ET4Bs Spring 2017 Newsletter includes updates on new legislation applicable to salary sacrifice and flexible benefits (or ‘Optional Remuneration Arrangements’ to use the latest terminology), as well as changes to ‘IR35’ obligations in the Public Sector and a range of other employment related updates.
Flexible Benefits, HMRC, News articles, Status / Comments Off on ET4Bs Spring 2017 Newsletter
Expenses and benefits, Flexible Benefits, HMRC, News articles / Comments Off on Government paranoia over salary sacrifice persists
A significant change effective from 6 April 2017 is the new legislation applicable to salary sacrifice and flexible benefits (or ‘Optional Remuneration Arrangements’ to use the latest terminology). Non-cash benefits provided to employees on an ‘Optional’ basis (i.e. where the employee has a choice whether or not to receive the benefit) will then be taxed on the higher of the amount of salary the employee gives up or the value of the benefit they actually receive. However, given that the most common salary sacrifices (pensions, employer provided childcare, and Cycle to Work schemes) will be excluded from the new rules, this seems unlikely to swell the Exchequer’s coffers as much as expected.
In our own view, the new legislation is extremely ill-conceived (both in concept and in practical application). Nonetheless, and despite reasonable objections and suggested alternatives being put forward by many professional bodies, it is due to become law very soon. In short, it is a highly complex and significant change (i.e. taxing what the employee might have received rather than what they actually receive), for what might be very expensive to administer and police, and of course a resultant loss of flexibility for the employer/employee.
We think the new arrangements will most commonly affect in-house benefits, accommodation benefits, and ‘company car or cash’ schemes (if provided optionally). For example, if the employee elects for an efficient and clean company car (as opposed to taking a cash allowance so they can buy their own gas guzzler), they will be caught within the new rules unless the car’s CO2 rating is 75g/km or less!
Following the 2016 Autumn Statement it was announced that some of the changes are to be phased in; there will be no alteration to the treatment of existing employee agreements on company cars, living accommodation, or school fees benefits, until April 2021, and for other existing benefits, until April 2018.
Whilst there may be a temptation to think that ‘nothing needs to be done’ until these later dates are reached, this is certainly not the case. This transitional ‘grandfathering’ will only apply if arrangements have been definitively entered into with each employee, by 5 April 2017. Also HMRC has said that subsequent contractual changes, renewal (including auto renewal) or modification (i.e. made after 5 April) will have the effect of cancelling any such transitional exceptions. Given there are many ways in which a contract can be updated or amended (some involving specific employee elections or employer confirmations, others being undertaken on a one-off basis and some periodically), it will be vital that any new contracts or contractual changes, both before and after 5 April, are considered and implemented effectively.
Whilst some changes may be needed, we don’t see this as the end of ‘flexible benefits’ as a concept. We believe that a quite a lot of existing flexible remuneration policies may be retained, well within both the letter and the spirit of the new law. However, more than ever before, careful drafting of employer policies and employee agreements will be essential.
HMRC, News articles, Payroll, Status / Comments Off on IR35 obligations where personal services are provided to Public Authority clients
There will be new ‘IR35’ rules to consider from 6 April 2017, where individuals provide their personal services to a Public Authority client via their own Personal Service Company (PSC). The planned changes apply for all payments made on or after 6 April 2017, whether or not the service etc was provided before that date.
The new obligations may be summarised as follows:
– Firstly it is essential to decide whether the contract falls within the new rules, i.e. is the contractor supplying their services to a Public Authority client, as opposed to someone else (not always easy to tell, especially if there is a chain of contracts), and are they providing a personal service in doing so? NB: the stated definition of a Public Authority body is one which is required to respond to ‘Freedom of Information’ requests, but many smaller or subsidiary bodies are not actually sure if this applies to them.
– If so, then the Public Authority client must make a decision whether or not ‘IR35’ applies i.e. would the worker be their own employee if none of the other ‘intermediary’ structures existed in the engagement chain?
– If IR35 applies, the Public Authority must either withhold PAYE/NIC in full (accounting for this under RTI) or inform anyone else paying the PSC, in order that the payer may itself observe that obligation (the latter may apply if payments are routed through an employment business or agency to the PSC).
