The Budget 2011 commentaries - Employment taxes
The commentaries below are written in general terms. Details can also be found in our downloadable Budget Report brochure. You are strongly recommended to seek specific advice before taking any action based on the information given, both in the commentaries and in the publication.
Disguised remuneration
The Government is pressing ahead with its plans to clamp down on perceived tax avoidance through the use of third party arrangements originally published on 9 December 2010. Following a consultation process, there is to be amendments to the proposed legislation. The amendments are to provide specific exemption from the very wide-ranging provisions for arrangements that are considered harmless. Further draft legislation will be published in the Finance Bill at the end of March with a new Explanatory Note.
The proposals for ‘disguised remuneration’ were well trailed, having been announced in the June 2010 Budget. Draft legislation was produced on 9 December 2010 which was extremely broadly drawn. The nub of the proposal was to ensure that the provision of loans to employees via third party arrangements such as employee benefit trusts (EBTs) and employer-financed retirement benefit schemes (EFRBS) should be immediately taxed as employment income, liable to PAYE and NIC. This was to counter arrangements where such loans were made but in practice were not expected ever to be repaid. Such loans could be taxed as benefits in kind, but, if at all, on the element of interest forgone only. These arrangements have been very popular. Analogous arrangements involving the provision or setting aside of assets are also countered. Even a mere informal ‘earmarking’ of assets in an EBT or EFRBS could constitute a taxable event.
In addition, detailed anti-forestalling provisions introduced at the time meant that any loan or a payment made by an EBT or EFRBS could be immediately caught by the proposed new rules.
Comment: In the consultation period following the publication of the draft legislation, it was pointed out that, as drafted, the legislation could catch many entirely innocent arrangements for employees such as short-term loans to employees, possibly to fund the exercise of share options. Similarly, many long-term incentive plans involve earmarking of funds to be paid over a period could also be caught.
The Government has accepted this criticism and has undertaken to limit the impact of the legislation in particular around genuine share plans and long-term incentive plans involving deferred remuneration. It will also now protect investment income and gains of earmarked funds and exclude existing pension savings.
Among the Chancellor’s stated aims for taxes are “that they should be certain and predictable… they should be simple to understand and easy to comply with”. It is to be hoped that the refinements of the proposed legislation also takes those aims fully into account. The risk will be that further complication is added to an already complicated picture.
Approved mileage allowance payments (AMAP) rates from 2011/12
Where employees use their own cars for business mileage they can claim reimbursement from their employers through the AMAP rates. If reimbursement is within the prescribed limits it is not regarded as a taxable benefit. The limits are currently 40p per mile for the first 10,000 miles of business use and 25p per mile thereafter. Where individuals are paid less than the prescribed amounts by their employer, they can claim mileage allowance relief (MAR) for the residual amount.
There is to be an increase of the first 10,000 miles rate from 40p to 45p per mile with effect from 6 April 2011. The rate will also apply to MAR.
Volunteer drivers may reclaim the actual cost of motoring expenses from the relevant voluntary organisation as long as they keep records to demonstrate that no taxable profit has been made, but, for administrative ease, they are allowed to use the AMAP rates if preferred. In addition to claiming AMAP rates, an allowance for passenger payments is currently in place for employees of 5p per passenger per mile which will be extended to volunteers.
Comment: The 40p rate has been in place since 2002/03 and has never been increased. This increase is most welcome in view of increasing fuel costs.
Fuel benefit charge 2011/12
Employees and directors who are provided with a company car and who also receive free fuel from their employers are subject to the fuel benefit charge. The cash equivalent of the taxable benefit is determined by multiplying a set figure (currently £18,000) by the appropriate percentage for the car, based on its CO2 emissions (grams per kilometre).
The level of the set figure increased to £18,800 with effect from 6 April 2011.