There are a number of anomalies in the taxation of healthcare benefits, so it is essential for employers to check the rules, says Sam Barrett.
Tax was never designed to be simple, but the rules surrounding some healthcare benefits are littered with anomalies, with the tax treatment depending on the benefit, when and why it is used, and the view of the local tax office.
This doesn’t make it easy for employers. Shawn Healy, employment tax director at BDO Stoy Hayward, says: “Employment tax issues are complex. The way UK employers remunerate staff has changed, but the tax rules have remained the same for many years. Ignore the rules and they will work against you; work with them and you can remain compliant.”
One example is how medical treatment for an employee is taxed. This is always regarded as a benefit in kind, unless the illness or injury meets certain criteria (see box left). If it is later found that treatment doesn’t meet HM Revenue and Custom’s (HMRC) criteria, employers may find they have to meet the liability. “You could find yourself having to tell the employee there is a P11D liability, which could be sizeable if the treatment was expensive. However, it’s more likely that HMRC will ask the employer to pay the tax grossed up,” says Healy.
The situation is further confused as there are instances where medical treatment will be exempt from tax, regardless of the cause of the illness or injury. Alex Bennett, head of healthcare at Aon Consulting, explains: “If an employee receives medical treatment through an insurer’s attempts to manage employers’ liability or group income protection claims, then there wouldn’t be a tax liability. It doesn’t really make any sense.”
However, the tax position of other healthcare benefits has been called into question. Last year, HMRC introduced new regulations on health screening, making it a taxable benefit if the employer didn’t provide it to all staff. The move, which was intended to collect tax from senior managers who are provided with an annual executive health screen, created an industry outcry as it also affected many other instances of health screening. David Levey, UK health and benefits business leader at Mercer, explains: “There are plenty of instances where screening has a real business benefit. If you are sending an employee on an overseas assignment, it makes sense to screen them before they go, as it could put them at risk, as well as being very expensive if you need to bring them back.”
Faced with these types of argument, HMRC put its plans on hold for this tax year while it sought to clarify its position. “I do hope HMRC recognises screening can be a business benefit even when it isn’t provided to all employees. An appropriately designed programme that targets those most at risk is sensible,” says Levey.
The tax treatment of employee assistance programmes (EAPs) has also come under scrutiny. Although these were always thought to be exempt from tax because they are considered a form of welfare counselling, HMRC challenged this in 2007, stating that some EAPs were offering services that were outside its definition of welfare counselling. It is, in particular, unhappy with the extension of EAPs into areas such as legal and financial advice, arguing that these are taxable benefits.
However, Dudley Lusted, head of corporate healthcare development at Axa PPP Healthcare, believes the type of legal and financial support given through EAPs is not strictly advice. “It is information. By delivering this part of the service, we are helping people to avoid psychological problems that could be caused by their distress,” he says.
The jury is still out on this matter, but Healy says the position is likely to become clearer over the next few years. “HMRC is likely to review EAPs as part of its routine employer compliance review process. If it feels a programme fits its criteria, there will be no tax to pay. But if it thinks it offers a range of services wider than the exemption, tax will become payable,” he says.
Healthcare cash plans have also faced tax tussles, especially since the launch of low-premium, employer-focused schemes a few years ago. James Glover, member services director at Healthsure, says: “Because these provide a number of benefits that are exempt, some employers have been able to get an exemption for part, and in some cases all, of the premium.”
Glover says some employers have argued that once optical benefits, an EAP, occupational health, and health screening are set aside, the tax liability on the cost of the rest of the provision is so small it is not worth collecting. “The position does vary between local tax offices, but it can be worth pursuing,” he adds.
On-site provision of health benefits is another tricky area for employers where tax is concerned. “If [you offer] some form of medical treatment, such as physiotherapy, you need to consider the purpose of the service and how it sits with the rules relating to medical treatment generally,” says Healy.
An in-house physiotherapy service, for example, is classed as a taxable benefit in kind if staff use it to be treated for sports injuries. But if the service is provided to ensure manual employees receive prompt treatment for work-related injuries arising from a risk that is not common to everyone, then it would be classed as a business expense for the employer Even providing employees with access to a gym can cause tax issues. Although free or subsidised membership to a gym is classed as a benefit in kind, if the gym is on site it could be exempt. Naturally, conditions apply. The gym must be available to all employees and, while dependants and former employees are allowed to use the facility, it must be open to the public.
Although HMRC is sticking to its rulebook on healthcare, there is growing pressure for change. “It is not ideal to have the design of health interventions dictated by its tax treatment. The government has stated that cultural change rather than tax incentives is required to improve the health of the working population but, while I agree with this, any intervention that has a positive impact on the workplace should be at least tax neutral and should be incentivised,” says Bennett.
Lusted agrees, stating that the Department for Work and Pensions’ initiatives to improve the health of the working population would be better supported by a more joined-up approach to the taxation of healthcare benefits. “The government is calling for more access to rehabilitation, but there are no incentives for employers to do this. If employers were encouraged to do more to keep employees as fit as possible for as long as possible, this would have benefits for everyone concerned. The employee would enjoy better health, the employer would see productivity increase, and the government would see a reduction in its benefits bill and in demand for NHS services,” he says.
But while the current rules are in place with all their complexities, Healy says: “It is a duty of the employer to understand how the rules apply and interpret what the terms mean. If you are at all uncertain, it is best to seek advice from an employment tax professional who can ensure you remain compliant. After all, if it turns out that your view differs from that of HMRC, you will have to prove your case or pay the tax bill.”
Tax rules on medical treatment
Although HM Revenue & Customs’ (HMRC) rules on healthcare benefits may seem to be open to interpretation, it does provide guidance to highlight the tax treatment in place.
The HMRC Employment Income Manual sets out the conditions that must apply for an exemption to be granted.
For medical treatment (EIM21770), the rules state that the benefit is taxable unless the employee’s injury or illness: is shown to be a risk of the employee’s occupation; is due to a cause that is reasonably attributable to the employee’s employment; is not a risk that is common to everyone, and that the treatment is intended to return the employee to the same state of health they had before the illness or injury.
HMRC uses a professional footballer as an example and says that if he broke his leg while playing football, the club could pay for his treatment without it being classed as a benefit in kind.
If, however, the player broke his leg while at home, the cost of any treatment paid for by his club would be considered as a benefit in kind.
EAP tax rules
For employee assistance programmes (EAPs), the key piece of guidance is the exemption for welfare counselling (EIM21845). This states that welfare counselling is exempt from tax, providing the counselling is not:
- Medical treatment of any kind
- Financial advice, other than that relating to debt problems†
- Tax advice
- Legal advice
- Advice on leisure or recreation.
It also states that if the counselling includes any of these areas, then the exemption will not apply.