Closed call for evidence

Remuneration practices: call for evidence

Published 18 June 2014

This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

1. Introduction

Remuneration is an important factor in determining an individual’s standard of living; salaries, benefits and other perks govern decisions about how much individuals can save, spend or invest and ultimately determines their wellbeing. Remuneration is also important to employers as it is one of the most significant costs they face and is a major consideration for running an effective business. Different ways of rewarding employees can be used to incentivise workers and maximise their productivity and in turn can have considerable impacts on the flexible labour market, especially where employers compete on effective remuneration packages to attract the best workers.

At the same time, the taxation of remuneration is the biggest source of government revenue. Over the past decade income tax and National Insurance receipts alone have made up on average 55% of total tax receipts. Total tax revenue in 2012/13 was £470 billion with £152 billion from income tax and £102 billion from National Insurance^{[footnote 1]}.

Understanding trends and developments in remuneration practices is therefore important for the government to ensure that there is coherence in the way different forms of remuneration are taxed and to understand the impact that current and future trends in remuneration have on the tax base in the UK.

1.1 Purpose of the call for evidence

Whilst the majority of employees are rewarded for their labour mainly with cash remuneration, in recent times there has been a growth in other ways of rewarding employees. The review of benefit and expenses undertaken by the Office of Tax Simplification^{[footnote 2]} (OTS) highlighted that working practices have changed. Remuneration packages nowadays include many different forms ranging from long term incentive plans, pension schemes, insurance policies, leave entitlements and company cars or private medical insurance to name but a few. The way these benefits are offered has also evolved; with a growing appetite and market for voluntary or flexible benefit packages which are often combined with salary sacrifice arrangements.

The OTS’ interim report^{[footnote 3]} set out the differences in the tax and National Insurance treatment of salary, benefits in kind, expenses and other forms of remuneration. The final report set out recommendations for simplifications for the tax treatment of benefits and expenses and identified a requirement for further work on the issue of which benefits should be taxed.

This call for evidence is being published in response to the recommendations set out in the OTS’ second report. It is being published alongside a core package of four related HM Revenue and Customs (HMRC) consultation documents and a note on the review of travel and subsistence rules will follow shortly.

The core package covers:

• Abolishing the threshold for the taxation of benefits in kind for employees who earn less than £8,500 a year (‘lower paid’ employments), with action to mitigate the effects on any vulnerable groups disadvantaged by the reforms;
• Introducing a statutory exemption for trivial benefits;
• Introducing a system of voluntary payrolling for benefits in kind; and
• Replacing the expenses dispensation regime with an exemption for paid and reimbursed expenses.

This process is intended to seek views to inform future tax policy development but is not expected to lead directly to any immediate or specific policy outcome. The evidence sought will be used to supplement the government’s other data sources and evidence base to improve the tax policy making process and provide an informed backdrop to shape future policy decisions.

Specifically, the government is inviting evidence on the following broad areas:

• What different forms of remuneration make up remuneration packages?
• Why are different forms of remuneration used?
• How are different forms of remuneration provided?
• What does the future of remuneration look like?

Individual questions are set out in section 2.

1.2 The taxation of remuneration

The general principle is that income tax is due on all employment earnings, defined as ‘any gratuity or other profit or incidental benefit of any kind obtained by the employee if it is in money or money’s worth’. There are however some deductions specifically allowed from employment earnings including:

• Allowable expenses that are wholly, exclusively and necessarily incurred in the performance of the duties of employment;
• Contributions to an approved pension scheme;
• Payments to charities under a payroll deductions scheme; and
• Expenses incurred in performing duties and reimbursed by the employer.

Legislation also specifically exempts some forms of earnings from income tax including shares allotted to employees under approved profit sharing schemes.

For income tax purposes benefits in kind are treated as earnings and taxed accordingly. In some cases the cash equivalent of the benefit is valued whereas for others it is based on the cost to the employer of provision. Some benefits are either exempt from income tax altogether (e.g. workplace parking and workplace nurseries) or carry a limited relief (e.g. childcare vouchers and relocation expenses).

Class 1A National Insurance contributions were introduced in 1991 as an employer only liability, normally payable on benefits provided to staff by reason of their employment. A few benefits (such as vouchers) are subject to Class 1 NICs, payable by both employers and employees. However, many benefits follow the income tax position, where they are exempt from income tax, they will normally be disregarded for NICs purposes. Tax and National Insurance policy on remuneration has developed over time; in some cases responding to trends in the use of different reward strategies, to external factors such as avoidance behaviours or to promote behaviours that the government intended to incentivise, for example encouraging employee ownership or helping parents return to work through support for childcare costs.

