HMRC

Inflexible benefits from April 2017?

Posted by David on October 04, 2016
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 No attempt seems to have been made to quantify objectively the number of schemes which have been withdrawn or phased out in recent years, which is surely part of any overall balanced picture.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.

Timing problems

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.

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ET4Bs Top Ten tips for PSA submission

Posted by David on July 14, 2016
Expenses and benefits, HMRC, News articles, Payroll / Comments Off on ET4Bs Top Ten tips for PSA submission

 

 

ET4Bs Top Ten tips for PSAs_2016

This document provides helpful guidance on PSA completion matters (this is a 2016 updated version of ET4Bs  earlier PSA guidance document)

 

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Update on voluntary payrolling of benefits from April 2016

Posted by David on February 15, 2016
Expenses and benefits, HMRC, National Insurance, News articles, Payroll / Comments Off on Update on voluntary payrolling of benefits from April 2016

HMRC has recently set out the framework by which employers will be able to collect tax voluntarily on specified benefits through payroll thus avoiding (or very substantially reducing) the annual P11D return cycle.

From the outset

Decide which benefits you wish to payroll: Employers may elect for some but not necessarily all benefits to be payrolled, e.g. to include medical benefits but not company cars. Many employers see this a way of ‘easing themselves in’ to the new process, especially if HMRC does experience any teething problems.

Also note that the election will cover the whole of a particular section of the P11D; so that if for instance you use Section M of the P11D to record two or more different types of ‘Other’ benefits, you would need to be sure that all such benefits (previously included within that P11D section) can now be payrolled.

Benefits which specifically cannot be payrolled are: vouchers and credit cards/tokens, employer provided living accommodation, and beneficial loans (currently sections C, D and H of the form P11D).

Are there any employees you wish to exclude? The presumption is that all employees receiving benefits within that ‘P11D section’ will now be payrolled, unless HMRC is told otherwise. Whilst it is possible to tell HMRC if you need to exclude particular people, it remains to be seen how effective HMRC is in recognising any such exclusions.

Make your election in good time: HMRC requires the employer to register before the start of the tax year – this can be done via the online ‘PAYE for Employers’ service. Employers who have informally payrolled benefits in the past are still required to register as this previous process is being phased out.

Another point to note is that you can’t change your mind part way through the tax year.

If you decide you want to ‘opt out’ for a future tax year (having previously opted in) you would need to inform HMRC before the start of that new year.

Removing benefits from tax codes: Once you have made the election, HMRC states that they will remove the benefits in kind, previously included within each employees’ tax coding, automatically. This may prove to be an interesting conundrum for HMRC, if say the tax coding currently includes two or more P11D items under the generic description of ‘benefits in kind’ (one of which is now payrolled and the other one isn’t) and we wait to see if HMRC’s systems are subtle enough to detect the difference.

Tell the employees: Although the latest HMRC guidance says that you ‘must’ provide employees certain information at the outset, we cannot see that requirement reflected within the new Regulations. Nonetheless any sensible employer would be well advised to let employees know, i.e. before the employees start to receive their updated tax codings (and before they notice the changes to their payslips). Whilst HMRC does suggest sending a letter to affected employees, the department does acknowledge there is no required or set format for such notifications, and the employer will generally choose the method which is most effective for them e.g. email, intranet, separate notices on pay statements etc.

During the year

Tax the benefit via PAYE: You must include the relevant benefit as an amount which is subject to PAYE tax, but not NIC, and spread this over each payment period of the year. Of course this is not an actual payment in cash so, in payroll terms, the easiest way of ensuring the correct calculations may be to also include the benefit as a net pay deduction.

Maximum PAYE deduction is 50% of pay: Employers must ensure the maximum PAYE deduction of 50% of pay is not exceeded. Note that the benefit is a deemed rather than an actual payment of income; so the 50% maximum must be applied to the pay before the deemed benefit is added in. Most employers will probably rely on their payroll software supplier to spot any potential issues here. In practice we can envisage some potential issues in cases where employees are on unpaid sick or maternity leave (i.e. where their benefits in kind continue).

Dealing with leavers: The employer should include the cash equivalent of the benefits within any P45 taxable pay to date figure.

HMRC does also confirm that the employer may adjust the final pay period(s) of leavers, to ensure that, as far as possible, the employee pays the correct amount of tax on the benefit up to the date of leaving. If such an adjustment is not possible before the employee has left (e.g. there is no further payment due), there are two choices; either the employer adds the ‘untaxed’ element of the benefit to  taxable pay and enters this on an amended FPS, but without adjusting the taxable pay to date, and sends this to HMRC advising the employee has left, or the value of benefit not collected via payroll must be returned on form P11D. Whichever of the two option is chosen, HMRC’s current guidance is that the department will itself seek to recover the unpaid tax direct from the employee.

