Simpler Tax Rules on Employee Benefits

15 Aug 2014

The Office of Tax Simplification has recently published its third and final report on employee benefits and expenses. Stay with me; the report is well written and surprisingly interesting.

The report covers a wide range of topics including accommodation, termination payments, long service awards, staff canteens and loan schemes. Arguably the marquee item for HR is the discussion about termination payments.

The OTS recommends a straightforward principle that any payment connected with the termination of employment is taxable. It then proposes a single tax relief for all payments (including PILON) to employees made redundant. This relief might be a multiple of the Statutory Redundancy Payment alternatively a flat sum but there's a clear preference for the former.

The OTS has steered clear of recommending a multiplier but teases us with a coy hint at three times the SRP.  That would produce relief up to £41,760 at today's figures compared with a current ceiling of £30,000 – or £71,000 if the limit had risen in line with inflation since it was last reviewed.

The arguments for the change are that it's simpler than the widely misunderstood rule currently in place, eligibility doesn’t depend on the foresight of the draftsman of the employment contract and it's easily applied because we have a long established definition of redundancy.

The OTS is prescient in suggesting it'll be a long time before anything is done so in the meantime it recommends HMRC relax its stance on PILON in order to align its approach with current commercial practice.

The proposal on termination payments deserves constructive discussion. Acknowledging vested interests, is it right that the tax payer subsidise an employer's greasing the wheels of what is essentially a commercial arrangement?