The taxation of remuneration is complicated and can sometimes lead to differing outcomes for individuals in similar circumstances. The OTS have done extensive work in assessing opportunities for simplification within the tax system, completing reviews of benefits and expenses, partnerships and share schemes, amongst others. The government has responded by taking action in a discrete number of areas to improve the current framework, for example the government is consulting on four proposals to simplify different aspects of the benefits and expenses regime.

However, the government believes a fair and simple tax system should reflect all current remuneration practices and support sustainable growth without incentivising distortive or different behaviours to those that would otherwise be undertaken. The primary aim of this call for evidence is therefore to improve the government’s understanding of the wider picture around remuneration including the factors and issues that influence businesses’ and individuals’ decisions in order to achieve these objectives. The focus of this consultation is on the remuneration of individuals who are employed i.e. employees and directors.

2. Evidence sought

Below are 17 questions covering the evidence the government would like to gather. The questions are divided into 4 sections and the government invites views on the questions posed from anyone with an interest in remuneration packages, particularly employers, payroll providers, HR and remuneration specialists, tax professionals and advisers and businesses, across all sectors and employer sizes.

Respondents can provide evidence on the broad areas that the government is interested in, or address any of the individual questions where they feel they can make a contribution. If appropriate, please could you provide the demographics of your organisation in your response including what type of organisation it is and, if a representative body, whom your organisation represents. Where possible we would be grateful if you could provide data or quantitative analysis to support your evidence.

Please also provide further comment if there are areas not covered by this call for evidence that respondents feel are relevant to inform the government on remuneration practices.

2.1 Section 1: What different forms of remuneration make up remuneration packages?

For most people remuneration from employment is fundamental to their lifestyle choice and activities as it is the most significant and often the only source of income. For employers, remuneration is likely to be the largest cost they face and is an important tool for incentivising workers and running an effective business. For the government the taxation of remuneration is the biggest source of revenue.

Remuneration is the compensation an individual receives in exchange for the work or services they provide, sometimes called reward. In tax legislation, this is defined as employment income, in National Insurance legislation it is defined as earnings. Remuneration can be in the form of cash or might be non-monetary such as access to benefits in kind or increased entitlements from their job e.g. to leave or flexible arrangements. The structure of compensation might relate directly to an individual’s characteristics or performance at work or be available more broadly to whole workforces or specific types of worker.

The government understands that there is a plethora of ways individuals can be remunerated. These include:

• Regular pay in the form of salary or wages;
• Variable pay linked to individual, group or company performance such as bonuses or other cash incentives;
• Non-cash incentives and perks including extended leave or flexible working arrangements;
• Allowances such as those to cover removal or relocation and other private expenses;
• Benefits in kind such as travel and retail vouchers, childcare vouchers, clothing, company cars, equipment for home-working, loans, travel and subsistence payments, telephones, activities, and special events;
• Reimbursements where the employer meets an employee’s private expense
• Loans from employer to employee;
• Employer pension contributions; and
• Employment related shares and securities

At the same time the taxation of these forms of remuneration has developed over time. Whilst income tax and National Insurance will nearly always be due on regular and variable pay, some non-cash incentives may not be liable to tax or National Insurance, some allowances or benefits in kind may only be liable to income tax, or income tax and employer National Insurance, or neither. In some cases there are particular reliefs available for specific types of alternative remuneration. The government intends to use this call for evidence to more broadly determine whether systematic differential tax and National Insurance treatment is appropriate in these cases and how far these drive the use of certain forms of remuneration.

Question 1

Do you agree with the definition and composition of remuneration set out above?

Question 2

Are there additional forms of remuneration that you consider are relevant to current practice?

Question 3

Are there benefits in kind or other payments that should not be treated as remuneration for tax and/or National Insurance purposes?

Different forms of remuneration are used by employers because of their role in creating an optimal remuneration package for workers. The government appreciates that there is no ‘one size fits all’ and would like to understand the relative magnitudes of these different forms of remuneration.

The government is keen to understand whether the composition of remuneration packages is dependent on characteristics relating to the individual, business, location or industry (or any combination of the four) or if they are tailored to individual preferences and requests.

Question 4

Where applicable could you provide evidence of typical remuneration practices for the categories set out below. Any data you can provide to illustrate the breakdown for your organisation would be welcome.

