With the Budget only a matter of days away we take a look at a few issues surrounding the tax treatment of Health Benefits and services.

Insurance Premium Tax

At this time of year there is always a good deal of speculation as to whether the Chancellor will increase the rate of Insurance Premium Tax (IPT) from its current level of 5%. The rate of tax has not changed for five years and there has been no indication this year that this will change.

The traditional arguments for higher rates of IPT centre around the fact that rates are higher in other EU countries. We found that whilst in some countries the tax on insurance is higher, this is not universally so and in a number of EU countries medical and health-related insurances are exempt from any insurance tax.

The traditional method for offsetting the cost of IPT has been to set up a medical Trust arrangement and this allows most of the cost of medical claims to be funded free of IPT. Only the insurance taken out to protect the Trust in the event of unexpectedly high claims attracts the IPT charge. We are aware of new product research that is underway that is aimed at finding new ways of packaging medical benefits in a tax efficient way. Thought is also being given as to how developments in the US market might translate into the UK environment. "Consumer Driven Healthcare" and "Health Savings Accounts" are two new buzz phrases that we are bound to hear more of in time. Both concepts seek to make the end user more conscious of how health care costs are incurred and encouraging a real responsibility for obtaining the best value for money.

Benefit in Kind Taxation

Payment for Medical Treatment

Medical Benefits provided by employers in the UK, where employees are the beneficiaries of such arrangements, continue to attract a taxable charge, through the P11d, for employees and employers pay Class 1A National Insurance Contributions on the cost of the benefit provided. This applies to medical benefits provided through either Medical Insurance or Trust arrangements.

Medical Benefits provided by employers for employees who are working abroad are exempt from a UK taxable charge. This relates to both the cost of international medical insurances or any instance where the employer directly reimburses the cost of medical treatment. This exemption does not extend to members of the employee's family or household.

In the UK a number of employers have set up programmes for employees who are not covered by Medical Benefits arrangements for the direct funding of medical treatment in order to facilitate an early return to work. If the treatment provided is for a 'work-related' condition then there will be no taxable charge - the Inland Revenue guidance on this matter is as follows:

Where the employee's injury or illness:

there may be no chargeable benefit if the treatment is intended to return the employee to the state of health enjoyed before the injury or illness.

If an employer funds medical treatment directly which is not 'work-related' then the taxable charge will apply to the whole of the treatment cost

Health Screening

Defined by the Inland Revenue as 'periodic medical check-ups' - where paid for by the employer, they are not subject to any taxable charge for employees or members of their family or household.

Occupational Health

Not defined as a benefit in kind and such services paid for by an employer do not attract tax or NIC charges. Specialist health services provided by Health Professionals are also VAT exempt.

Pensioners

We are often asked about the position for those employers who continue to fund Medical Benefits into retirement. Since pensioners are no longer employees it is our understanding that the employer is not liable for any NICs on the costs of providing the benefit. As to the liability of the individual pensioner, there is no specific guidance given by the Inland Revenue on this. It is not included in the definitions of taxable income for pensioners and general practice seems to be that pensioners do not declare it as income for the purposes of tax. As always in such matters the best advice is that individual pensioners should be directed to their local tax office with any queries.