The last 12 months have been filled with many surprises in the British payroll industry. Here are a few final thoughts on some of the most noteworthy issues as we get ready for the New Year.
Brexit Affects Payroll
Much has been written about the future impact of Brexit and the surprise Brits felt when the results of the “In or Out” EU referendum were announced in the U.K.
In the absence of my crystal ball, I won’t attempt to predict our future, but I think it is fair to say that one of the immediate impacts of the Brexit result on payroll was the delay it caused to all of the consultations we had expected following the Budget 2016.
While too many consultations have been published to review in this brief article, one or two notable exceptions came up for discussion during the late summer of 2016 that set temperatures soaring.
We had been given several warning “shots across the bow” in previous Budget announcements and Autumn Statement reports. The Government was concerned about the increased use of salary sacrifice schemes. When the paper was published, it became clear that Her Majesty’s Revenue and Customs (HMRC) was particularly keen to narrow its focus to schemes offering greater flexibility.
At Budget 2016, the Government had previously stated its intention to exclude a number of Benefits in Kind (BiKs) from the policy because it wished to encourage employers to provide these to employees (see the May 2016 article in Global Payroll for more on the Budget). These exclusions included:
- Employer pension contributions
- Employer-provided pension advice based on the recommendations of the Financial Advice Market Review (FAMR)
- Employer-supported childcare and provision of workplace nurseries
- Cycles and cycle safety equipment, which meet the statutory conditions
Health-related benefits like cycle to work were also excluded from review and will continue to benefit from relief when provided through salary sacrifice arrangements. However, much evidence will be required for the Government to be persuaded to consider widening the scope to include other health-related BiKs such as health screenings and private medical health insurance.
The proposal for change (see next section) will not impact Payroll Giving.
The proposal looked not to prevent employers providing BiKs via salary sacrifice but instead to remove the tax and NIC advantages that come from doing so.
Generally speaking, the amount treated as general earnings of the employee under the benefits code is determined by reference to the cash equivalent of the benefit. This is normally the cost to the person providing the benefit unless it is affected by a special rule such as a company car benefit.
The Proposal for Change
When a BiK is provided in conjunction with salary sacrifice, legislation will change the way that the benefits code in Part 3 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) and the exemptions in Part 4 of ITEPA will apply.
Where an employee is provided with a non-exempt BiK in conjunction with salary sacrifice, the cash equivalent of the BiK would equal the greater of the cash equivalent of the BiK as specified in the benefits code or the actual amount of the salary sacrificed by the employee.
Where an employee is provided with a tax-exempt BiK in conjunction with salary sacrifice, the exemption will no longer apply. The cash equivalent of the BiK, treated as general earnings of the employee, would equal the greater of the taxable value of the BiK specified in the benefits code (if the exemption had not applied) or the amount of salary sacrificed by the employee.
For National Insurance Contributions, the majority of BiKs attract a Class 1A (employer-only) NICs liability. The Class 1A NICs treatment of the BiK will continue to follow the income tax treatment following any change.
The taxation of BiKs provided beyond salary sacrifice will remain unaffected.
At press time, this consultation has yet to close. However, by the time you read this, we will have heard from our new Chancellor in his Autumn Statement, which is scheduled to be published on 23 November.
Depending on your viewpoint (and there are many), these proposals will be seen as a blessing—or a curse.
Simplifying PAYE Settlement Agreements
Running alongside the salary sacrifice consultation was another paper that focused on the provision of BiKs, but this time under the structure of a PAYE Settlement Agreement (PSA).
The process involved for both employer and HMRC in agreeing on and administering a PSA is lengthy, manual, and has been identified by the Office of Tax Simplification as a perfect candidate for administrative improvement.
The Government consulted on proposals to simplify the process used for agreeing on and reporting items in a PSA and wanted to know how the process could be simplified and how the guidance could be strengthened to provide clarity for both employers and HMRC.
There was no proposal to broaden the scope of PSAs.
