Company car

ET4Bs Winter 2018 Newsletter

Posted by David on February 11, 2018
Flexible Benefits, HMRC, News articles, Payroll, Status, Termination Payments / Comments Off on ET4Bs Winter 2018 Newsletter

ET4B’s Winter Newsletter 2018 looks at some of the more pressing matters currently on our, and our clients’ agendas.

One aspect affecting nearly all employers is the changes planned on treatment of employment termination payments. Upon implementation the changes are now being justified on a robust agenda of ‘fairness and clarity’, with the previous pretences of extra ‘simplicity’ and tax-neutrality having been dropped.  This presents the prospect of more work for employers and more tax/NIC to pay (for almost every employer and employee).

A few specific points of interpretation in respect of the new termination payments rules have very recently (14 February 2018) been clarified by HMRC in its February 2018 Employer Bulletin.

Firstly, HMRC has confirmed that payments made on or after 6 April 2018, but relating to a termination before that date, would fall under the ‘old’ rather than ‘new’ rules.

Secondly HMRC confirms that genuine redundancy payments (whether statutory, or non-statutory i.e. at enhanced rates agreed between employer and employee) should not be looked at under the new Post Employment Notice Pay rules i.e. they will still qualify for the £30,000 exemption. This is consistent with existing treatment which in effect goes as far back as the ‘Inland Revenue’ Statement Of Practice 1 of 1994 – so it would been a major disappointment if HMRC had decided to take a more stringent view here.

Finally the Employer Bulletin does confirm that the proposed withdrawal of Foreign Service Relief on termination payments from 6 April 2018 is still intended, but remains subject to further Parliamentary Approval.

Other than termination payments, the Newsletter looks at other hot topics concerning the government’s ongoing concern on employed v self-employed status, the increase in HMRC minimum wage reviews, changes in tax treatment of flexible benefits (or Optional Remuneration Arrangements to use the current terminology), possible changes to the way employee expenses are treated, and the proposed further uplift in taxation for diesel company car drivers.

We trust you find the Newsletter of interest. If you think we can assist, on these or any other employment/worker related matters, please of course contact us contact us.

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Government paranoia over salary sacrifice persists

Posted by David on February 28, 2017
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.

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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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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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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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OTS recommendations – a whole new ball game, or tinkering with the rules?

Posted by David on February 19, 2014
Expenses and benefits, Flexible Benefits, HMRC, National Insurance, News articles, Payroll / Comments Off on OTS recommendations – a whole new ball game, or tinkering with the rules?

At the end of last month the Office of Tax Simplification (OTS) published its eagerly anticipated Second Report into the tax treatment of Employee Benefits and Expenses.

Not everyone will wish to read all 86 pages of the Report, therefore we have produced a summarised version, together with some of ET4B’s own observations, in this attached document. However the fundamental questions addressed boil down to two things; can interpretation and administration of the rules be made any simpler, and can HMRC do more to help employers in their (sometimes reluctant) role as informal ‘tax assessor and collector’.

Amongst some fairly significant changes proposed by the OTS, the main ones are as follows:

– HMRC should actively encourage employers to voluntarily payroll benefits.
– There should be a legislative P11D exemption for benefits which have been fully taxed and NIC’d via payroll.
– The scope of PAYE Settlement Agreements (PSAs) should be widened. In addition, an online PSA return completion process should be introduced, and the current need for employers to ‘apply’ for a PSA should be abolished completely.
– There should be a clearer definition of certain benefits.
Dispensations to be replaced by a statutory exemption.
– Abolition of the £8,500 ‘higher paid’ P11D threshold.
– Simplification of Travel and Subsistence and other expenses deduction rules.
– Simplification of NICs generally.

Substantial changes may not happen overnight and so employers must continue to meet their existing ongoing obligations. At ET4B we pride ourselves in being able to abbreviate these complex matters significantly, translating these into plain English and simple guidelines, whilst of course keeping a close eye on possible future changes. If you feel ET4B can assist your own organisation in this rapidly changing environment please do not hesitate to contact us.

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