• Sector, including any distinctions between:
  • the private, public and third sector;
  • manufacturing/production and services industries; and
  • Individual sectors e.g. the financial sector, construction or pharmaceuticals.
• Nations and regions across the UK
• Type of worker, including any distinctions between:
  • Individuals on different income levels for example workers on National Minimum Wage, average wage and on very high salary levels;
  • Roles within a firm for example whether remuneration packages are different for a regular employee compared to a senior executive or director; and
  • Differences in types of employment contract for example between a permanent or temporary employee, someone on a fixed term contract, non-guaranteed hours contract or agency worker.
• Type of employer, including any distinctions between:
  • Size of employer; and
  • Type of ownership e.g. UK private company, employee owned or multinational

Are there other broad categories by which remuneration practices vary that you think are important?

The sustainability of the tax system relies on its ability to respond to changes and trends in the economic environment. Whilst salary would traditionally have formed the bulk of a remuneration package, today’s labour market displays an abundance of different reward strategies. The government wants to understand how remuneration practices have evolved and why this is the case for example whether it is a result of changing preferences on the part of the employer or individual, the economic environment or changes to government policy such as taxation.

Question 5

What are the most significant changes you have seen to remuneration practices over recent times? Have you seen certain forms of remuneration become more or less popular over time? What has driven these changes; in particular what role has the tax system played?

2.2 Section 2: Why are different forms of remuneration used?

Understanding the motives for different remuneration packages is an area the government is keen to develop in order to establish whether the tax system is currently creating distortions compared to the way individuals and employers intend remuneration to be structured. Therefore the government would like to understand more generally what drives the provision of different types of remuneration and whether this is a decision made by employers, employees, the interaction of the preferences of the two or is mainly driven by external factors.

For employers, remuneration is an important tool for maximising productivity, as well as a significant cost to the firm. Understanding how employers use these packages and the way they intend remuneration to reward employees is therefore vital. The government appreciates that there are a number of competing objectives an employer may be interested in achieving, set out below:

• To attract, recruit and retain an effective workforce;
• To promote work-life balance and support employee health and wellbeing;
• To motivate or incentivise desired employee behaviours and encourage good performance;
• To share the success of the business with employees; and
• To reduce costs. Some forms of remuneration can be cheaper to provide than salary.

Question 6

Which of the objectives set out above do employers consider are the most and least important when determining remuneration practices and how does this vary? Are there other objectives missing from this list?

Question 7

What forms of remuneration do employers think fulfil each of these objectives and why? It would be helpful if you could outline specific forms of remuneration that are used most widely in each case.

The government recognises that remuneration through shares and other forms of employment-related securities is a central part of many senior reward and incentive packages. Employers have indicated that by using shares they can link key employees’ or managers’ rewards to individual or company performance; align their employee’s interests with those of external investors; and in some cases require employees or managers to demonstrate commitment by investing their own funds. The government is interested in forms of remuneration that align the interests of employer and employee. Some of these reward and incentive plans are already supported by tax approved treatment and this government has also introduced incentives to encourage indirect share ownership.

The tax system seeks to differentiate between reward accruing to an individual as a result of their employment and gains arising from investment. Some employment-related security plans or awards offer potential rewards through capital growth that exceed the growth which would be available to an investor who is not an employee. In many cases, those rewards may be taxed as capital in the hands of the employee rather than as employment income.

Question 8

Why are plans involving employment-related securities used in remuneration packages?

• What are the advantages of these plans compared to other forms of remuneration?
• How effective are these plans in incentivising employment performance?
• To what extent is this form of remuneration driven by the current tax treatment?
• It would be helpful if you could provide evidence on how commonly employment related securities awards involve shares or other securities that are not available to non-employee investors and which enable an employee to benefit from growth or rights in excess to those available to non-employee investors when answering this question. What award characteristics in particular enable this and why do employers choose to award these securities rather than shares or other securities of a type held by non-employee investors?

At the same time workers’ preferences play a part in remuneration practices; the government considers that employees’ bargaining power must factor into the decisions of employers when setting them. The government would therefore appreciate any insight on what employees are looking for and whether decisions to accept or negotiate remuneration packages is dependent on what is viewed broadly as fair or equitable or responds to individual priorities.

Question 9

How far do individuals’ preferences drive the packages on offer by employers? How does bargaining power vary according to an individual’s status at the firm? What is the take up of different forms of remuneration?

In addition to employers’ objectives and individuals’ preferences, the government recognises that there are external factors that influence the composition of remuneration packages. These include:

• Legal and employment obligations such as Transfer of Undertakings (Protection of Employment) (TUPE) or other employment right legislation; • Income tax, capital gains tax and National Insurance or other tax obligations; • Competition with other employers who offer similar packages; and • Economic conditions, trade unions, international pressures and cultural considerations.