Regulation 106 of the Income Tax (Pay As You Earn) Regulations 2003 require items that are included within a PSA to be:
- Minor, with regards to the cost of the benefit provided or made available
- Irregular, as regards the frequency in which, or the times at which, the sums are paid or the benefit is provided or made available
- Paid in circumstances where deduction of tax by reference to the tax tables is impracticable or, in the case of a benefit provided or made available, is shared between employees so that apportionment of the benefit between the employees is impracticable
Currently, employers have to apply in writing for a PSA each year. A paper agreement must be signed and dated (in duplicate) by both HMRC and the employer, with each retaining a copy for their records.
HMRC has identified that the majority of PSA applications made by employers are identical each year and often agreed on the same terms. Items commonly included in a PSA include BiKs such as Christmas parties, working lunches, team-building exercises, and staff incentive awards.
The time the PSA is agreed upon also impacts whether Class 1 NIC becomes payable in some instances. This has been recognised as leading to practical difficulties for employees and is an area that will benefit enormously from simplification.
HMRC currently checks every PSA calculation for errors and anomalies before employers pay their PSA liability. These checks ensure the items returned in the PSA calculation match those agreed upon in the PSA agreement. Once the PSA calculations have been checked and the value agreed upon, employers have until 19 (22) October (depending on the method of payment) following the relevant tax year to settle their PSA liability, which includes paying Class 1B NICs.
Removing the process of checking the calculation can significantly reduce the administrative burden. This presents an opportunity to review the payment deadlines for PSAs, with a view to aligning the payment date of PSAs with other deadlines that exist for reporting of BiKs, i.e., 6 July.
- Remove the need for upfront agreement
- Removing the need for annual agreement will make the process simpler, particularly for employers who apply for the same items year on year.
- It will also remove the anomaly that exists where Class NICs become payable on non-cash vouchers on which agreement isn’t achieved before the non-cash vouchers are provided.
- Replace the paper return with a digital return—which in turn would reduce the risk of frequent errors made by employers when entering data in the PSA returns.
- Handling differences of opinion—where upfront agreement is removed there is a risk of disagreement at a later date by HMRC as to its inclusion. The Government was open to hearing views during consultation but was proposing that a pragmatic approach should be adopted where the employer acted in “good faith,” with action only being taken where the employer does not act in good faith or where it continues to include items within the PSA when HRMC has warned it not to do so.
- Removing the requirement for items to be “minor”—since the introduction of the Trivial Benefit exemption, many items have been removed from a PSA agreement. The Government proposed that removing this criteria would achieve simplification and additional certainty.
- “Irregular” should be considered in the context of a tax year and not be repeated within any pattern and additionally not be anything an employee has a contractual right to.
- The “Impracticable” test cannot simply occur as result of limitations within an employer’s software or due to presentational awkwardness.
Future articles, I feel certain, will include news on Termination Payments, Making Tax Digital (no less than six individual consultation papers), Tackling the Hidden Economy (three papers), Making Good, and many, many more.
As we approach the festive season, I would very much like to finish on a positive note. The Chartered Institute of Payroll Professionals (CIPP) policy team has been thrilled at the expansion, engagement, and enthusiasm for the Policy Think Tanks during 2016.
The roundtable discussions and debates give CIPP full and fellow members an opportunity to share their experience on a chosen subject. This in turn provides valuable insight for external policy makers and stakeholders to aid in their development of legislative change and service delivery.
Subjects covered this year include salary sacrifice; holiday pay; devolution of UK nations and its impact on the payroll function; self-serve software and its impact on external agencies such as Bankers’ Automated Clearing Services (BACs), payments services limited, HMRC and Beneficial Loans; and voluntary payrolling, the latter being a fact-finding process for the possibility of beneficial loans to be included within the voluntary payrolling framework. It has been an absolute privilege to be involved with these events, and I look forward to even more of them in 2017.
This just leaves me to wish you Happy Holidays and a happy, healthy, and productive 2017.