Employment taxes and payroll

National insurance thresholds

From April 2017, the thresholds for primary (employee) and secondary (employer) national insurance will be aligned.

This change will help simplify National Insurance calculations for employers. It is also appears to be the start of the process towards closer alignment of tax and national insurance highlighted by the Office of Tax Simplification’s recent report.

This is a welcome change. It is unlikely to have a significant impact on employers and employees in the short run. The real change could come with future developments in relation to the closer alignment of tax and national insurance. This is a small first step towards that.

 

Salary sacrifice

Following the Budget 2016 announcement, the Government is restricting the number of benefits that employees can receive with income tax and national insurance advantages through salary sacrifice arrangements.

Under salary sacrifice arrangements, an employee gives up some salary in exchange for the employer providing a benefit. The Government believes that this system does not treat everyone fairly, making the system more generous for some employees and inconsistent in the tax and national insurance treatment.

From April 2017, the tax and employer national insurance advantages of salary sacrifice schemes will be removed, except for arrangements relating to pensions (including advice), childcare, cycle to work and ultra-low emission cars. This will mean that employees swapping salary for benefits will pay the same tax as the vast majority of individuals who buy them out of their post-tax income. Arrangements in place before April 2017 will be protected until April 2018, and arrangements for cars, accommodation and school fees will be protected until April 2021.

It is helpful that the Government has reaffirmed that any change will not have an impact on the salary sacrifice for employer pension contributions, childcare or cycle to work in line with their continuing focus on encouraging saving for retirement, making it easier for parents to return to work and encouraging employers to focus on staff health. Employers will at least have until April 2018 to revisit benefit packages for existing arrangements in place at April 2017.

 

Valuation of benefits in kind

The Government will consider how benefits in kind are valued for tax purposes.

The Government intends to publish a consultation on employer-provided living accommodation and a call for evidence on the valuation of all other benefits in kind at Budget 2017.

The Office for Tax Simplification recommended a review of employer-provided living accommodation following a call for evidence in December 2015. The Government has agreed that this complicated benefit in kind and the long standing exemptions should be reviewed.

The call for evidence for the valuation of other benefits in kind comes as a surprise and would involve a lengthy process of legislative changes, but might relate to the proposed changes for salary sacrifice. We shall have to wait and see what the call for evidence covers in Budget 2017.

 

Call for evidence on non-reimbursed expenses

The Government will be asking in due course for evidence on the use of income tax relief for employee's business expenses, including those that are not reimbursed by the employer.

Employees who incur certain tax deductible expenses that are not reimbursed by their employer may claim relief via their Self-Assessment Tax Return. A call for evidence will be published by the government to ascertain the extent to which this relief is claimed. 

This is a welcome development. In many cases, employees may not claim relief due to the administrative burden involved or simply not understanding that they are entitled to make a claim.

 

Termination payments

From April 2018 termination payments over £30,000, which are subject to income tax will also apply be subject to employer NICs.

The proposals in HMRC's August 2016 consultation in relation to notice pay have been simplified.

Qualifying termination payments in excess of £30,000 will now attract employer's NIC. The rules surrounding payments in lieu of notice will be changed to ensure that payment equivalent to an employee’s basic pay will be fully taxable. The £30,000 exemption is still in principle available on amounts above the employee’s basic pay.

The application of employer's NIC to termination payments above £30,000 should generate significant Exchequer receipts on larger termination payments, where historically the NI saving, being on the whole payment, has often been larger than the tax saving, which is limited to tax on the first £30,000.

The taxation of payments in lieu of notice is an understandable attempt to standardise an area for which employees historically have obtained varying tax treatments depending on the wording of their employment contract and on their employer’s customary practice in respect of paying termination payments. The new rules may however create complexity in determining the basic pay of an employee where they receive bonuses and non-cash remuneration.

 

Tax relief for legal support from employers

Employees called to give evidence in court will no longer pay tax on legal support from their employer.

Legal support provided by employers to employees giving evidence in court will qualify for tax relief so that employees will not pay tax on the benefit of support received. Previously, tax relief was only available where the allegations were specifically against them personally. 

This is a welcome change and should ensure that employees are not unfairly out of pocket where required to give evidence.

 

Simplifying the Pay As You Earn Settlement Agreement process

It was announced in the 2016 Budget that the Government will legislate to simplify the Pay as You Earn Settlement Agreement (PSA) process for applying for and agreeing PSAs from the 2018/19 tax year.

Having a PSA in place can remove the need to report items on annual benefit in kind forms P11D or through the payroll.

HMRC consulted on changes to simplify for employers the process of agreeing which employee expenses and benefits may be included in a PSA. The Government will now legislate changes to simplify the PSA process from 2018/19.

