Salary sacrifice

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.

Tags: , , , , , , ,

ET4Bs Spring 2017 Newsletter

Posted by David on March 04, 2017
Flexible Benefits, HMRC, News articles, Status / Comments Off on ET4Bs Spring 2017 Newsletter

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.

Tags: , , , , , , ,

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.

Tags: , , , , , ,

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.

Tags: , , , ,

What next for salary sacrifice following the ‘Reed’ case?

Posted by David on August 26, 2015
Expenses and benefits, Flexible Benefits, News articles / Comments Off on What next for salary sacrifice following the ‘Reed’ case?

At the end of July (2015) the Court of Appeal heard, and rejected, an appeal by Reed Employment plc (“Reed”), against a nine-figure assessment of arrears of PAYE/NIC by HMRC.

For anyone unfamiliar with this potential landmark case, Reed had paid its temporary employees partly in salary and partly in tax free travel expenses, ostensibly implementing a ‘variable’ salary sacrifice so that PAYE/NIC would apply only to the lower salary element. HMRC took the view that no genuine alteration to contractual salary had ever been made, hence PAYE/NIC applied to the full original contractual sum. This view was supported by both the First Tier and Upper Tribunals.

In also agreeing, the Court of Appeal highlighted the absence of any clear unequivocal statement, by the employer to the employee, that the employment contract had been changed (i.e. in any way that the employee could be said to have understood, much less agreed to, the change). For example an employer statement that there will be a ‘small reduction’ to the employee’s gross pay was seen as at best ambiguous, and could not override the ‘clarity’ of the main contract’s terms.

The Court of Appeal also accepted the earlier Tribunals’ decisions that dispensations previously issued by HMRC were not relevant in this matter. In short, Reed had previously agreed with HMRC as to what circumstances a payment of tax free expenses could be made; however it was felt to have not also explicitly agreed the salary sacrifice methodology with HMRC.

Whilst the suggestion that Reed had not made ‘full disclosure’ in discussions with HMRC seems harsh, in our view the courts were correct in regarding the ‘salary sacrifice’ and the payment of expenses as two completely separate steps (i.e. if the two operate in conjunction, then the salary sacrifice must always come first). If the salary sacrifice does not work in the first place, any subsequent payment of ‘expenses’ would be considered as mere window dressing on the payslip and would be ineffective for tax/NIC purposes. The 1960s tax case of Heaton v Bell established the premise that there must be more than a mere payslip deduction, to effect a true contractual change.

Are statutory changes to salary sacrifice rules likely?
There has been speculation (following some rather vague government announcements recently) that there will be a general attempt to ‘outlaw’ salary sacrifice in future. ET4B certainly does not see this as a simple matter and therefore happening in the short to medium term. There are a vast number of different scenarios to consider, such as the employer which automatically applies a supposedly ‘invisible’ tax free benefit in addition to salary (e.g. as in the case of most Civil Service pension contributions), employers which provide and quantify tax-favoured benefits but don’t permit them to be altered by the employee, employers which automatically ‘opt-in’ employees to receive specific benefits (e.g. stakeholder or other occupational pension contributions) unless the employee ‘opts-out’ directly, employers which operate a full flexible benefits package, and employers which allow individual employees to opt for salary sacrifice in conjunction with tax-favoured benefits (e.g. employer sponsored childcare) merely on an ad hoc basis. Arguably there is no fundamental difference between each of these schemes; merely that larger employers tend to be slightly more sophisticated in the way in which they are able to demonstrate and agree revised terms with staff.

What we will very probably see is that specific arrangements, which HMRC is known to ‘disapprove of’, will continue to be challenged actively. For example it is expected that employee travel expenses, if paid in direct conjunction with a salary sacrifice agreement, will be excluded from the proposed statutory exemption for allowable expenses (planned to be introduced in April 2016, to replace existing employer dispensations for allowable expenses).

