The DSS has announced plans to raise 10m by taxing non-cash staff incentives. But the proposals raise questions as to which schemes will fall prey to the new tax, with frequent-flyer programmes poised for a losing battle.

The Department of Social Security says it wants to raise 10m by taxing “non-cash voucher” schemes used by companies as staff incentives. It is an attempt to close a loophole which allows unscrupulous employers to escape national insurance payments by topping-up wages with vouchers rather than money.

But there are growing fears that the change in the law will lead to other employee incentive schemes, including frequent-flyer programmes and those which feature on the mass of loyalty schemes in the UK, being hit.

The legislation, scheduled to come into force in 1999, was unveiled in a speech by Social Security Secretary Harriet Harman at the second reading of the Social Security Modernisation Bill last month. She highlighted the case of the owner of a residential care home who paid employees in cash up to the National Insurance Contributions lower earnings limit, and the balance in vouchers from a supermarket chain – thereby avoiding national insurance payments.

But although it is aimed at employers who avoid paying National Insurance, the legislation will also hit “vouchers”, both paper versions and those collected electronically, which are used in incentive schemes. These include Air Miles.

When pushed last week, the DSS could not say how the 10m figure was calculated. It is understood to be based on unspecified Inland Revenue statistics. Its sister body, the Contributions Agency, which manages the national insurance system, has no definition of a “non-cash voucher”.

The two did agree, as did Harman, that the only vouchers exempt from the tax would be childcare versions and even those only “for the moment”. However, last week there was a suggestion that luncheon vouchers would also be exempt. The uncertainty is partly owing to the fact that the legislation is still going through the House of Commons. But to have arrived at the 10m figure the DSS must have a clearer idea of what will and will not be taxed.

The only known publicly-quoted Inland Revenue figure is one which states that 150,000 employees will be affected by this move. Using a very rough calculation, that would mean an employer paying an extra 66 per year in National Insurance for each person currently receiving part payment in vouchers.

There is agreement that Air Miles-style programmes, bought by employers as incentives, will be covered by the tax. And without sounding alarmist, many of those involved in frequent-flyer programmes are privately concerned that their schemes will be caught up by the DSS tax, or indeed, hit by wider ranging taxes.

“It never occurred to us that this DSS proposal was aimed at any thing other than vouchers used as incentives,” says one senior source within the frequent-flyer market. “But this Labour Government is trying to tax everything that cannot be described as personal taxation, so who knows how these proposals will end up when they become legislation.”

British Airways, which owns Air Miles, says while Air Miles used as incentives are an important part of its business, it will adapt to the measures should they become law. “If there was any impact as a result of these measures we would aim to expand other parts of our business,” says Martin George, BA’s director of marketing who is also chairman of Air Miles.

Over 40 organisations offer Air Miles as incentives to employees, including BT, Whitbread, Guinness and ICL. All could be affected by the new tax. And if Air Miles became too expensive, they may be forced to consider new incentive schemes.

But the way the Bill is phrased means it is conceivable that frequent-flyer schemes could be affected. The DSS says: “Vouchers provided to employees as remuneration are, with some exceptions, taxable”. But it is possible to describe frequent-flyer miles collected by business travellers as remuneration, because companies allow employees to use them for personal use.

Budget airline easyJet has been waging a war on frequent-flyer schemes for several years. At the end of last year it wrote a letter to company chief executives in which chairman Stelios Haji Ioannou claimed the collection of points by individuals was akin to “a computer company offering your IT manager a free PC to take home for every ten PCs purchased by your company”.

The budget airlines say since frequent-flyer points are not generally available on discounted fares, business travellers are more likely to book more expensive tickets, so distorting the market and making the cheaper fares offered by some airlines less popular.

“It started as a harmless loyalty scheme, before air travel was deregulated and lower air fares were possible. On the transatlantic routes the European carriers believe they can’t afford not to have schemes, or else the US carriers would have an unfair advantage,” says easyJet marketing director Tony Anderson. “But it is a benefit in kind because it results from employment with a company and ought to be taxed.”

Some of those involved in frequent-flyer schemes claim they are exempt from the DSS legislation affecting vouchers because they can operate electronically. But the DSS, which defines vouchers as “anything which can be exchanged for goods or services”, says vouchers do not necessarily have to be made of paper, they can be electronic points.

Air Miles rejects this interpretation of the DSS’s proposals saying only Air Miles awarded as incentives will be liable to National Insurance and any suggestion that the proposals will affect frequent-flyer schemes involves “second-guessing a government department which has not yet commented on how this would be administered”.

But that is the whole point. While things remain ill-defined Air Miles and others cannot be sure that they will not be more heavily hit.

Air Miles also says the Inland Revenue said earlier this year that Income Tax will not be introduced on frequent-flyer points, though Harman’s proposals refer to National Insurance, which is administered by the Department of Social Security. Accountants who specialise in these kinds of taxation issues say the chances of the DSS introducing rules which affect frequent flyers certainly exist – though they claim it is unlikely.

Businesses which make use of frequent-flyer schemes within loyalty programmes, such as American Express, point to the difficulty of applying such a tax.

Preben Vestdam, head of membership rewards for American Express Europe, says: “The practicality of such a tax is a problem since [in schemes such as ours] how do you separate private spending which can earn frequent-flyer miles from corporate spending, and where would you levy the tax?”

The Government stopped allowing civil servants to collect frequent-flyer points for personal use in 1994 and easyJet, for one, would like to see businesses take a similar line.

The anti-sleaze ticket on which the Government was elected; moves made by the Department of Health last month when it warned drugs companies they would be prosecuted for offering corporate bribes to GPs; and Labour’s already mentioned concerns about raising personal taxation, are making a number of highly-placed sources within the frequent-flyer market believe it is only a matter of time before these schemes become subject to tax or other restrictions.

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