In making decisions on IR35 matters, HMRC expects the Public Authority to be able to rely on its new online digital status tool (which seems highly optimistic given that the tool was only made public by HMRC on 2 March, and there have been many signs in the ‘beta testing’ phase that the tool lacks robustness ). Whilst this digital HMRC tool may ultimately prove to be a useful guide, the distinction between employed and self-employed status remains a non-statutory test, so an effective working knowledge of employment case law is likely to be required.
This in itself assumes that the Public Authority will know enough about how the contract operates in order to make these decisions. Whilst HMRC insists that the IR35 rules are not being tightened fundamentally, all those in the contractual chain will need to have an operational understanding on these new procedures, as well as effective exchanges of information, to avoid PAYE/NIC simply having to be operated ‘by default’. This would inevitably cause upward pressures on the costs of the contract, if only for the fact that employer’s NIC would be due from the payer.
The most recent HMRC guidance also says that if the worker does not provide their services via a PSC, then the new rules don’t apply. Perhaps misleadingly, this guidance omits to say that more onerous obligations apply if the payer is a non-compliant Managed Service Company (MSC). In practice it may be very difficult to distinguish between a PSC, a compliant ‘umbrella’ payroll, and a non-compliant MSC, so specialist advice may be needed in cases of doubt.
CIS, HMRC, News articles, Status / Comments Off on What is a Managed Service Company and why do you need to know?
Can you spot the difference between a Managed Service Company (MSC) and a Personal Service Company (PSC)? If not, you may be subject to not only reputational, but also financial risks.
We suspect many hirers of labour feel little incentive to try to understand how their temporary workers (if engaged through an ‘agency’) are actually paid, or how any contractors’ business operates. However, when undertaking Employer Compliance Reviews (sometimes using the euphemism of ‘Know Your Customer’) we do now see HMRC expecting the hirer or ‘Client’ to take an active role in policing the arrangements. A recent Tax Tribunal decision has also now brought this matter into sharper focus.
In fact it can be very difficult to identify the difference between a legitimate intermediary e.g. an employment agency which makes payment to contractors via different (authentic) routes including PSCs, and the riskier type of operation which perhaps offers the contractor an off the shelf ‘complete payment solution’ albeit where the worker is also paid by ‘their own’ limited company.
If the contractor trades through a PSC, they can expect to be subject to the IR35 considerations. In short the IR35 rules say that if the worker would be an employee of the hirer but for the interposition of the PSC, then the PSC must account for PAYE/NIC on nearly all the income from that contract (NB: if they supply their services to a Public Authority client then, under new rules which apply from 6 April 2017, the Public Authority must take that IR35 decision, with tax/NIC being withheld from the PSC at source).
Whilst application of the IR35 rules appear to be in a constant state of flux, the advantage from the hirer’s perspective is that (outside of the Public Sector) these rules must be considered solely by the contractor company rather than the hirer.
MSCs on the other hand are potentially much more troublesome. They tend to be run by organisations and individuals who are not risking significant capital; hence these businesses can be ‘folded’ in the event of any significant HMRC enquiries (and they often are). If this happens, MSC rules indicate that any unpaid PAYE/ NIC duties may then be transferred further ‘up the supply chain’ to any other person or business who has encouraged or been actively involved in the MSC arrangements. Thus any attempt by the hirer to ‘shoehorn’ workers through a particular agency etc engagement route (perhaps based on a lower cost margin charged by that agency etc) could be seen as ‘encouragement’, and if so this becomes a PAYE/NIC risk for the hirer.
Although the MSC rules were introduced to significant fanfare back in 2007, little has been heard of these since, so there may be a temptation to think that the legislation has been forgotten about. However a recently published Tax Tribunal decision (involving Christianuyi Limited and others v HMRC, TC05045) indicates that HMRC is indeed taking a more robust approach. The case has only proceeded to the First Tier Tribunal and therefore does not yet constitute legal precedent, however it gives a good indication of how HMRC is likely to perceive the difference between a compliant and a non-compliant business.