What steps should be taken now?
The Reed case provides another timely reminder that basic principles should always be followed when implementing or reviewing salary sacrifice or flex schemes, i.e.:

  • Is the contractual change legally effective? As Reed has found, this question is particularly important if an employee is included ‘automatically’, so that the employee cannot be said to have signed up to the scheme directly. Annual employee ‘total reward’ statements can often help, but in some cases can indeed hinder, this process.
    ET4B has noted that many salary sacrifice schemes (worryingly, including many of those drafted by the Big-4) do not appear to address this basic principle fully. Rather than explaining to employees exactly how a salary sacrifice will operate, we have seen extremely vague wording which is no more than saying ‘we [the employer] will decide how much your salary sacrifice will be each month’. The Reed case reminds us that a mutual and clear ongoing agreement is needed with the employee, before an employment contract may be regarded as altered.
  • Payroll calculations and operation of ‘notional pay’ e.g. as regards overtime, bonuses, increments etc., must also be thought through, and payslips must be able to cope if there are multiple sacrifices.
  • Treatment of leavers, staff on long term sick, and maternity leave etc. should be considered. There may well be employee rights at those times, as well as ongoing employer costs to consider.
  • Exclusion of certain employees should be considered e.g. those close to or below Minimum Wage or NIC Lower Earnings Limits.
  • Finally, is any tax clearance from HMRC comprehensive and effective i.e. is it specific to your own organisation and has it been achieved by putting all your cards face up on the table on a full disclosure basis?

In this complex area, choosing the right specialist adviser to review or implement your scheme may mean the difference between having confidence in a robust and watertight arrangement, and nervously awaiting the next knock on the door from HMRC.

Tags: , , , , ,

HMRC Know Your Customer (KYC) Reviews – an update

Posted by David on November 17, 2014
Expenses and benefits, Flexible Benefits, HMRC, News articles, Status, Termination Payments / Comments Off on HMRC Know Your Customer (KYC) Reviews – an update

After going rather quiet on the ‘PAYE Audit’ front for a few years, HMRC has now introduced a new round of employer reviews, under the title of ‘Know Your Customer’ (KYC). Whilst these sound like a bit of a cosy chat, we should not overlook the reality – that for all intents and purposes these are simply PAYE Audits aka Employer Compliance Reviews, in another guise.

The ‘KYC’ programme is initially being rolled out by HMRC’s Large Business Service (LBS) teams i.e. those offices who deal with the largest employers in the country. However this is no surprise: HMRC invariably follows the ‘law of diminishing returns’ when undertaking Employer Compliance work, i.e. the larger employers will always be first in line, and things then gradually work their way down to medium and smaller-sized structures.

KYC reviews initially involve a high level review of the employer’s policies. This may happen before or after an initial KYC meeting with HMRC. From there we can expect HMRC to focus in on what it perceives to be the main areas of risk. Whilst those areas will vary depending on the worker profile, experience suggests that HMRC will always wish to consider the following common risk areas:

  • Employment status: recent changes to the employment agency or ’employment intermediary’ rules seem to have re-focussed HMRC’s minds on the risks associated with temporary workers, self-employed, and limited company engagements.
  • Termination payments: businesses that have seen substantial staffing changes can expect HMRC to take a particular interest in severance packages paid, with the usual focus on Pay in Lieu of Notice and any other payments on termination potentially arising from the contract (rather than simply from the severance).
  • Company expenses policies: relevant policies include those applying to company vans, company cars and private fuel (the last one is a particular HMRC favourite as this represents an all or nothing benefit when linked to company vehicle use).
  • Flexible benefits and salary sacrifice: HMRC will be especially interested in any aspect of the scheme which has not already been cleared fully by HMRC on a ‘cards face up on the table’ basis (or where the ‘goalposts have moved’ so that the scheme does not operate precisely in the way HMRC was told originally).

For those employers who also have ‘Senior Accounting Officer’ (SAO) reporting responsibilities, this provides HMRC with an additional angle of approach, i.e. within a KYC review HMRC may at the same time seek assurances on the validity of previous SAO reporting and the extent of internal checking undertaken to verify this. Indeed we are now seeing HMRC ask for copies of relevant internal audit reports – an approach not previously followed.

On the plus side, our own recent experience has indicated that, with a little advance planning it is usually possible for an employer to take and retain control of much of the process. If so the employer should be able to approach any KYC review with a fair amount of calmness, rather than simply hoping for the best, and then having to ‘fire-fight’ when issues later arise.

If you require assistance in dealing with a forthcoming KYC review or in relation to any other Employer Compliance matter, please contact the ET4B team.

Tags: , , , , , , , , ,