Expenses and benefits

What next for salary sacrifice following the ‘Reed’ case?

Posted by David on August 26, 2015
Expenses and benefits, Flexible Benefits, News articles / Comments Off on What next for salary sacrifice following the ‘Reed’ case?

At the end of July (2015) the Court of Appeal heard, and rejected, an appeal by Reed Employment plc (“Reed”), against a nine-figure assessment of arrears of PAYE/NIC by HMRC.

For anyone unfamiliar with this potential landmark case, Reed had paid its temporary employees partly in salary and partly in tax free travel expenses, ostensibly implementing a ‘variable’ salary sacrifice so that PAYE/NIC would apply only to the lower salary element. HMRC took the view that no genuine alteration to contractual salary had ever been made, hence PAYE/NIC applied to the full original contractual sum. This view was supported by both the First Tier and Upper Tribunals.

In also agreeing, the Court of Appeal highlighted the absence of any clear unequivocal statement, by the employer to the employee, that the employment contract had been changed (i.e. in any way that the employee could be said to have understood, much less agreed to, the change). For example an employer statement that there will be a ‘small reduction’ to the employee’s gross pay was seen as at best ambiguous, and could not override the ‘clarity’ of the main contract’s terms.

The Court of Appeal also accepted the earlier Tribunals’ decisions that dispensations previously issued by HMRC were not relevant in this matter. In short, Reed had previously agreed with HMRC as to what circumstances a payment of tax free expenses could be made; however it was felt to have not also explicitly agreed the salary sacrifice methodology with HMRC.

Whilst the suggestion that Reed had not made ‘full disclosure’ in discussions with HMRC seems harsh, in our view the courts were correct in regarding the ‘salary sacrifice’ and the payment of expenses as two completely separate steps (i.e. if the two operate in conjunction, then the salary sacrifice must always come first). If the salary sacrifice does not work in the first place, any subsequent payment of ‘expenses’ would be considered as mere window dressing on the payslip and would be ineffective for tax/NIC purposes. The 1960s tax case of Heaton v Bell established the premise that there must be more than a mere payslip deduction, to effect a true contractual change.

Are statutory changes to salary sacrifice rules likely?
There has been speculation (following some rather vague government announcements recently) that there will be a general attempt to ‘outlaw’ salary sacrifice in future. ET4B certainly does not see this as a simple matter and therefore happening in the short to medium term. There are a vast number of different scenarios to consider, such as the employer which automatically applies a supposedly ‘invisible’ tax free benefit in addition to salary (e.g. as in the case of most Civil Service pension contributions), employers which provide and quantify tax-favoured benefits but don’t permit them to be altered by the employee, employers which automatically ‘opt-in’ employees to receive specific benefits (e.g. stakeholder or other occupational pension contributions) unless the employee ‘opts-out’ directly, employers which operate a full flexible benefits package, and employers which allow individual employees to opt for salary sacrifice in conjunction with tax-favoured benefits (e.g. employer sponsored childcare) merely on an ad hoc basis. Arguably there is no fundamental difference between each of these schemes; merely that larger employers tend to be slightly more sophisticated in the way in which they are able to demonstrate and agree revised terms with staff.

What we will very probably see is that specific arrangements, which HMRC is known to ‘disapprove of’, will continue to be challenged actively. For example it is expected that employee travel expenses, if paid in direct conjunction with a salary sacrifice agreement, will be excluded from the proposed statutory exemption for allowable expenses (planned to be introduced in April 2016, to replace existing employer dispensations for allowable expenses).

What steps should be taken now?
The Reed case provides another timely reminder that basic principles should always be followed when implementing or reviewing salary sacrifice or flex schemes, i.e.:

  • Is the contractual change legally effective? As Reed has found, this question is particularly important if an employee is included ‘automatically’, so that the employee cannot be said to have signed up to the scheme directly. Annual employee ‘total reward’ statements can often help, but in some cases can indeed hinder, this process.
    ET4B has noted that many salary sacrifice schemes (worryingly, including many of those drafted by the Big-4) do not appear to address this basic principle fully. Rather than explaining to employees exactly how a salary sacrifice will operate, we have seen extremely vague wording which is no more than saying ‘we [the employer] will decide how much your salary sacrifice will be each month’. The Reed case reminds us that a mutual and clear ongoing agreement is needed with the employee, before an employment contract may be regarded as altered.
  • Payroll calculations and operation of ‘notional pay’ e.g. as regards overtime, bonuses, increments etc., must also be thought through, and payslips must be able to cope if there are multiple sacrifices.
  • Treatment of leavers, staff on long term sick, and maternity leave etc. should be considered. There may well be employee rights at those times, as well as ongoing employer costs to consider.
  • Exclusion of certain employees should be considered e.g. those close to or below Minimum Wage or NIC Lower Earnings Limits.
  • Finally, is any tax clearance from HMRC comprehensive and effective i.e. is it specific to your own organisation and has it been achieved by putting all your cards face up on the table on a full disclosure basis?