We can therefore expect to see some further publicity from HMRC over the coming months, as they seek to gain traction from this (perhaps belated) Tribunal success. As a first step, on 7 November 2016 HMRC issued some guidance entitled ‘Use of Labour Providers‘. This was HMRC’s suggestion of a ‘due diligence’ approach which end-users or hirers of workers’ services ought to adopt. This guidance included reference to various statutory obligations, mixed in with a number of ‘recommendations’ (the latter may reflect ‘best practice’ in HMRC’s eyes, but these are non-statutory and may not always be achieved by the hirer, realistically). Nonetheless the document is an accurate reflection of HMRC’s intention to challenge non-compliant payment arrangements, including those offered by some Managed Service providers.
So what do you need to do? If the end-user client makes payment via a reputable employment business or agency, then the agency is likely to be first in the firing line (i.e. because the it is the agency rather than the end-user client which will then decide whether to engage with any ‘MSC’). However the business which hires the worker should also be aware of the distinctions. Often there will be several contractual layers in the engagement chain, and it is difficult to know how temporary workers are actually being paid. At the very least the hirer or Client will not wish to be tainted by association, with potentially negative publicity and reputational damage if it were to appear that they have (at best) acquiesced to large numbers of their workers being paid via non-compliant methods.
For any organisation seeking to persuade HMRC that the MSC legislation is not in point, it would be very useful to be able to show that any ‘PSC’ maintains full control of its own company bank account. This would include paying its own VAT and Corporation Tax bills as they become due, rather than a third party merely deducting these sums as a percentage of total contractual income. The PSC should also take personalised decisions on how each director and/or shareholder is to be paid or rewarded (rather than following a prescribed ‘off the shelf’ payment methodology).
Engaging a third party adviser to help with the mechanics of running a PSC should not be a problem so long as bespoke advice is given and the adviser’s fees are not set as a regular proportion of the income from the contract.
If you would like any assistance in this complex area please of course contact us.
News articles / Comments Off on Happy Christmas 2016 from ET4B
Please click on the ‘play’ button above to view ET4B’s very own special festive greeting for 2016.
As well as wishing you and yours a very Merry Christmas, may we also take this opportunity to enclose our ET4B Christmas Quiz 2016 (including answers). It’s just a bit of harmless fun, and (to ensure we we don’t turn your stomach before the Christmas Pudding has arrived) we have even removed all those exciting questions concerning the draft 2017 Finance Bill legislation!
Still a glutton for punishment? With a double extra helping of corn we have also included links to our earlier collections of our ET4Bs Top Ten Christmas Jokes and our Top 10 Christmas Cracker Jokes. These hark back to a time when a White Christmas was a real White Christmas! Go on; force your family/colleagues to keep groaning!
Expenses and benefits, Flexible Benefits, HMRC, News articles, Payroll / Comments Off on Inflexible benefits from April 2017?
Now that the summer holiday period is over, it is (unfortunately) time to return our focus to work matters, and this inevitably includes recognition of any changes which HMRC has in the pipeline for us. In fact we have identified at least one such recent proposal which could prove to be a real banana skin, for both HMRC and employers.
In August 2016 HMRC announced a consultation on salary sacrifice arrangements (including flexible benefits). In brief, this document indicates that HM government has decided there are only certain types of flexible benefits which it ‘approves of’ (primarily contributions to registered pension schemes, employer provided childcare, and ‘cycle to work’ schemes). The consultation proposes that (from 6 April 2017) all tax advantages for any other benefits provided via salary sacrifice (which include for example company cars and health screening), would in effect be reversed.
It is our view that these proposals are very significantly misguided, both in principle, and as regards the proposed ‘solution’ which we do not believe will work effectively in practice. The proposed timescale is also much too short given the significance of the changes proposed.
Is there a rationale for change?
The consultation expresses a reasonable concern as to the extent to which tax/NIC duties are ‘lost’ to the Exchequer, as a result of salary sacrifice or flex schemes, but unfortunately that is where the common sense appears to begin and end. HMRC’s attempts to ‘quantify’ the extent of the problem seem to consist of a survey (designed and conducted by HMRC for its own purposes), and the fact that HMRC’s salary sacrifice clearance team is a bit busier than it used to be. The latter is more likely explained by the greater centralisation of HMRC resources, as well the publicity given to other statutory alterations which may be relevant (e.g. changes to dispensation rules). No attempt seems to have been made to quantify objectively the number of schemes which have been withdrawn or phased out in recent years, which is surely part of any overall balanced picture.
