Select Committee on Environment, Transport and Regional Affairs Appendices to the Minutes of Evidence


Memorandum by the Board of the Inland Revenue (IT 177)

INTEGRATED TRANSPORT AND TAX MEASURES

1. In its evidence to the Committee, Transport 2000 stated that the current tax situation "hinders or actively works against" the adoption by employers of green transport plans, because most measures are treated as taxable benefits in kind. What is the Inland Revenue's response to criticism that its current position is discouraging the adoption by employers of such plans?

  The general position in tax law, subject to specified exceptions, is that benefits in kind which employers provide to their employees, whether "green transport" or other types of benefit, are taxable. The Revenue's duty this to apply the law as it stands; the Department cannot apply the law selectively depending on whether the benefits concerned are green transport measures or not.

  In the green transport context, it may be helpful to mention that tax law provides an exemption from the tax charge on benefits for loans which an employer makes to employees on preferential terms, provided the total amount of outstanding loan(s) to an individual employee does not exceed £5,000. This exemption is often used by employers to offer interest-free or low interst loans to employees to enable them to but their home-to-work public transport season tickets.

2. Is it the case that the Inland Revenue has recently imposed a stricter tax treatment of measures by employers, such as the provision fo works bus services, and that employers are facing large bills for tax and that it is making requests for detailed travel diaries to assess individual liability? The Boots company, for example, has advised the Committee that it has been presented with an estimate for its tax lability for supporting a public bus service used by its employees, dating back over six years, of £500,000.

  Where an employer pays for the provision of a bus service to bring employees to work, the cost of that provision will generally be a taxable employee benefit. There has been no recent change in the law in this respect, nor have we issued any instructions to our staff to impose stricter tax treatment on this benefit than on others. As explained below, the Revenue, may, of course, ask for information from employers to help establish an employee's liability to tax.

  Employers are under a statutory duty to notify the Revenue of benefits in kind they provide to their employees. Sometimes however, the provision of a benefit by an employer to employees may, inadvertently, not be reported to the Revenue by the employer. If a benefit subsequently comes to the attention of the tax officer, or of our audit staff—who check that employers are correctly operating PAYE on their employees' pay and are reporting taxable benefits—a tax charge, which may be signficant if the benefit has not been taxed over a period of years, can arise.

  Where an employer-provided benefit is identified the Revenue may ask for information to establish the extent of which individual's use of the benefit facility to decide on the amount on which he or she should be taxable. This may involve the need to distinguish between benefits which relate to journeys which an employee makes in carrying out his work duties—where the law provides tax relief which effectively removes the tax change on the benefit—and other journeys which do nto qualify for relief.

  In relation to the particular example given, the Revenue cannot comment on affairs of individual employees or taxpayers.

3. Green Transport plan measures have been described as falling into a grey area between being viewed as "negligible" and "significant" benefits by local tax inspectors. What is being done to ensure that tax treatment of such measures is applied consistently by the different tax offices?

  Whether a benefit is regarded as "negligible" or "signficant" generally depends on factors such as the number of employee beneficiaries and the cost to the employer of providing the benefit. But there will also, inevitably, be a subjective element. Tax law does not however allow a different approach to be taken in relation to smaller benefits than for larger benefits. The Department's aim, here as elsewhere, is to collect no more than the right amount of tax due under the law. We do our best to ensure the consistent application of national tax system. All tax inspectors receive the same instructions and guidance, including on employee benefits; and guidance is reviewed regularly and renewed or revised as necessary.

4. What is being done to reduce the complexity of administering the tax implications of green travel plan measures?

  The degree of administrative complexity associated with calculating tax on benefits provided under green transport plans will depend, as elsewhere, on the nature and extent of the benefits provided. But we accept that determining the extent of the individual benefit for each employee can sometimes be complicated; one example in the transport area is where an employer provides a bus service potentially covering a large number of employees who use the service to an extent which varies and can change over time.

  It was to help simplify this sort of situation, amongst others, that in 1996 the Government introduced legislation to allow employers to make "PAYE Settlement Agreements" (PSAs) with their Tax Inspector. Under a PSA, the employer undertakes to meet the employees' tax liability on specificied benefits in kind or expenses; this means that the employee neither has to calculate each employee's share of the benefit or expenses, or make an individual report of it to the Revenue; and that employees do not have to declare the benefit or expense to their tax office or pay tax on it. The employer makes a single settlement of the total tax due to the Inspector of Taxes some months after the end of the tax year. (The payment by the employer of an employee's tax liability is itself a taxable benefit, so the amount of the tax due has to be increased ("grossed up") to reflect the tax liability on the payment.)

  The PSA scheme cannot always be used to replace the normal arrangements under which the employee who receives benefits is responsible for paying the tax on them. But it does provide a simpler administrative way of taxing certain benefits, for example where valuing and apportioning the benefit among many employees would involve severe complexity; in particular it could be used to cover the benefit arising from a bus service subsidised by an employer to take employees to and from work.