In this complex area, choosing the right specialist adviser to review or implement your scheme may mean the difference between having confidence in a robust and watertight arrangement, and nervously awaiting the next knock on the door from HMRC.

Tags: , , , , ,

Tax relief on Professional Subscriptions and similar items

Posted by David on June 15, 2015
Expenses and benefits, News articles / Comments Off on Tax relief on Professional Subscriptions and similar items

HMRC publishes and periodically updates a list of ‘approved’ professional bodies, annual subscriptions to which will attract tax relief. These subscriptions may therefore be paid by employers without attracting a tax or NIC charge (though formal HMRC dispensation is needed before such payments may be excluded from employer’s forms P11D).

An updated version of this HMRC ‘List 3’ was published recently. (Tip: even those as long in the tooth as ET4B can’t remember what ‘List 1’ or ‘List 2’ used to be, so don’t bother searching!).

It is interesting that the covering text includes an HMRC comment that you can’t claim tax back on fees or subscriptions you’ve paid to professional organisations if these are not approved by HM Revenue and Customs, however don’t let that necessarily put you off!  Certainly subscriptions that are deemed to have a dual business/private purpose would fail the ‘wholly exclusively and necessarily’ employee expenses deduction test. This was found to be so in the 1960s tax case of Brown v Bullock; here a bank manager was required by his employer to join a West End club in order to foster business contacts, however some of the benefits of the club were deemed to be at least partly private. The case also underlined the principle that the duties of the job, not simply the arbitrary wishes of the employer, must objectively make the expense a ‘necessary’ one.

However the more favourable case of Elwood v Utitz found that a club subscription, which gave the employee access to reduced business accommodation etc. rates, and provided nothing other than incidental private benefits, was allowable. Thus many subscriptions, although not directly identified as allowable under List 3, could be deductible if there is a direct business motive, and no private element.

In the case of Fitzpatrick v CIR, HMRC achieved some success in challenging the deductibility of newspapers purchased by journalists. The situation here could be said to be analogous to an employee paying for their own training to improve their CV – the purchase of the newspapers being considered to prepare the employees themselves for their future duties (rather than in the actual performance of their duties). However if the newspapers purchased had been more directly related to the journalists’ current actual duties (and objectively met the standard necessary test), then a different outcome may have been achieved.



Tags: , , , ,

HMRC updates to booklet CWG(2) – transparency or opacity?

Posted by David on June 09, 2015
Expenses and benefits, News articles, Payroll / Comments Off on HMRC updates to booklet CWG(2) – transparency or opacity?

HMRC has recently published its latest annual update to its booklet CWG(2), i.e. the Employers Further Guide to PAYE/NICs, for the year 2015/16.

The CWG(2) does tend to retain the same basic paragraph and section numbering year on year, and it occurs to ET4B how easy it would be for HMRC to flag up or highlight any updated sections (within this and other updated guidance). Indeed it is difficult to fathom why the department does not opt to highlight changes to this (92 page guidance), clearly and directly?

Some of the main changes to the booklet would appear to be as follows (the page and paragraph numbers of the guide are shown in brackets for reference):

  • Details of the new 0% rate applying to certain employer Class 1 NICs, for employees under the age of 21, are now included (page 6, para 4).
  • Some of the examples scenarios potentially applying, when the regular date for employee pay is on a non-banking day, are now elaborated upon (page 9, para 4).
  • Guidance on Lump Sum payments from pension schemes (page 19, para 20) now refers to the more general use of the “Uncrystallised Funds Pension Lump Sums” (UFPLS) terminology, following changes in the rules permitting access to defined contribution pension funds.
  • Guidance on workers supplied by agencies has been developed, in an attempt to reflect some of the new and additional PAYE/NIC obligations for  onshore (page 51, pre-para 110) and offshore (page 60, para 125) agency workers.
  • For PAYE due on employment related securities and similar non-cash payments, the guide now reflects the recent legislative change that PAYE not recovered within 90 days of the end of the tax year now constitutes a benefit in kind (page 82, para 161). The previous 2014 version reflected the old rules where PAYE had to be made good within 90 days of the receipt of the non-cash payment, to avoid the benefit charge.