Other ‘in year’ benefit changes: If for instance an employee changes their company car during the year, the employer would normally calculate the actual benefit for ‘car 1’ plus the estimated benefit for ‘car 2’ (both calculations reduced as appropriate for days unavailable). Any benefit value not already taxed would then be spread over the remaining pay periods of the year.

HMRC does acknowledge there will be occasions where the ‘correction’ is not processed before the end of the tax year, and in these circumstances will accept that any sum not taxed in ‘year 1’ can be taxed in ‘year 2’. NB: the Regulations appear to be drafted on the premise that the employer will always know about such changes instantaneously, however in reality that may not always happen (e.g. in a large organisation where information cannot always be shared immediately between departments). We would therefore hope that HMRC will apply some common sense and latitude here.

Correcting calculation mistakes made: Similarly HMRC accepts the occasional recalculation will be necessary e.g.  where the estimated number of paydays or actual benefits have been calculated wrongly. The same might apply if a company car fuel benefit applied which had not been recognised and payrolled (e.g. because an employee failed to make good the full private fuel as expected). Again some amount of year end cross-over is permitted so that any benefits not payrolled in ‘year 1’ can be payrolled in ‘year 2’

At the year end

Employee information: The new Regulations do confirm that the employer should include the cash equivalent of the benefits within any P60 year end figure. The timescale is the same as for forms P60 (i.e. 31 May following the year end), and it is assumed that most payroll software will be able to incorporate any necessary data on the form P60 itself.

Forms P11D will of course still be required for any benefits which were (for whatever reason) not payrolled.  Many sections of the current form P11D incorporate a section showing ‘amount made good or from which tax deducted’, however this is not so for company car or fuel benefits, hence we assume the P11D form will either be reworded or further HMRC guidance issued.

Submit form P11D(b) and pay Class 1A NIC: As only PAYE tax has been collected via payroll, the employer’s NIC obligation will be largely unchanged. As things stand, forms P11D(b) must still be submitted by 6 July following the end of the year, with the Class 1A NIC remaining due and payable by the following 19 July date.

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Travel and subsistence deductions – for agency and other workers paid through intermediaries

Posted by David on December 15, 2015
Expenses and benefits, HMRC, News articles, Status / Comments Off on Travel and subsistence deductions – for agency and other workers paid through intermediaries

On 9 December 2015 HMRC published its detailed proposals and draft PAYE legislation (with equivalent NIC legislation to follow), which would place significant limits on expenses claims made by workers paid though employment agencies and similar structures. The proposals are expected to take effect from 6 April 2016.

How does the new legislation work?
In principle the change is disarmingly simple, and will now deem that each engagement of the worker, by the employment agency etc., is regarded as a separate employment.

Since 1998, legislation has deemed that if substantially the whole period of an employment is performed at a single place, then any travel (i.e. from home or another private location) in order to get to or from that place, is ‘ordinary commuting’ i.e. non-allowable.

However employment agencies have often argued that a worker, albeit ‘moved’ from one period/place of client engagement to another period/place, is employed on a single overarching contract of employment by the agency. If this argument succeeds, substantially all of the employment is not performed at a single place and hence any such travel to reach that place is to a ‘temporary’ rather than permanent workplace i.e. an allowable journey. The new legislation therefore expects to defeat this argument, by ensuring that each client engagement will be considered separately as if it was a stand-alone employment.

It is HMRC’s view that some workers of employment businesses are currently able to enjoy ‘unfair’ tax deductions. Also it is perceived that in many such cases the ’employer’ (or paying business) retains most of the benefit of this. Indeed it seems HMRC may possibly regard many ‘umbrella payrolls’ as adding little or no true commercial value, beyond generating income for themselves at the expense of the Exchequer (i.e. typically by charging a fee to the worker in return for arranging payment of ‘tax free’ expenses). The new legislation therefore seeks to remove any such perceived unfair tax/NIC advantages.

Which workers will be caught under the new legislation?
As a minimum:
– An individual (worker) must personally provide services. There will be some situations where personal services are demonstrably not provided; however it will be assumed most agency workers do provide their services personally, and the onus would be the parties if they wish to show that this test is not met.
– The personal services must be supplied to another person (the client).
– However any direct contract between the client and the worker would be excluded, hence the arrangement must involve an ’employment intermediary’ (such as an employment business or agency) being contractually placed between worker and client.
– The new rules do not however apply if the manner in which the worker provides the services is not subject to (or to the right of) supervision, direction or control, i.e. by any person. HMRC is known to interpret these tests both widely and stringently, and again it must be assumed the onus would be very much on the parties to prove that this test is not met.
– Work undertaken wholly within the client’s home is also excluded (this is a factual test).

