The Government has recently made several important announcements that will, potentially, affect the tax treatment of a number of employee payments.
Our tax expert Paul Spenceley analyses the impact these changes may have on business.
Following an earlier consultation and the 2016 Budget announcement, the Government has published draft legislation and indicated that from 6 April 2018:
- It will no longer be necessary to consider if payments made in lieu of notice (PILON’s) are contractual or not to determine tax liability. Effectively anything that the employee would have received if they had remained in employment and worked out their notice will be taxable and subject to NIC, whether or not their employment has ended early.
- The rules for income tax and employer NIC will be aligned so that both will be payable on any termination payment that exceeds £30,000. Interestingly HMRC has decided to retain the employee NIC exemption where the payment exceeds £30,000. Whilst this is good news for the employee it will result in complexity for the employer in processing these amounts correctly through the payroll.
- The Foreign Service exemption will be removed. This will impact employees who have worked overseas for a proportion of their period of employment
- The £30,000 exemption for both tax and employers NI will be retained. There was talk of providing a lower exemption and based on length of service but these have all been dropped.
HMRC are of the opinion that the vast majority of termination payments are less than £30,000 and will therefore remain free from income tax and NIC. However the change on non-contractual PILON’s will increase the tax payable on a number of termination payments albeit that it will simplify the position for employers.
These proposals will increase NIC costs and this may result in a reduction in the value of settlement offers.
Salary sacrifice for the provision of benefits in kind
HMRC has been concerned for a number of years about the increase in salary sacrifice, which includes flexible benefit packages. There have been a number of specific attempts to limit their use on certain benefits (for example canteens and more recently travel & subsistence) but HMRC are still concerned about them. HMRC has therefore proposed:
- To change tax legislation so that where a benefit in kind is provided through a salary sacrifice scheme it will be chargeable to income tax and class 1A NIC on the greater of the amount of salary sacrificed and the cash equivalent of the benefit set out in statute. This is aimed at benefits that have a statutory calculation rather than the actual cost to the employer such as company vehicles, fuel benefits, use of assets etc. It is suspected that the main item caught by this will be “salary sacrifice for cars” which has become popular and involves the employee receiving a company car in lieu of a salary sacrifice. There is no date for this change but these arrangements often last for three years so employees taking new cars now might get caught by the change.
- To seek tax and class 1A NIC on salary sacrifice arrangements even if the subsequent benefit provided is tax exempt. For example in the case of a workplace car park arrangement the employer will enter into an arrangement to provide a car park space with the employee reducing their salary through sacrifice to use that space. At present the car park provision is exempt from tax and NI but, after the proposed changes come into effect, the amount sacrificed will become liable to income tax and NIC. The exemption will still be available to employees where the provision is not part of a salary sacrifice arrangement.
These rules will not apply to the following benefits:
- Employer pension contributions
- Employer provided pension advice based on the recommendations of the Financial Advice Market Review
- Employer supported childcare and provision of workplace nurseries
- Cycles and cyclist’s safety equipment (provided they meet the statutory conditions).
There will be no change where salary sacrifice involves intangible benefits that are not taxed and do not rely on a specific tax exemption, such as extra annual leave or flexible working hours. Payroll giving arrangements will also be outside the new proposed rules.
All other benefits will potentially be subject to the proposed new rules.
Making good on benefits in kind
Benefits in kind has been on HMRC’s radar for a few years and one they are looking to resolve. There are a number of benefits in kind that can be reduced if the employee is required to contribute towards the cost. This can include such things as private medical insurance, private use of a company vehicle, vehicle fuel benefit, living accommodation and interest on beneficial loans and payments for the loan of an asset etc.
The proposal is that for the vast majority of these contributions they must be paid before the end of the tax year. HMRC will allow contributions towards the following benefits to be paid by 1 June following the end of the tax year:
- Vehicle fuel benefits
- Credit tokens (company credit cards etc.)
- Beneficial loans.
An announcement of the result of the consultation will be included in the 2016 Autumn statement. One of the main concerns here is the timing of payments from the employee to employer – in the case of car/van fuel this is usually the situation where company fuel cards are provided and the employee is required to pay back the costs of private mileage. At the moment the general rule is that this must be done without unreasonable delay and HMRC has suggested that this means by the time the P11d’s are to be submitted (6 July). However if an employee fails to submit his expense claim at the end of the year (perhaps due to holiday or too busy to deal with it) and recovery is not made by 1 June after the end of the tax year this could result in the employee having a car/van fuel benefit for the full tax year. Employers will need to review their systems to capture these “at risk” employees.
These rules apply for tax purposes only – For Class 1A NIC purposes the contribution must be made by the employer before the NIC is due (19 or 22 June following the end of the tax year)
PAYE Settlement Agreements (“PSA’s”)
A PSA is it is a formal agreement between HMRC and the employer that the employer agrees to pay the employee’s tax on a grossed up basis on certain benefits in kind. The current basis is that only benefits which are minor, irregular or impracticable to deal with can be included and the formal agreement must be entered in to with HMRC at some point prior to 6 July following the end of the tax year. The employer submits a computation of the grossed up tax, (usually by the end of August) and tax is payable on 19 October following the end of the tax year. Whilst the 6 July date is generous for tax purposes it does not apply for NIC purposes and therefore a benefit provided during the year that attracts class 1 NIC will still do so unless the PSA is in place before the benefit is provided. It is therefore common for employers to enter into these arrangements shortly before the commencement of the tax year rather than after the end of it. The proposals include:
- Removing the need to enter into the formal agreement with HMRC on an annual basis.
Bringing forward the payment date to 19/22 July following the end of the tax year, similar to class 1A NIC on benefits.
- Removing the “minor” benefit rule – HMRC consider that the majority of these benefits would probably already be excluded under the trivial benefit rules.
These are generally good changes, although the proposed payment date could present a number of employers with cash flow issues or work pressure as employees try to deal with other end of year returns, such as P11d’s, share scheme returns and termination reports all of which must be filed by 6 July following the end of the tax year.
HMRC has said that it will publish the results of the consultation later this year and set out the next steps.
Click here for a copy of the consultation: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/549682/Salary_sacrifice_for_the_provision_of_benefits-in-kind_HMRC_consultation.pdf
Responses must be received by 19 October 2016.
If anyone would like any further comment or clarification please contact our tax expert: Paul Spenceley: paul.spenceley@IrwinMitchell.com or 0370 1500 100 extension 6207.
Employment Law Update - September 2016