Tags: , , , , ,

ET4Bs Winter 2014/15 Newsletter

Posted by David on January 08, 2015
CIS, Expenses and benefits, HMRC, News articles, Status / Comments Off on ET4Bs Winter 2014/15 Newsletter


Please click here for a copy of the ET4B Winter 2014_15 Newsletter

In our Newsletter we provide additional details on changes proposed by the Office of Tax Simplification (as confirmed in the Chancellor’s Autumn Statement), an update on the current round of HMRC ‘Know Your Customer’ reviews (aka PAYE Compliance Reviews), the abolition of the IR35 Business Entity Tests, and further information on the new reporting obligations which will apply to employment agencies from April 2015.


Tags: , , , , , , , ,

The expense that still dare not speak its name: Duality of Purpose (an update)

Posted by David on December 15, 2014
Expenses and benefits, News articles / Comments Off on The expense that still dare not speak its name: Duality of Purpose (an update)

The Upper Tribunal case of Samadian v HMRC published earlier this year (2014, UKUT 0013) has revived one of HMRC’s all time favourite hobby horses, that of where a travelling expense involves a dual purpose. As most readers will know, in general expenses must be incurred ‘wholly and exclusively’ for business purposes to be allowable for tax deduction. Those wishing to dust off old tax tomes may recall that two famous cases, Ricketts v Colquhoun and Newsom v Robertson, established some basic principles in HMRC’s favour; that travel between home and ones normal workplace is considered to be at least incurred partly by personal choice, and is undertaken primarily ‘to get to/from home’ (rather than to reach another workplace to perform duties). In short both cases failed the ‘wholly and exclusively’ test.

In the Samadian case, the taxpayer was a senior medical professional who travelled regularly between home, his private practice, and his NHS employment. Both Upper and Lower tax tribunals have reinforced the HMRC view that travel between home and the private practice (in a regular and predictable pattern) is little different to the aforementioned cases. Perhaps more harshly the Tribunals also came to the view that regular travel between the NHS employment and the private practice also failed the duality of purpose test.

Even though this Upper Tribunal case does not in itself appear to create a new legal precedent (there are already adequate cases in existence), HMRC appears anxious to reinforce the ‘win’ by preparing further guidance, which has been drafted and is expected to be issued for public consumption very shortly (contrast this approach with the wall of silence which followed HMRC losing the Court of Appeal decision involving Total People Ltd’s NIC reclaim on mileage payments; a case which does clearly create new legal precedent, despite HMRC protestations to the contrary).

Whilst this updated HMRC guidance is intended to apply initially to the medical profession, it is a timely reminder that the duality of purpose hurdle has to be considered by all who make claims to deduct expenses on business. In the case of employees’ travel expenses there are of course additional statutory tests which determine whether one or more Permanent Workplaces exist – if so travel to reach there (from home or any other private place) is seen as Ordinary Commuting i.e. private travel.

When we move away from travel and consider other expenses, the rules if anything become even more blurred. Whilst an employed worker (including an office holder e.g. a director) does also have to show that such expenses are incurred ‘necessarily’ in performing the duties (i.e. that the job rather than personal preference dictates the need for the expense), in most cases the main barrier remains the ‘wholly and exclusively’ test. Although the statutory tests remain similar, the distinction between those who are self-employed and those who are employed also becomes more tenuous.

For example, if a self-employed individual works from home to earn a living, HMRC would normally regard household expenses as partially meeting the wholly and exclusively test so that a proportion of the costs will be allowable . The common HMRC view here is that there will be a specific part of the expense which is wholly and exclusively incurred for business purposes and is therefore allowable. Consider the worker turning on the heating whilst carrying out his/her trade: that specific part of the heating bill is incurred wholly and exclusively for the purposes of the trade (this contrasts with say a regular journey to work where the whole journey could have a dual purpose).

Whilst this is a subtle distinction it is at least understandable. However this does not fit transparently with HMRC’s reluctance to permit a similar proportionate deduction for ‘working from home’ expenses incurred necessarily by employees. The published guidance on home working expenses indicates that only the marginal and specific additional costs of necessary home working are deductible, and that any flat rate charges e.g. for Council Tax, Rent and Water Rates (which, HMRC asserts, would be incurred anyway) will not be allowed. It is interesting to note that HMRC appears to have implemented a tougher interpretation in this area with effect from the tax year 2006/07, without (apparently) establishing any clear additional legislation or case law precedent in support of this approach.