One chink of light is that the draft guidance does accept that secondment of a worker from one place to another within the same engagement would potentially still be regarded as a move to a temporary workplace (assuming that secondment was for 2 years or less). Whilst there may be certain limited circumstances where this exception might apply, we imagine it would be difficult for an agency to ‘manipulate’ the length of a particular engagement in order to seek to take advantage of the ‘relaxation’. In practice most engagement periods are for a finite period and are determined by factors outside the employment agency’s control i.e. they are based on the client’s requirement primarily.

What about Personal Service Companies (PSCs)?
PSCs are themselves an ’employment intermediary’, and hence the worker supplied by the PSC is also potentially caught under the rules. However the draft legislation confirms the Government’s intention, as outlined in the Chancellor’s recent Autumn 2015 statement, that the PSC will have to be within ‘IR35’ to also be caught within these new travel restrictions.

In simple terms the ‘IR35’ legislation applies if the worker would be an employee of the client but for the interposition of the PSC. At present the large majority of PSCs regard their contracts as outside of IR35 and, if this is correct, then the PSC will not be caught by the new restrictions. However HMRC is currently considering consultation responses on the extent to which the IR35 rules should themselves be overhauled. Whilst HMRC sources have recently indicated that no hard and fast decisions (on IR35 changes) have yet been made, it is very much a question of ‘watching this space’.

As a PSC structure will only have to consider the new travel rules if they are also caught by IR35, another potential stumbling block is how precisely to define a PSC? In most cases a PSC will be self-evident i.e. a company owned and run by one man or woman; however for instance the structure and ownership of jointly run businesses may have to be looked at more carefully. In general the IR35 legislation (Section 48 et. seq. of Income Tax (Earnings and Pensions) Act 2003), is drawn widely to include as many businesses as possible within its definition of a PSC for this purpose. However paradoxically, in the context of the new legislation, IR35 may prove to be an excluding factor, i.e. if you are defined as a PSC but are outside of IR35, you are also outside of the new travel rules.

When might the new proposed ‘transfers of debt’ rules apply?
In common with other ‘anti-avoidance’ legislation, the new rules propose that unpaid PAYE debts can be transferred to other relevant parties. This follows a pattern initially established with the 2006 rules applicable to ‘Managed Service Companies’, as well as the 2014 legislation seeking to prevent the payment of agency workers on a ‘falsely self-employed’ basis, or being paid via ‘offshore’ companies where work has been undertaken in the UK. Briefly the new transfers of debt proposals are that:
-PAYE/NIC due on any taxable travel expenses would in the first instance be sought from the employment intermediary which paid those expenses.
– However if those duties remain unpaid, the debts may be transferred to any director of that employment intermediary, by means of serving a ‘personal liability notice’.
– As mentioned, if the IR35 rules apply to a PSC then so will the new travel rules. If in this event the PSC fails to account for the PAYE/NIC on taxable travel expenses, the debts may be transferred to the director(s) of the PSC. Presumably such a PSC may have also failed to recognise and properly apply the IR35 rules themselves; hence the business will face a challenge on more than one front.
– If there is evidence that a ‘client’ (i.e. the end user of the worker’s services) has fraudulently colluded with the intermediary i.e. by providing false evidence that the worker is not subject to supervision, direction or control, then debts may be transferred to the client (and in turn, the client’s directors if the debts remain unpaid). Whilst in practice a client will no doubt wish to determine the actual extent of supervision, direction or control of each worker, on an individual basis, under the new regime they would be unwise to share that process (formally or informally) with the Agency without extreme caution.

If you require any further information on these proposals, or indeed other ’employment intermediary’ obligations including the proposed IR35 overhaul, please contact ET4B.

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Updates to company car Advisory Fuel Rates

Posted by David on December 01, 2015
Expenses and benefits, HMRC, News articles / Comments Off on Updates to company car Advisory Fuel Rates

HMRC has updated its company car Advisory Fuel Rates (AFRs) with effect from 1 December 2015. The new rates apply from that date, though  employers do have an option of retaining the previous rates for one further month i.e. until 1 January 2016 if they prefer.

The new rates are shown below.

Engine size Petrol LPG Diesel
1400cc or less 11p 7p 9p
1,401 cc to 1,600cc 13p 9p 9p
1,601cc to 2000cc 13p 9p 11p
Over 2000cc 20p 14p 13p

Note: HMRC normally reviews AFRs on a quarterly basis, and these slight reductions to the previous rates are intended to reflect recent trends in fuel prices.

