A wall coming down?

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Tax breaks for return to work therapies unveiled in the Budget may not impact the world of PMI immediately. But, says Sam Barrett, they represent a crack in the wall of opposition to incentivising private healthcare

Rehabilitation was given a significant endorsement in this year’s Budget, with the chancellor announcing a targeted tax relief on health initiatives that help employees return to work. The relief, which will apply to treatment costing up to £500, will come into force in 2014.

Although there’s still uncertainty around exactly how the tax relief will be applied, the announcement has been well received by the health insurance industry.

“It’s very positive that the government recognises that there is an issue with long term sickness absence that it can help to solve,” says Elliott Hurst, director, health consulting at Axa PPP healthcare. “Getting employees back into work is good for the individual, the employer and for society generally.”

Tax relief details

Under the proposals, it is anticipated that health interventions costing up to £500 and recommended by the government’s proposed health and work assessment and advisory service, known as the Independent Assessment Service (IAS) in the Sickness Absence Review, will not be treated as benefits in kind. This will save employers national insurance at 12.8% while employees will not be liable to income tax on the value of the treatment.

The Department for Work and Pensions estimates that this will encourage employers to fund around 110,000 health interventions a year. The cost of this tax relief – which forecasts included in the Budget statement set at £10 million a year starting from 2014/15, and rising to £15 million in 2017/18 – will be met through the abolition of the Percentage Threshold Scheme, which ends in April 2014.

The finer details are yet to be thrashed out in a consultation. This is being run later this year ahead of the introduction of tax relief in 2014. But, regardless of how the consultation shapes up, introducing this tax relief brings some much needed logic to the rules on employers paying for treatment to help staff that are unable to work due to illness or injury. The current rules permit the value of this treatment to be exempt from benefit in kind taxation, but only where the illness or injury was caused by the workplace.

Industry reaction

But while the industry welcomed the announcement, insurers also acknowledge that the introduction of this tax relief probably won’t directly affect them. “It’s a step in the right direction, especially when put alongside the other health initiatives that are coming out of the Sickness Absence Review,” says Dr Doug Wright, medical director, Aviva UK Health. “But the introduction of tax relief on treatment in itself is unlikely to affect the medical insurance industry.”

Where it will have more impact is the occupational health sector. As well as increasing the profile of the sector and the number of employees that will benefit from treatment, it also raises questions about existing provision.

For example, where an employer already provides occupational health to its employees, it is uncertain whether any treatment it recommends will also qualify for tax relief. But, if tax relief is only available for treatment recommended by the IAS, this could affect the viability of employers’ in-house occupational health services.

Hurst is also concerned that there could be the potential for conflict and inconsistencies. “What if the IAS recommends something contradictory to the recommendation made by an employer’s occupational health service?” he says. “This conflict won’t help the employee get back to work and it could ultimately lead to legal action if someone feels they’ve received the wrong advice. There needs to be a level playing field with the IAS and employer’s own occupational health services both able to gain accreditation and provide treatment recommendations that qualify for tax relief.”

This is certainly a possibility in the longer term. Dr Wright believes that as the government gains experience of how the health interventions recommended by the IAS enable employees to return to work, it will broaden its approach. “By restricting the tax relief to treatment provided by the IAS the government is containing the cost. But, as it starts to see the benefits and understands the cost implications, I expect it will extend it to other sources of occupational health advice,” he says.

The group income protection providers are also watching developments carefully. Their products already deliver targeted rehabilitation to help employees return to work and there is some obvious overlap with the treatment that will qualify for tax relief.

“The announcement is very positive but it does look like the tax relief might only be applied very narrowly,” says Katharine Moxham, spokesperson for Group Risk Development (Grid). “We’d like greater recognition for the role of group income protection in helping employees to return to work and we will be working hard to help the Department for Work and Pensions understand how group income protection can interface with the return to work health interventions it is proposing.”

First step

Further, although linking the tax break with treatment recommended by the IAS may appear to sidestep the medical insurance industry, many are looking on this announcement as the beginning of a trend to encourage employers to look after employee health.

Steve Herbert, head of benefits strategy at Jelf Employee Benefits, explains: ” We need to see some traction to help employers introduce health interventions for their employees, especially those in the SME sector, and this is really the first crumbling of the dam towards tax relief on other healthcare premiums.”

He is not alone in holding this view. Dr Wright also believes the government will look to introduce more incentives for employers to implement services to help employees return to work.

“The government is cautious about offering tax relief on benefits for individuals so while medical insurance is still an employee perk rather than an employer benefit, it’s unlikely to qualify for a tax break. I do think there is plenty of room for other services to fall within the tax break though,” he explains.

High on the list of services that health insurance experts would like to see considered for tax relief are those that focus on prevention. These could include programmes that look at improving employee health and fitness. “I’d like to see more attention paid to prevention instead of just on cure,” says Herbert. “If the government could offer an incentive to increase the take up of initiatives that improve employees’ health this would help to reduce the possibility of long term sickness absence in the first place. This would be a good thing.”

This sort of move is certainly possible. Two benefits, employee assistance programmes (EAPs) and health screening, that can help prevent long term absence already benefit from favourable tax treatment. EAPs qualify for tax relief in the same way as the proposed health interventions and, providing employees receive no more than one health screening a year, these are not classed as a benefit in kind either.

Product development

It’s also possible that the introduction of tax breaks will cause medical insurance products to morph to fit the government’s remit of helping employees stay healthy and in work.

Already there are medical insurance products that do target treatment at employees that are unable to work due to illness or injury. These include Bupa’s Business Fit, which costs as little as £11 per employee a month and targets treatment at the two main causes of long term absence, mental health conditions and muscular and joint disorders, and Axa PPP healthcare’s Back to Work plan, which authorises treatment where the condition prevents the employee working.

Hurst believes these types of products may have more of a shot at qualifying for tax relief in the future. “The government finances mean there’s little or no chance that traditional medical insurance will qualify for tax relief in the short term,” he says. “However these products have more targeted interventions making them very much in line with the government’s thinking on the IAS. I wouldn’t be surprised if we saw more product development around this model.”

But, with details of the consultation still to be announced, the health insurance industry is holding off from making any radical changes to its product design. “We need to see what comes out of the consultation,” says Herbert. “It might not immediately affect the health insurance market but it’s definitely a step in the right direction.”

Healthcare tax relief – the employer’s view

With a consultation into tax relief to support employees to return to work still to be announced, understanding how employers would like to see it applied is important. To gauge this, at a recent seminar, Jelf Employee Benefits asked delegates to state which benefits would most assist their company in managing sickness absence.

The poll gave the following results:

  • Healthcare policies 31%
  • Occupational health 31%
  • Employee assistance programmes (EAPs) 12%
  • Income protection 11%
  • Healthcare cash plans 10%
  • Rehabilitation 5%

Given that the tax breaks are most likely to be set against rehabilitation and are already in place for EAPs, it is surprising to see both of these benefits rate so low as a means to manage sickness absence.