In our experience, by far and away the main employer saving is achieved when salary sacrifice is implemented to pay pension contributions, i.e. something which HMRC does approve of and would be unaffected by the proposals. Most other arrangements tend to generate minimal savings for the employer. Overall we feel the consultation downplays the real reason why most such schemes are introduced, i.e. as a legitimate employee recruitment and retention tool, and focuses simply on the perceived cost to the Exchequer.
The rest of HMRC’s reasoning contains a number of very questionable assertions around the loss of state benefits for claimants and possible knock-on effects for the tax/universal credits systems. It is true for example that some employees very close to National Minimum Wage cannot participate, but this is so for all salary sacrifice arrangements (including the ones HMRC ‘generously’ approves of).
What is the solution proposed by HMRC?
The solution proposed is, unfortunately, even more half-baked. The idea is that, to identify arrangements caught under these rules, there would be a simple distinction between a benefit an employee can choose, and one which the employee has no choice in (the latter being unaffected). Where the benefit (of a type which is not ‘approved’ by HMRC) has been chosen by the employee via salary sacrifice, the taxable sum would be the higher of the normal benefit calculation and the sacrificed salary.
In principle this seems both a complex and an incorrect approach. The idea of the employee being taxed on what they could potentially have received, rather than on what salary and benefits they do actually enjoy seems wrong fundamentally. It will create the exact opposite of the level playing field HMRC says it wants. For example, in the (extremely common) situation where an employee takes a simple option for a company car rather than an alternative cash allowance, presumably the proposal would now make the cash allowance the taxable sum, if higher than the company car benefit.
Furthermore we don’t believe the proposal will work in practice. Changes to contracts may be achieved by a myriad of methods, including situations where the employee appears to have no choice in the matter (but may have?), and cases where the employee is ‘opted in’ without their explicit agreement. In trying to over-simplify something which can be extremely complex in nature, we believe a system would be created which most employers (and probably HMRC) would not really understand and hence fail to comply with in practice. From our own experience we have seen numerous instances where even the Big-4 accountancy practices have failed to grasp what is involved in actually implementing an effective contractual change.
We can also foresee a number of practical problems. Not all employer’s systems (whether payroll, or other internal or external systems are used) recognise or display sacrificed salary, and indeed some agreements are almost ‘silent’ and date back several years (perhaps even to the date the employment commenced). In practice, how will any additional reporting requirement be identified and met in such cases?
Ultimately we suspect that employers who can obtain the best advice will be able to work around these problems, and in many cases it may be possible to protect the existing tax/NIC treatment with careful planning. Other employers will not be so lucky, and we would not envisage any employer would feel comfortable at the time of their next Employer Compliance Review by HMRC.
What is the alternative?
If HM government does genuinely perceive a real issue with salary sacrifice, we would suggest the only realistic alternative is to consider the benefits in kind legislation itself. For example in the case where a specific statutory exemption applies, it would be possible to alter that exemption if implemented in conjunction with salary sacrifice. You may recall the government has already dealt with matters on this basis in previous years, when abolishing the ‘home computer scheme’, also in revising the ‘mobile telephone’ and ‘workplace canteen’ exemptions.
Where the benefit is being taxed already we would suggest HMRC should reconsider, and pause for a sense check here. Why should for example a company car be taxed any differently where salary sacrifice is involved? The CO2 basis of company car taxation seems to have been very successful over the years, in helping to drive down vehicle emissions, and we completely fail to see why anyone should want to alter this now.
We believe there could be very significant employer cost and compliance implications if the changes as proposed were indeed adopted on 6 April 2017. Apart from necessitating an update to any flexible benefits policy document, the systems implications could be great (this would potentially include payroll, and any other system which is used to record and monitor flex or salary sacrifices). Does HMRC think such changes can happen overnight, without any material cost implications? Where the benefit is agreed between employers and employees on a longer term basis (e.g. a company car taken on a 4 year lease) this cannot be cancelled at short notice without significant additional costs for all parties. We therefore find it difficult to believe that HM government genuinely wishes to bring in any changes within such a short and arbitrary timeframe.
We would be interested to receive your own feedback in relation to these proposals.
If you wish to discuss this further, to understand how the changes may affect your own arrangements, or if you would like ET4B to contribute toward your own response to the consultation (which should be submitted by 19 October 2016), please contact us.