One thing to add here is a reference to the permitted Homeworking Allowance which may be paid to employees tax free. Whilst the sums involved (currently a maximum of £4 per week) will not set the world alight, one advantage is that the exemption relies on a simple defacto test of whether the employee regularly works from home under arrangements agreed with the employer. In particular there is no ‘necessary’ test, so for instance an employee who ‘volunteers’ to work from home should not see the claim disallowed on the basis that ‘each and every’ such employee may not necessarily incur the expense.

When considering deductions on clothing for example, the rules if anything become even more stringent. The HMRC view is that ‘ordinary wardrobe’ clothing is likely to have a dual purpose and therefore is not allowable. As illustrated in the tax case of Mallalieu v Drummond as well as earlier cases, such clothing is likely to be used for ‘warmth and decency’ (with a few exceptions, no doubt including the current crop of ‘D list’ tabloid celebrities) as well as for business. To qualify, the clothing therefore must be either protective in nature or worn as part of a uniform which easily identifies the individual as part of that organisation etc (e.g. containing a conspicuous logo).

In summary, and whilst some of these principles were developed at a time when business travel was almost exclusively undertaken in one’s horse and cart (and long before reality TV became the nightmare that good taste forgot!), the Samadian case is a timely reminder that HMRC still remains prepared to adopt a rigorous defence of its views on duality of purpose.

Tags: , , ,

HMRC Know Your Customer (KYC) Reviews – an update

Posted by David on November 17, 2014
Expenses and benefits, Flexible Benefits, HMRC, News articles, Status, Termination Payments / Comments Off on HMRC Know Your Customer (KYC) Reviews – an update

After going rather quiet on the ‘PAYE Audit’ front for a few years, HMRC has now introduced a new round of employer reviews, under the title of ‘Know Your Customer’ (KYC). Whilst these sound like a bit of a cosy chat, we should not overlook the reality – that for all intents and purposes these are simply PAYE Audits aka Employer Compliance Reviews, in another guise.

The ‘KYC’ programme is initially being rolled out by HMRC’s Large Business Service (LBS) teams i.e. those offices who deal with the largest employers in the country. However this is no surprise: HMRC invariably follows the ‘law of diminishing returns’ when undertaking Employer Compliance work, i.e. the larger employers will always be first in line, and things then gradually work their way down to medium and smaller-sized structures.

KYC reviews initially involve a high level review of the employer’s policies. This may happen before or after an initial KYC meeting with HMRC. From there we can expect HMRC to focus in on what it perceives to be the main areas of risk. Whilst those areas will vary depending on the worker profile, experience suggests that HMRC will always wish to consider the following common risk areas:

  • Employment status: recent changes to the employment agency or ’employment intermediary’ rules seem to have re-focussed HMRC’s minds on the risks associated with temporary workers, self-employed, and limited company engagements.
  • Termination payments: businesses that have seen substantial staffing changes can expect HMRC to take a particular interest in severance packages paid, with the usual focus on Pay in Lieu of Notice and any other payments on termination potentially arising from the contract (rather than simply from the severance).
  • Company expenses policies: relevant policies include those applying to company vans, company cars and private fuel (the last one is a particular HMRC favourite as this represents an all or nothing benefit when linked to company vehicle use).
  • Flexible benefits and salary sacrifice: HMRC will be especially interested in any aspect of the scheme which has not already been cleared fully by HMRC on a ‘cards face up on the table’ basis (or where the ‘goalposts have moved’ so that the scheme does not operate precisely in the way HMRC was told originally).

For those employers who also have ‘Senior Accounting Officer’ (SAO) reporting responsibilities, this provides HMRC with an additional angle of approach, i.e. within a KYC review HMRC may at the same time seek assurances on the validity of previous SAO reporting and the extent of internal checking undertaken to verify this. Indeed we are now seeing HMRC ask for copies of relevant internal audit reports – an approach not previously followed.

On the plus side, our own recent experience has indicated that, with a little advance planning it is usually possible for an employer to take and retain control of much of the process. If so the employer should be able to approach any KYC review with a fair amount of calmness, rather than simply hoping for the best, and then having to ‘fire-fight’ when issues later arise.

If you require assistance in dealing with a forthcoming KYC review or in relation to any other Employer Compliance matter, please contact the ET4B team.

Tags: , , , , , , , , ,