodation and termination payments

UK benefits: Accommodation and termination payments
30 Sep 2014

At the end of July 2014, the UK's Office of Tax Simplification (OTS) published its last report on benefits and expenses having been asked by David Gauke the exchequer secretary to devote their considerable expertise to trying to reduce the complexities of this aspect of payroll compliance.

The July report tackled the thorny subjects of living accommodation and termination payments which they had also been urged to focus on by employers and tax professionals. In this article we will outline the OTS’ proposals and the government’s likely next steps.

Living accommodation

For those of us firmly rooted in the world of mortgages or rent the thought of having your living accommodation paid for by your employer no doubt seems attractive and we are probably of the opinion that such a perk should be easy to value and must be taxable. Sadly the rules as they stand mean that neither statement is true.

Valuation can require using data going back to 1973 and there are some occupations where ‘living in’ is necessary and should not be taxable and others where this requirement probably no longer holds good but an exemption remains. So whilst there is general acceptance that the current rules don’t work in the 21st century and lead to unfair winners and losers as well as too much complexity, there is no consensus as to a solution.

Myth

The first myth that the OTS claim to debunk is that living accommodation is a perk only enjoyed by senior executives given the average value of the reported benefit is only £5,000. My view is that this may well be because the reported values are low as the complex and ancient rules mean:

• That they may not have a 21st century value
• Some of the higher value benefits may well not be reported as the recipients are relying on an exemption agreed long ago (many exemptions are grandfathered back to the exemptions that existed pre-1977 when the current rules were introduced) that has not been revisited by HMRC as to its appropriateness.

This grandfathering can mean for example that a university vice chancellor, or whoever is in that post in 2014, has tax-free on-site accommodation to use if he so chooses as it was tax-free in 1977. But a full time warden in a sheltered housing setting has had to start paying tax on this ‘benefit’ even though there appears a much stronger case that their being on site is both ‘customary’ and ‘necessary’.

Definitions

The first problem is actually in defining living accommodation. Is it bed and breakfast? Is it staying in a hotel for a week whilst on a project? And then where the distinction between ‘perk’ and ‘necessity’ should lie. To address this, the OTS believes the taxable benefit test should take as its starting point:

• Whether the employee is required to live in the accommodation to enable him/ her to protect buildings, people or assets eg the sheltered housing warden
• Whether the employee is regularly required to work outside normal working hours eg the night duty manager at a hotel
• Whether he/ she is required to live in the accommodation as a result of regulatory requirements eg a house master in a boarding school.

They suggest that all those in receipt of accommodation should be subject to these new tests and all grandfathered arrangements be null and void. In the short term they feel that HMRC could assist in delivering fairness by reviewing their manuals to focus on job roles and duties that necessitate accommodation, rather than job titles.

Additionally the provision of ancillary services other than council tax, water and sewage should be tax-exempt if the benefit of the accommodation is tax exempt.

Calculations

Instead of the six steps for calculating the taxable benefit that depends on whether it is rented or brought, they suggest the benefit should simply be assessed on the basis of the open market rental value. To prevent annual reassessment they suggest that it is done fiveyearly or is indexed by inflation year on year.

Termination payments

We can all identify the first myth that perpetuates: ‘We’re all allowed to receive £30,000 tax-free when it is not our decision to leave a job’. If we are honest about it, why would any government be that generous?

But the myth persists and leads employers and HMRC to engage in trying to make circumstances fit the legislation depending on whose side of the fence you’re on. The consequences are usually that those who are well advised will get the exemption and those who aren’t will pay either too much in liabilities or not enough, which may well catch up with them at a later date.

Rather than having to consider every element of a termination package this is where the blurred edges of liability creep in), the OTS believes that if an employee qualifies for a statutory redundancy payment then they should receive an amount of their termination package tax-free, which should potentially be calculated in a similar way to how statutory redundancy is calculated using age and length of service.

Subject to NI?

