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.