5. In order to reduce the administrative complexity of green travel plans to encourage their adoption more generally, it has been suggested that a de minimis tax exemption of up to £500 for green travel benefits be provided. What assessment has the Inland Revenue made of the effects of granting such an exemption? How much of an incentive would such an exemption be for increasing the number of employers that have green travel plans?

  Any proposal to change the law to provide a de minimis tax exemption of up to £500 per person for green travel benefits would be for Treasury Ministers to consider. We are not aware of research which has clearly established what the effect of such an exemption would be, for example in increasing the number of employers who have green transport plans. But in terms of Exchequer cost, for illustrative purposes, if 1 million employees received the benefit of a £500 tax deduction for green travel the annual cost at the basic rate of tax would be £115 million.

6. In the White Paper, the Government indicated (paragraph 4.13.1) that it would be undertaking research into whether changes to the tax system, amongst other factors, could promote green travel plans. Is the Inland Revenue participating in this research and, if so, what progress has been made? What preliminary advice would the Inland Revenue give to the Government on this matter?

  Inland Revenue officials have discussed the effect of the current tax rules with officials from the Department of Environment, Transport and the Regions who are taking the lead in carrying out the research referred to in the Integrated Transport White Paper. Revenue officials also had discussions with Dr Stephen Potter during the preparation of his Open University report on "Tax and Green Transport Plans" sponsored by London Transport and published in September 1998.

  The Committee will understand that any tax policy adivice given by Revenue officials to Treasury Ministers is confidential.

7. By contrast with reports of the tightening up of the Inland Revenue's tax treatment of green travel benefits, workplace parking was exempted from taxation as a benefit in kind in the 1988 Budget. This step was taken because it was thought that assessing liability was too complex for employers and the Inland Revenue. Does the Inland Revenue see any inconsistencies in its approach to the taxation of workplace parking and green travel measures, and what is it doing to address them? Would it agree that it current position on this issue will make it more difficult to achieve the aims of the White Paper? What plans has the Inland Revenue for re-appraising the possibility of taxing workplace parking in view of the changes in transport policy since 1988?

  The exemption from tax of the benefit of workplace parking for employees was introduced by the then Government in 1988 because of the exceptional administrative difficulties in seeking to impose an income tax charge on this benefit. Instead of trying to reinstate this income tax charge, with its accompanying administrative problems, the Integrated Transport White Paper proposes that local authorities should be given the power to impose a local tax charge on employers in respect of workplace parking. The question of further changes in tax law, for example to promote green transport plans, would be a matter for Treasury Ministers.

8. Based on the market value of off-street parking in central London, the Transport Committee for London has estimated that a car parking space represents an untaxed benefit in kind of up to £5,000 per annum. Approximately 70 per cent of those who drive to work in central London are believed to have use of a reserved free parking space. What is the loss to the Inland Revenue of not taxing workplace parking in:

    (a)  London; and

    (b)  the rest of the UK?

  When the benefit of free workplace car parking was exempted from income tax in 1988 the annual cost was estimated to be around £5 million. This figure reflects, amongst other things, the difficulties previously facing employers and the Revenue in trying to tax the value of this benefit to individual employees. The practical difficulties of seeking to establish the additional cost to the employer of providing workplace car parking and the extent of use, and therefore the benefit enjoyed, by individual employees have not diminished since 1988. Even were it possible to overcome them, the scale of the likely behavioural effects resulting from trying to reimpose the tax charge, and the need for a fair apportionment where use of a space is shared would make it misleading to try to extrapolate the potential yield from taxing workplace car parking on the basis proposed in the question.

9. Does the Inland Revenue have any plans for changing the way in which company car mileage is taxed?

  The Committee will be aware that in the March 1998 Budget, the Chancellor announced he would be considering, in relation to income tax charged on company cars, the case for replacing the existing business mileage discounts with discounts for driving fewer private miles. Views were invited and since then the Revenue has received a number of comments. Many are supportive of the proposal, as business mileage discounts are seen as providing an incentive to drive unnecessary, extra miles. Others are neutral or even opposed to the change. Some have expressed concerns that the proposal to give discounts for low private mileage would simply shift private miles from company cars to private cars (as some 70 per cent of all company car drivers also have access to a second, privately-owned car). That would not help reduce congestion or pollution. There is also a concern that the proposals would mean extra record keeping for company car drivers and their employers.

  In the light of these comments, the Revenue is continuing to review how the company car tax regime might be altered to send better environmental signals. Despite what was said in newspaper articles published towards the end of last year, the review of company car taxation has not been abandoned. That review is continuing and Treasury Ministers will not be taking any decisions on the review until it has been completed.

January 1999


 
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