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OTS Recommends PAYE Changes

Office of Tax Simplification suggestions for streamlining benefit and expense reporting

In its second report of ‘Review of employee benefits and expenses’ the OTS has made a number of recommendations for improving the UK’s PAYE system with the aim of substantially reducing the number of P11D forms that are completed. With the changes they propose the OTS believe 99% of P11D’s could be eliminated.

For the year ended 5th April 2013 HMRC figures show:

  • taxable benefits generate in excess of £3.3 billion of tax and NIC;
  • over 4 million individual benefits were reported, half a million of which were for under £100;  and
  • 4.4 million P11D forms were filed annually.

With this in mind the OTS’s overall objectives were:

  1. To look for ways of modernising the system and ensuring they are in tune with modern employment patterns;
  2. To reduce administrative burdens for both employers and HMRC alike by streamlining or eliminating procedures that can be delivered more efficiently; and
  3. To increase certainty for employers in the rules and regulations that govern the Employee Benefits and Expenses system.

1.  Voluntary payrolling of benefits

Many employers have indicated to the OTS that they want to be able to process more benefits via monthly payroll rather than reporting these on form P11D. The first recommendation proposes a legislative framework to permit employers to have some/all benefits and expenses taxed via payroll on a voluntary basis.

2.  Broadening PAYE Settlement Agreements (PSA’s)

A PSA allows an employer to pay the income tax and NIC on employees’ taxable expenses or benefits which are minor or irregular. The OTS recommend that the scope of PSA’s should be widened to permit employers to settle any tax liability on benefits and expenses.

3.  Exemption for qualifying business expenses

To replace the PAYE dispensation process with a more modern, practical approach and including in legislation an exemption for qualifying business expenses paid or reimbursed by an employer. This would cover all routine business expenses that can be currently included in a PAYE dispensation.

This suggestion would however require HMRC increasing its support and guidance to employers, especially in the formative years of change.

4.  Abolition of the £8,500 threshold

Currently, an employer must complete a form P11D for all those earning £8,500 p.a and who are in receipt of benefits-in-kind. This threshold has remained unchanged since 1979! With the personal allowance set to rise to £10,000 in April 2014 there should be no reason for retaining this threshold and should therefore be abolished.

5.  Trivial benefits

A short, easy to understand ‘principles based’ definition of a trivial benefit, incorporating a per item cap, e.g. £50, so as cut out superfluous P11D’s

6.  Travel and subsistence

In this area the OTS found that:

  • the system does work in most cases for most employees; BUT
  • there are difficulties in areas such as the ’24 month rule’ and employees attending multiple workplaces; and
  • overall, employers do not want a major change but think that steady improvement of the existing system is the best route.

The OTS would therefore like to see a rule that says an employee can only have one permanent workplace, being the place where they spend the greatest part of their working time. If this should prove too expensive for the Exchequer however, then “permanent” and “temporary” workplace should be redefined by introducing a statutory percentage test, probably at 30%.

Where it is necessary to provide hotel accommodation or a company flat (or equivalent) for an employee who is working at a temporary workplace, then this should be included in a P11D dispensation.

7.  Simplification of NIC – what more can be done?

One proposal is to explore further the case for applying Class 1 NIC to all employee remuneration, whether that be cash or benefits-in-kind.

Over to you HMRC!

By Andy Vessey

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2 thoughts on “OTS Recommends PAYE Changes”

  1. Andrew Harrison

    P11D & expenses – up there in my list of top dislikes. I start with what my Company has paid me as expenses trains, hotels, mileage, professional indemnity … Then I cross off the mileage because it is exempt (but train tickets aren’t?). Then I shoehorn the rest into categories. Then on my tax return I bring in my P11D amounts and contra them under “expenses not paid by employer”. Nett effect nil except a certain crossness. To my mind the heading “expenses not paid by employer” is just wrong for these expenses – the employer paying them is why they are on the P11D! Then something in the system sees all the expenses and includes them in my tax code without noticing the P11D amounts.

  2. Mandy Tagney

    We certainly will be looking forward to these changes suggested by the OTS as currently our claiming process for construction workers on PAYE is often made difficult by the schemes intricacies.

    We discuss this on our blog and more at http://www.expresstaxclaims.co.uk/blog/

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