Policy paper

Power to make temporary modifications of taxation of employment income

Published 27 October 2021

Who is likely to be affected

Employees who receive certain benefits in kind or expenses from their employer during a disaster or emergency of national significance.

General description of the measure

This measure will allow HM Treasury, under ministerial direction, to make regulations to make temporary modifications to Parts 3,4 and 5 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) for a period of up to 2 tax years in the event of a disaster or emergency of national significance as determined by HM Treasury. This will enable the government to support taxpayers, for example by:

• Exempting benefits in kind of a specified description from income tax where appropriate
• Changing the qualifying conditions for exemptions on benefits in kind
• Exempting specified reimbursements from the charge to income tax
• Providing relief for specified expenses

Policy objective

To enable the government to quickly and effectively support taxpayers in the event of a disaster or emergency of national significance.

Background to the measure

COVID-19 has highlighted the limited scope to make changes to the current benefits in kind and expenses tax system to respond quickly to the pandemic. The government has had to introduce primary and secondary legislation with temporary effect to respond to the pandemic, to exempt a number of benefits in kind, change the qualifying conditions of certain benefits and provide relief for specified expenses and reimbursements.

It is expected that during any future disaster or emergency of national significance, it may be necessary to make similar changes on a temporary basis. The current legislation only allows changes to be made through secondary legislation in limited circumstances.

Therefore, in order to be able to respond effectively to disasters or emergencies of national significance like COVID-19 in the future, the government will introduce regulation making powers that will allow HM Treasury to respond quickly to various emergency situations, including but not limited to pandemics, if deemed necessary.

Detailed proposal

Operative date

This measure will have effect on and after the date of Royal Assent to the Finance Bill 2021-22.

Current law

There are only limited circumstances within ITEPA that allow for changes to be made to the income tax benefit in kind and expenses rules via secondary legislation to deal with urgent situations.

Part 3 of ITEPA relates to Employment Income: Earnings and benefits treated as earnings. HM Treasury may exempt benefits in kind which are liable to income tax under Chapter 10 Part 3 of ITEPA and which are deemed “minor” using secondary legislation under powers contained in section 210 of ITEPA. Ministers cannot exercise this power to exempt payments or any benefits that are not considered to be “minor”.

In some narrow circumstances, HM Treasury may also use regulations to change the qualifying conditions of certain exemptions to benefits in kind and expenses (such as under section 318D which contains a power for HM Treasury to vary the amounts which are exempt in section 318A, or to amend sections 318 to 318C relating to qualifying conditions connected with childcare).

Any other changes would most likely require the use of primary legislation, making it difficult to introduce temporary modifications at pace, especially during an emergency.

Proposed revisions

Legislation will be introduced in Finance Bill 2021-22 that will grant HM Treasury the power to make regulations, under ministerial direction, in the event of a disaster or emergency of national significance.

HM Treasury can determine when it is appropriate to use the powers, but may only make temporary modifications to Parts 3,4 and 5 ITEPA (which includes the power to make consequential modifications to the Income Tax Acts).

Any modifications made in exercise of the new powers would have effect only for a limited period of time as set out in any regulations made under the new power. In any event, any modifications must cease to have effect at the end of the tax year after the year in which they first have effect (and will therefore only remain in place for a maximum of two complete tax years). However, the new powers may be exercised to make similar provision, if necessary, to extend any relieving measures for the taxpayer for a further period of time during which an emergency or disaster is having an impact, or in relation to a new disaster or emergency.

The power can only be exercised in a way that is wholly relieving to the taxpayer and cannot be used to create a tax charge.

Summary of impacts

Exchequer impact (£m)

2021 to 2022	2022 to 2023	2023 to 2024	2024 to 2025	2025 to 2026	2026 to 2027
-	nil	nil	nil	nil	nil

This measure is not expected to have an Exchequer impact.

Economic impact

This measure is not expected to have any significant economic impacts.

The terms used in this section are defined in line with the Office for Budget Responsibility’s indirect effects process. This will apply where, for example, a measure affects inflation or growth. You can request further details regarding this measure at the email address listed below.

Impact on individuals, households and families

This measure does not introduce immediate changes to the tax system and so it is not anticipated that there will be an impact on individuals, households, and families.

The measure allows future changes which may impact on individuals, households, and families, however, the impact is likely to be positive as changes will be wholly relieving.

Customer experience is expected to remain broadly the same as it does not alter how individuals interact with HMRC.

This measure is not expected to impact on family formation, stability or breakdown.

Further consideration will be given in the event that the powers are used to introduce changes.

Equalities impacts

This measure does not introduce immediate changes to the tax system and so it is not anticipated that there will be impacts for those in groups sharing protected characteristics.

Impact on business including civil society organisations

This measure does not introduce immediate changes to the tax system and so it is not anticipated that there will be impacts on businesses and civil society organisations.

The measure allows future changes which may impact on businesses, however, the impact is likely to be positive as changes will be wholly relieving, therefore, removing reporting requirements for employees who receive a relevant benefit in kind or expense. Such changes would likely have a one-off familiarisation cost.

In the event of future changes under the new powers, customer experience is expected to stay broadly the same as the powers can only be used for wholly relieving purposes.

There is expected to be no impact on civil society organisations.

Further consideration will be given in the event that the powers are used to introduce changes.

Operational impact (£m) (HMRC or other)

This measure does not introduce immediate changes to the tax system and so it is not anticipated that there will be any operational impacts to HMRC.

In the event of future changes under the new powers, the impacts will depend on the nature of the disaster or emergency, the government’s response and what secondary legislation is proposed to be laid. We anticipate the operational impacts to stay broadly the same as the powers can only be used for wholly relieving purposes.

Further consideration will be given in the event that the powers are used to introduce changes.

Other impacts

The impacts will depend on the nature of the disaster or emergency, and how the powers are used to support employees, but none of have been identified to date.

Further consideration will be given in the event that the powers are used to introduce changes.

Monitoring and evaluation

The policy will be kept under review through communication with affected taxpayer groups.

Further advice

If you have any questions about this change, please contact the employment income policy team by email: [email protected]