ET4Bs Spring 2017 Newsletter includes updates on new legislation applicable to salary sacrifice and flexible benefits (or ‘Optional Remuneration Arrangements’ to use the latest terminology), as well as changes to ‘IR35’ obligations in the Public Sector and a range of other employment related updates.
Flexible Benefits, HMRC, News articles, Status / Comments Off on ET4Bs Spring 2017 Newsletter
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.
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.
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.
HMRC, News articles, Payroll / Comments Off on New Employer PAYE year end procedures 2013/14 under RTI
Having embraced the Real Time Information (RTI) process for the first time in 2013/14, employers will be hoping that their PAYE year end processes will now become much more straightforward. The previous annual return forms (forms P35 and P14) are no longer now required under RTI. Instead HMRC will itself collate annual details of each employee’s pay tax and NIC, from the ‘Full Payment Submissions’ (FPSs) already made ‘in year’ by the employer.
The employer will still be required to send a ‘Final Submission’ to HMRC once all FPS returns for the year have been done. This is broadly based on the end of year questions formerly included within the previous form P35. However the numbers and complexity of the questions appear to be much reduced, therefore the process should be much simpler.
Perhaps the most important aspect will therefore be to ensure that all FPS submissions for the year have first been submitted. Many employers have in the past tended to make informal ‘Month 12’ adjustments to their PAYE/NIC records, around about the end of the tax year. Unfortunately such practices do not fit in comfortably within the RTI process, requiring an FPS return ‘on or before’ each payment. HMRC has stated that it would still be possible to file an amended or ‘revised FPS’ on or before 19 April 2014. After that date, corrections would still be possible, using what is referred to by HMRC as its ‘Earlier Year Update’ process, though such updates would have to be filed by 19 May 2014 to avoid any risk of penalties for late submission (in effect, the same deadline as for the outgoing form P35).
HMRC has taken to YouTube in an attempt to explain the new process. Unfortunately we found this rather long winded (perhaps taking its lead from watching the Oscars ceremony – imagine a couple of minutes of entertainment ‘crammed’ into several hours of TV, as they say!). If you do require more practical assistance, you can also refer to the written guidance in the Employers Bulletin issued last month, call the HMRC Employer Helpline directly, or of course contact ET4B.
Other employer P11D and Class 1A (P11D(b)) returns will still of course be separately required, by the normal timescales of 6 July and 19 July 2014 respectively.
Expenses and benefits, Flexible Benefits, News articles / Comments Off on Tax breaks when looking after employees’ health
Earlier this year the government opened consultations on providing a new tax exemption for employer costs incurred in helping staff return to work. This is intended to tie in with the new ‘health and work assessment and advisory service’ due to be created next year, whose main ‘intervention’ focus will be to ensure that employees off sick are able to return to work as soon as possible.
The initial suggestions, that the tax relief should have a £500 maximum and should only apply if the employer agrees to fund all such ‘interventions’, has attracted some criticism. However it is worth remembering that a significant proportion of staff medical or welfare costs may already be met by employers, without incurring tax or NIC charges. This article provides a brief summary. Please contact the ET4B team if you require additional information.