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 No attempt seems to have been made to quantify objectively the number of schemes which have been withdrawn or phased out in recent years, which is surely part of any overall balanced picture.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