Perhaps the most eye-catching part of this OTS report is the suggestion that the generous total NICs exemption on qualifying termination payments (as opposed to only £30,000 being tax-free) should be scrapped in the interests of harmonisation and simplicity (they aren’t called the OTS for nothing!).

Instead NICs (both employer and employee should be levied on the excess over whatever is the new termination payment limit). A NICs charge of 12 per cent for the employee and 13.8 per cent for the employer may well go a long way to focus minds on what really is needed to mitigate an employee’s loss when losing their job.

Next steps

Both proposals are quite radical in the impact they will have on taxpayers and on employers. Simplicity could well be achieved but more analysis will be needed of the winners and losers and that includes employers as well as their employees.

The OTS recognises that there are no ‘quick wins’, as they have indentified in other areas of expense and benefits, as there is a requirement for HMRC to amend legislation which will not be able to be delivered before the next election.

It will be for the next administration to take these proposals forward, however everyone would agree that they should be on the top of the in-tray for the minister who picks up the HMRC baton after the election. In the meantime, the pause brought about by an election that is just over six months away will at least give HMRC (and the treasury) time to give serious thought to OTS’ proposals and give us a steer on their response in the autumn statement 2014.

And what about those quick wins?

In their earlier report the OTS charged HMRC to deliver some improvements to expense and benefits administration that didn’t need legislative or policy change but perhaps a tweaking of guidance or a form to be amended.

In the final section of this final report they consider the current state of play:

• Removal expenses: The £8,000 limit is outdated and all removal expenses should be allowable with some provisions to prevent abuse and any non-allowable expenses that the employers wants to settle should be able to be wrapped up in a PSA
• Long service awards: How appropriate are these in today’s workplace and in light of age discrimination
• Entertainment, subsistence and staff canteens: The OTS urges employers to bring forward issues and suggestion to the treasury in response to their Call for Evidence on Remuneration Practices that closes on 9th September
• Booklet 490 on employee travel is due to be updated by May 2015
• Updated guidance on temporary workplaces is due to be published by the end of September 2014.

By Kate Upcraft.

At the end of July 2014, the UK's Office of Tax Simplification (OTS) published its last report on benefits and expenses having been asked by David Gauke the exchequer secretary to devote their considerable expertise to trying to reduce the complexities of this aspect of payroll compliance.

The July report tackled the thorny subjects of living accommodation and termination payments which they had also been urged to focus on by employers and tax professionals. In this article we will outline the OTS’ proposals and the government’s likely next steps.

Living accommodation

For those of us firmly rooted in the world of mortgages or rent the thought of having your living accommodation paid for by your employer no doubt seems attractive and we are probably of the opinion that such a perk should be easy to value and must be taxable. Sadly the rules as they stand mean that neither statement is true.

Valuation can require using data going back to 1973 and there are some occupations where ‘living in’ is necessary and should not be taxable and others where this requirement probably no longer holds good but an exemption remains. So whilst there is general acceptance that the current rules don’t work in the 21st century and lead to unfair winners and losers as well as too much complexity, there is no consensus as to a solution.

Myth

The first myth that the OTS claim to debunk is that living accommodation is a perk only enjoyed by senior executives given the average value of the reported benefit is only £5,000. My view is that this may well be because the reported values are low as the complex and ancient rules mean:

• That they may not have a 21st century value
• Some of the higher value benefits may well not be reported as the recipients are relying on an exemption agreed long ago (many exemptions are grandfathered back to the exemptions that existed pre-1977 when the current rules were introduced) that has not been revisited by HMRC as to its appropriateness.

This grandfathering can mean for example that a university vice chancellor, or whoever is in that post in 2014, has tax-free on-site accommodation to use if he so chooses as it was tax-free in 1977. But a full time warden in a sheltered housing setting has had to start paying tax on this ‘benefit’ even though there appears a much stronger case that their being on site is both ‘customary’ and ‘necessary’.