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New agency withholding and reporting rules – a further update

Posted by David on March 10, 2015
CIS, HMRC, News articles / Comments Off on New agency withholding and reporting rules – a further update

At ET4B (and sad though it seems) we have been ‘eagerly’ anticipating some updates and clarification from HMRC in respect of the new withholding and reporting obligations for employment intermediaries (i.e. employment businesses or agencies). It is only very recently that the final reporting Regulations have been published.

Our overall impression remains that HMRC still hasn’t done enough to clarify its interpretation in some areas, particularly as regards how the rules may affect Personal Service Companies (PSCs). Anyway, our current understanding of the new withholding and reporting rules (insofar as they affect most UK agencies), can be briefly summarised as follows:

– There has to be client involved, which in turn pays an intermediary for the service (i.e. if the agency simply hires and pays for a service itself without passing the costs to a client, this payment would be outside the new rules).
– Also an individual (worker) must personally provide services to the client.
– If these tests are satisfied, the agency must apply PAYE/NIC on all worker payments, unless it can be shown that either:

  • The manner in which the worker provides the services is not subject to (or to the right of) supervision, direction or control, by any person (this is a very difficult test to meet), or:
  • That any remuneration receivable by the worker already constitutes employment income. HMRC would generally accept payments made to a bona fide UK PSC falls within this second exception.

– Payments which fall within either of the previous two exceptions must then be included within the new quarterly reports, which are to apply from 06/04/15.

HMRC has now confirmed that PSCs would be expected to be included within the quarterly reports issued by the ‘first tier’ intermediary employment business, and this does raise some concerns. We do feel that HMRC has been somewhat disingenuous in its earlier statements here. HMRC had stated consistently that PSCs were not the direct target, whilst introduction of the additional legislation was being discussed. The new quarterly reports will now inevitably provide HMRC with a rich vein of additional data with which to consider each PSC’s IR35 compliance position (i.e. this assumes there is no PAYE/NIC failure for the agency, which itself is not absolutely clear given the limited guidance issued by HMRC).

What do ‘first tier’ agencies have to do now?
We would suggest that employment businesses i.e. those that are the ‘first tier’ below the client in any engagement chain, would need to:

  • Review their contractor take-on processes, ensuring that what is and what isn’t a PSC is recognised fully (if the organisation is not a genuine PSC, there may be not just a reporting obligation, but a PAYE/NIC withholding obligation as mentioned above). This represents a challenge because, amongst other things, HMRC has not clarified fully what it regards as a genuine PSC.
  • If the contractor is not a PSC (e.g. it is an umbrella payroll) a full and robust review of the payment processes adopted by that organisation (including any subsequent contractor in the engagement chain) would be warranted. This is because, if the ‘umbrella’ etc. defaults on its obligations and doesn’t account for PAYE/NIC, the first tier agency will now be liable under the new rules.
  • Include the payments to PSCs (and any other payees e.g. umbrella payrolls) in the new quarterly returns.  These returns are expected electronically, and the latest template supplied for these reports is available on the HMRC website.
  • Recognise the additional IR35 risk to the contractor that the new quarterly reporting obligations may present. Any other factors which can therefore be introduced or clarified to create reduced IR35 risk for a PSC may help to allay contractor concerns.

What do clients and service end-users have to do?
Most of the obligations under the new rules would be placed on the first tier agency. However as a minimum the hirer of the service should review contracts with those agencies, e.g. to ensure that the agency is contractually required to hire and pay the worker (i.e. so that the agency will clearly have the obligation under the new rules). If there is no agency involved then the hirer would itself have to undertake a proactive ‘due diligence’ approach when taking on any new contractor. Amongst other things the hirer would want to be comfortable that all parties being hired are UK registered business. There must be no suggestion of the payee (or indeed anyone lower down in the contractual chain) being based overseas (and perhaps paying workers offshore for work performed in the UK).

In summary, the new rules do present a substantial additional compliance burden, primarily for agencies but also potentially for hiring organisations. We do not feel HMRC has helped here, i.e. the department has failed to provide sufficient and clear enough advice which would assist fully compliant businesses.

Although genuine UK-based PSCs are unlikely to create direct PAYE/NIC obligation for the hirer or the agency, once PSC contractors become fully aware of any potential increased IR35 risk to their own business, we can expect additional focus on those IR35 obligations. If you require assistance in these complex matters, e.g. in reviewing contractor take-on processes and policies, or reviewing actual contractual terms and working practices (i.e. not just written contracts) in order to minimise these IR35 risks more effectively, please of course contact ET4B.

 

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