Question 10

How far are remuneration practices driven by these external factors, in particular what impact does the current tax treatment of different forms of remuneration have on remuneration packages? Are there other factors that are relevant here?

2.3 Section 3: How are these different forms of remuneration provided?

One key trend in the provision of remuneration over recent times has been the growth in dynamic remuneration practices such as flexible and voluntary remuneration practices. Where in the past reward strategy was set, implemented and did not accommodate the priorities of an individual employee, flexible and voluntary packages now allow individuals to tailor remuneration to their needs and can change over time. The government is also keen to understand flexible packages where benefits that are automatically provided can be given up for a cash allowance on top of salary. Understanding these trends and the rationale behind them are important to ensure that the tax system can respond appropriately to these changes.

Question 11

How much flexibility is there in the packages offered by employers and at what stage in an individual’s career are these more or less likely?

Question 12

What kinds of remuneration are usually offered flexibly or on a voluntary basis? How do these arrangements work in practice?

Question 13

Why are flexible or voluntary packages provided and what is the take up of these? How does this vary across the workforce?

The government is also interested in how certain forms of remuneration, particularly benefits in kind, are offered and whether they are generally provided on top of salary or through salary sacrifice arrangements. Salary sacrifice arrangements allow employees to give up the right to receive part of their cash remuneration, usually in return for their employer’s agreement to provide some form of non-cash benefit in kind such as pension contributions, cycle to work schemes, childcare vouchers or company car schemes. In some cases these arrangements can lead to a lower tax or National Insurance liability for employees and/or employers where benefits are valued differently for tax purposes.

Question 14

What forms of remuneration are commonly offered through salary sacrifice arrangements? Does the difference in valuation of benefits for tax purposes play a part in which ones are offered?

Question 15

Why are these salary sacrifice arrangements in place; how far are tax and National Insurance considerations important? Where possible, please provide evidence to quantify this.

Question 16

Do you see a distinction between salary sacrifice arrangements and arrangements where benefits in kind that are automatically provided on top of salary are sacrificed for a cash alternative? How far and tax and National Insurance, as well as other factors, drivers for these arrangements?

2.4 Section 4: What does the future of remuneration look like?

The government wants to ensure that taxation policy does not create future distortions in the labour market. A fair and sustainable tax system for the future will also need to respond to and support remuneration practices as they evolve. Therefore it would be helpful to understand whether respondents expect trends to continue or change and whether you foresee other pressures or issues influencing this landscape.

Question 17

How do you expect remuneration practices to change in the future? What are the contributing factors to this? Are there areas of the tax treatment of remuneration that the government should explore further?

3. Next steps

The deadline for responses to this call for evidence is 9 September 2014. Representations by email are preferable and should be sent to remunerationpractices@hmtreasury.gsi.gov.uk. Alternatively, hard copies can be sent to:

Personal Tax Team
HM Treasury
1 Horse Guards Road
London
SW1A 2HQ

Paper copies of this document or copies in Welsh and alternative formats (large print, audio and Braille) may be obtained free of charge from the above address. This document can also be accessed from the HM Treasury website. All responses will be acknowledged, but it will not be possible to give substantive replies to individual representations.

When responding please say if you are a business, consultancy, individual or representative body. Please provide demographics of your organisation; in the case of representative bodies, please provide information on the number and nature of people you represent.

This call for evidence will inform future policy development. The government will set out its intentions once it has considered the responses received.

3.1 Confidentiality

Information provided in response to this consultation, including personal information, may be published on disclosed in accordance with the access to information regimes. These are primarily the Freedom of Information Act 2000 (FOIA), the Data Protection Act 1988 (DPA) and the Environmental Information Regulations 2004.

If you want the information that you provide to be treated as confidential, please be aware that, under the FOIA, there is a statutory Code of Practice with which public authorities must comply and which deals with, amongst other things, obligations of confidence. In view of this it would be helpful if you could explain to us why you regard the information you have provided as confidential. If we receive a request for disclosure of the information we will take full account of your explanation, but we cannot give an assurance that confidentiality can be maintained in all circumstances. An automatic confidentiality disclaimer generated by your IT system will not, of itself, be regarded as binding on HM Treasury.

HM Treasury will process your personal data in accordance with the DPA and in the majority of circumstances this will mean that your personal data will not be disclosed to third parties.

1. HMRC Tax and NICs receipts, May 2014 ↩

2. Review of employee benefits and expenses: second report, Office of Tax Simplification, January 2014 ↩

3. Review of employee benefits and expenses: interim report, Office of Tax Simplification, August 2013 ↩