In its third and final report on employee benefits and expenses, the Office of Tax Simplification (OTS) has recommended a number of changes to the tax rules around the taxation of accommodation and termination payments. Although it is unlikely anything will be done before the election in May, the OTS has a good track record of driving through changes in tax law and so this is clearly one to watch.
In broad terms, a taxable benefit arises where an employer provides an employee with living accommodation. Exemptions are provided - notably, where the provision of accommodation is customary and necessary for the better performance of the employee's duties - however these can be difficult to apply. And it can be difficult to calculate the benefit: in some cases, you need to know the property's rateable value in 1973!
The solution put forward by the OTS is for the rules to be rewritten around three key principles:
- Whether the employee is required to live in the building to protect buildings, people or assets;
- Whether the employee is regularly required to work outside normal working hours; and
- Whether the employee is required to live in the accommodation as a result of regulatory requirements.
The new rules should be easier to understand and apply. And they should be fairer. Under the current rules, the Vice Chancellor of a university who occasionally uses the university's accommodation may benefit from exemption in certain circumstances. However, the same may not be true for a low-paid sheltered housing warden.
Most people think they know how termination payments are taxed, or rather not taxed as the general consensus seems to be that no tax is due if the payment is less than £30,000. This may be true in some cases but it is not in all. The rules around the £30k exemption are complicated and over the years many people have fallen foul of them, receiving an unwelcome tax bill as a result.
To clarify the situation, the OTS propose linking the exemption to the rules around statutory redundancy: if you qualify for a statutory redundancy payment then you also qualify for tax relief on any termination payment received. Further, the tax exempt limit could be set at a multiple of the statutory redundancy payment. As employers need to calculate the statutory redundancy amount anyway, this will be easy to apply and understand.
However, this is not all about simplification and there may be winners (e.g. those with a payment in lieu of notice (PILON) clause in their contracts) and losers (employees with less than 2 years services; office holders who don't work under a contract of employment). As this develops accountants and other advisers will need to work with employees and employers to ensure that the changes are understood and their effects managed.
Finally, this is also as good a time as any for a quick update on the proposed changes to the tax rules around travel and subsistence. Having recognised that the rules in this area have not kept pace with changes in working practices (not least the rise of home working), the Government is consulting with taxpayers and other stakeholders on what the new rules should look like. Much is expected of the new rules as the current situation is complicated and confusing. More should be known at the end of the year when the Government reflects on what it has learned and sets out its proposals for the way forward.