Currently, employers are required to reapply each year for a PSA. HMRC acknowledges that PSAs are often agreed on the same terms each year and we expect the changes to reduce administrative requirements.

We will need to see the details on how the PSAs will be simplified. Rather than broadening the use of PSAs, however, we expect the changes to be limited to making the process more administratively straightforward and giving clarity to what can and cannot be included in a PSA. 

 

Tax reduction for employer-provided assets provided for part of the tax year

Employees will only be taxed on the proportion of the tax year for which an employer-provided asset is made available for private use.

Employees are currently subject to tax on a percentage of the value of assets provided by employers (20% in most cases) with no relief for periods where the assets are unavailable for private use. The new rules should provide relief where assets are only available for part of the tax year.

This is a welcome change and aligns the tax treatment of such benefits more closely with the reality of the situation.

 

Dates for 'making good' on benefits in kind

As announced in the March 2016 Budget and following consultation, the government will now legislate in Finance Bill 2017 to ensure that an employee who wishes to 'make good' to their employer the cost of a benefit, will have until 6 July in the following tax year to make the payment.

An employee who receives a non-cash benefit will usually be taxed on the cash equivalent amount as a benefit in kind. If employees ‘make good’ the cost of the benefit to the employer, however, they will not be taxed on the benefit they have received.

The date by which they need to ‘make good’ the benefit previously varied between different types of benefits, leading to complexity for both the employer and the employee.

It was announced in Budget 2016 that the process would be simplified. Following a consultation exercise, legislation will be included in Finance Bill 2017 stating that an employee will have until 6 July following the tax-year end to make good the cost to their employer. This will have effect from April 2017.

Simplification and clarification of the current rules is to be welcomed, especially by employers who will save on administration and time costs. 

 

Removal of Employee Shareholder Status

Tax advantages linked to Employee Shareholder Status will be removed for agreements entered into on or after 1 December 2016. The status itself will subsequently be removed.

Employee Shareholder Status (‘ESS’) will lose its tax advantages for agreements entered into from 1 December 2016 with the status itself to be subsequently withdrawn. Previously, ESS offered both income tax and capital gains tax advantages where shares were issued to employees in return for them surrendering certain statutory employment rights. 

ESS was originally proposed as an incentive to support a more flexible workforce, but evidence gathered by HM Treasury suggests that the status is being used in tax planning and not for its original purpose.

It is understandable that the government wishes to close down an arrangement that it perceives as being misused. Many companies have, however, used ESS because they do not otherwise qualify for the other tax-advantaged share schemes, which are not available, for example, to subsidiary companies. We encourage the government to look at introducing alternative reliefs that allow such companies to incentivise their workforce in a tax efficient manner and support the flexibility in the workforce.

 

Public sector bodies' PAYE and NIC responsibilities for personal service companies

Public sector bodies will be liable to operate payroll taxes on workers engaging via personal service companies.

From April 2017, public sector bodies will need to consider the underlying employment status of individuals who work for them through personal service companies and apply Pay As You Earn (PAYE) and National Insurance (NI) where the underlying relationship is one of employment. Previously, in such scenarios, the responsibility for operating PAYE and NI only fell on the worker’s personal service company. Where the rules apply, the public sector body must apply PAYE and NIC on the full value of fees paid to the worker’s company. This does not affect the existing rules in relation to private sector arrangements of a similar nature. 

This is an understandable move to shift the payroll compliance burden away from a large number of individual contractors and onto larger public bodies that contract them. This will undoubtedly discourage their use where public sector bodies are involved and will add complexity both for such bodies and for agencies that supply workers to them, as potentially either could be liable under the new rules. If the new rules prove successful, we could see them expanded to cover private sector bodies.

 

Disguised remuneration schemes

The Government will introduce legislation to extend the scope of the disguised remuneration rules to tackle the use of certain types of tax avoidance schemes by the self-employed.

Employee disguised remuneration schemes often involve complex structures that seek to reclassify monies and benefits that would otherwise be taxed as employment income.

The Government will introduce changes in the 2017 Finance Bill that will extend the disguised remuneration concepts to apply to self-employed users of certain disguised remuneration schemes.

The drafting of the disguised remuneration legislation previously introduced was wide and, in some respects, is difficult to interpret. This had the effect of bringing some commercial transactions within its remit, causing uncertainty for taxpayers.

Where possible, it is preferable for such changes to be targeted at specific avoidance schemes in order to reduce the burden of uncertainty on commercial arrangements. We will need to wait and see the further detail on these proposed changes.

 

Read our full commentary here.

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