Definitions

The first problem is actually in defining living accommodation. Is it bed and breakfast? Is it staying in a hotel for a week whilst on a project? And then where the distinction between ‘perk’ and ‘necessity’ should lie. To address this, the OTS believes the taxable benefit test should take as its starting point:

• Whether the employee is required to live in the accommodation to enable him/ her to protect buildings, people or assets eg the sheltered housing warden
• Whether the employee is regularly required to work outside normal working hours eg the night duty manager at a hotel
• Whether he/ she is required to live in the accommodation as a result of regulatory requirements eg a house master in a boarding school.

They suggest that all those in receipt of accommodation should be subject to these new tests and all grandfathered arrangements be null and void. In the short term they feel that HMRC could assist in delivering fairness by reviewing their manuals to focus on job roles and duties that necessitate accommodation, rather than job titles.

Additionally the provision of ancillary services other than council tax, water and sewage should be tax-exempt if the benefit of the accommodation is tax exempt.

Calculations

Instead of the six steps for calculating the taxable benefit that depends on whether it is rented or brought, they suggest the benefit should simply be assessed on the basis of the open market rental value. To prevent annual reassessment they suggest that it is done fiveyearly or is indexed by inflation year on year.

Termination payments

We can all identify the first myth that perpetuates: ‘We’re all allowed to receive £30,000 tax-free when it is not our decision to leave a job’. If we are honest about it, why would any government be that generous?

But the myth persists and leads employers and HMRC to engage in trying to make circumstances fit the legislation depending on whose side of the fence you’re on. The consequences are usually that those who are well advised will get the exemption and those who aren’t will pay either too much in liabilities or not enough, which may well catch up with them at a later date.

Rather than having to consider every element of a termination package this is where the blurred edges of liability creep in), the OTS believes that if an employee qualifies for a statutory redundancy payment then they should receive an amount of their termination package tax-free, which should potentially be calculated in a similar way to how statutory redundancy is calculated using age and length of service.

Subject to NI?

Perhaps the most eye-catching part of this OTS report is the suggestion that the generous total NICs exemption on qualifying termination payments (as opposed to only £30,000 being tax-free) should be scrapped in the interests of harmonisation and simplicity (they aren’t called the OTS for nothing!).

Instead NICs (both employer and employee should be levied on the excess over whatever is the new termination payment limit). A NICs charge of 12 per cent for the employee and 13.8 per cent for the employer may well go a long way to focus minds on what really is needed to mitigate an employee’s loss when losing their job.

Next steps

Both proposals are quite radical in the impact they will have on taxpayers and on employers. Simplicity could well be achieved but more analysis will be needed of the winners and losers and that includes employers as well as their employees.

The OTS recognises that there are no ‘quick wins’, as they have indentified in other areas of expense and benefits, as there is a requirement for HMRC to amend legislation which will not be able to be delivered before the next election.

It will be for the next administration to take these proposals forward, however everyone would agree that they should be on the top of the in-tray for the minister who picks up the HMRC baton after the election. In the meantime, the pause brought about by an election that is just over six months away will at least give HMRC (and the treasury) time to give serious thought to OTS’ proposals and give us a steer on their response in the autumn statement 2014.

And what about those quick wins?

In their earlier report the OTS charged HMRC to deliver some improvements to expense and benefits administration that didn’t need legislative or policy change but perhaps a tweaking of guidance or a form to be amended.

In the final section of this final report they consider the current state of play:

• Removal expenses: The £8,000 limit is outdated and all removal expenses should be allowable with some provisions to prevent abuse and any non-allowable expenses that the employers wants to settle should be able to be wrapped up in a PSA
• Long service awards: How appropriate are these in today’s workplace and in light of age discrimination
• Entertainment, subsistence and staff canteens: The OTS urges employers to bring forward issues and suggestion to the treasury in response to their Call for Evidence on Remuneration Practices that closes on 9th September
• Booklet 490 on employee travel is due to be updated by May 2015
• Updated guidance on temporary workplaces is due to be published by the end of September 2014.

By Kate Upcraft.

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