May 2016

PAYE, NI and Benefits update

Update on current issues

• Childcare • Termination payments • Company vans and cars • Illegal workers • Testimonials • Share schemes • Intermediaries • IR35 • Pension advice • PSA

Budget

• Consultation on simplification of expenses and benefits

• Now have provisions in place – Voluntary payrolling of benefits – Statutory definition of trivial benefits – Abolition of lower paid employment definition – Replacement of dispensation regime

Simplification of expenses and benefits

• Allowing employers to deal with BIK via payroll • First looked at in 2007 • Proposal then was to make mandatory which was

not well received • So this is a voluntary process

Payrolling of benefits

• Adding the value of BIK to salary so PAYE is applied to that

• Rather than BIK collected (typically) through tax code after P11d submitted

• Little noticeable difference other than tax collected in real time

What is payrolling?

Details

• Cannot use for vouchers/ accommodation/loans (vouchers OK from 2017)

• Otherwise can pick and choose • Can also exclude employees • Must register before start of year – so too late for

2016 • Then can opt back out if necessary • Class 1A still reported on P11d(b)

• Specific legislative provision that trivial benefits will be exempt from income tax

• Number of conditions to be met for benefit to be treated as trivial

• Will also apply to benefits provided to member of employee’s family

Trivial benefits

• A: not cash or a cash voucher • B: cost of providing benefit or average cost does not

exceed £50 • C: benefit not provided pursuant to relevant salary

sacrifice arrangements • D: benefit not provided in recognition of particular

services provided by employee

Conditions

• Exemption works on all or nothing basis • If breaches limit benefit will be taxable and NICable

in full • No limit unless director of close company when

maximum of £300 per year

Further details

• Lower paid employments no longer applicable • All employees taxed on their BIKs and expenses • NIC provisions also aligned with this

Abolition of £8,500 threshold

• Exemptions provided to Ministers of Religion in LPE will be retained

• Reimbursement of accommodation costs such as heat & light etc for low paid will remain

Exemption

• New exemption will be retained for employees working as carers

• In respect of board and lodging in home of person caring for

• So no tax and NIC on this BIK

Carers

• Replacement of current regime • With exemption for allowable expenses that are paid

or reimbursed • Applies from 6 April 2016 • No longer any reporting requirements for qualifying

expenses • No need to apply for dispensation

Exemption for expenses

• Any amounts which would be treated as earnings • But where a deduction would otherwise be due

under s336 and s337

Expenses included?

• Employer or third party must have system in place to check expenses

• And that person could not reasonably have known or suspected that employee was not incurring deductible expenses

Conditions?

• No intention to change rules which determine whether tax relief is available

• Apply to all employers without option to opt in or out

• Still have to maintain records and checks

To note

• New legislation for applying for flat rate in respect of deductible expenses

• Requirement to provide reasonable estimate • Covers things like flat rate subsistence costs

Flat rate expenses

• Cannot apply where expenses under salary sacrifice – The employee gives up the right to receive an amount of

general earnings or specific employment income in return for the payment or reimbursement or

– The amount of other general earnings or specific employment income received by the employee depends on the amount of the payment or reimbursement

Salary sacrifice arrangements

• From 5 April 2014 many employers have been able to claim £2,000 reduction in NI

• Exclusions for certain organisations • From 6 April 2015 to be change in relation to

domestic care and support employees • From 6 April 2016 will go up to £3,000 but further

exclusion for one man band companies

Employment allowances

• Some confusion over operation of new restriction • Does company have to pay another person over

threshold • Or just pay them? • HMRC guidance states former • But not necessarily what people thought

New restriction

• Long consultation on potential change to travelling expenses for contractors

• General provisions allow for ordinary commuting where temporary workplace

• Broadly where travelling for less than 24 months • Anomaly where over-arching employment contract

Travelling expenses

12 months 12 months 12 months 3 FTC

Overarching employment contract

12 month 12 months 12 month

3 12 month placements but continuing employment

1

2

• Remove ordinary commuting relief where – Supplying personal services – Engaged through employment intermediary – Subject to right of supervision, direction or control

• Will apply to anyone who operates through intermediary

• Will only apply to PSC if caught by IR35

Proposal

• Actually confusion in consultation document • Not sure if all home to workplace travel or just to

engager’s workplace • Which has a big impact on those who are travelling

rather than site based

Confusion?

• From 6 April 2015 no employers NI for employees under 21

• Extended to apprentices under 25 from 2016 • Apprentice = government approved scheme

Abolition of NIC

Starter checklist

• Replaced P46 • Tax code worked out from online tool • Do not need to submit to HMRC • NB Student loans – need to use this to identify

correct as not on P45

Automatic enrolment

• Most people will be familiar with basic provisions • But just to recap …

Introduction

• Obviously a key issue • Need to understand how smaller companies will be

affected • No absolute exemption • Table on next slide outlines different scenarios • Would be useful to notify PR

Issues arising: small companies

Type of company AE obligations

Single director no employees Director is not a worker so no AE obligations to that individual

More than one director no employees

As above unless more than one with employment contracts

Director and workers Employer duties in relation to those workers but not to directors unless there is a contract of employment

Directors

• Have to assess at assessment date • If fluctuating may want to wait until know what

actual earnings are • Must act within six weeks if meet conditions • So may be some problem with waiting • Otherwise would have to estimate • Only not AE if know earnings trigger will never be

reached

Issues arising: variable earnings

• Do not have to have a pension fund up and running ‘just in case’

• But only have six weeks to get employee into pension scheme from date at which assessed as eligible

• Or where get request from non-eligible jobholder to join

• So have to be certain that can react if circumstances change

Issues arising: pension funds

Status

• Looking at contractual relationship between parties • If written contract then that is starting point • Autoclenz has changed the emphasis of contracts

Basic provisions

• Number of factors to be considered • Not a tick list • Each has different relevant weight • Depending on circumstances

Factors

• Very important • Some control in all relationships • But right of control is vital in determining employment • Falls into different categories – where, when, how,

what

Control

• Again, very important • Although not necessary considered so determinative • HMRC will want to make sure untrammelled • And substitute must be paid by worker or PSC • Cannot be employee if really can send substitute

Substitution

• Increasingly considered, particularly in IR35 case • Does this person feel like a person in business on their own

account? • Many different facets to this • Includes ability to benefit from sound financial management

Business operation

• Employment law criteria • Commitment by one party to continue to provide work • And by other party to continue to be available for work • HMRC often not confident in arguing this point

Mutuality of obligation

• Part of organisation • Employment type benefits • Training • Provision of equipment

Other factors

• Accessible from HMRC website • Designed to enable someone to determine status • Easy to be cynical! • Will be binding on HMRC if can show answers were

correct • So is a useful starting point

Employment Status Indicator

• Who is asking the question (worker/engager/representative)? • Is the enquiry for a current or future contract? • What is the individual’s current status? • What is engager’s business? • What is the worker’s trade? • If the worker is unable or unwilling to carry out the work

personal ae they obliged to send someone else to do it? • If yes, does the obligation reflect what happens or would

happen in practice if the worker is unable or unwilling to work?

• If yes, doe the worker pay the other person? • Could the worker bring in a helper to assist with the work?

Questions asked

• Can the worker be told what work to do? • Can the worker be moved from task to task? • Can the worker decide how work is done? • Is the worker a skilled person? • Which statement best describes when the work is done

– The worker works regular hours as agreed with the engager – The worker has freedom to work when he wishes subject to the

demands of the work – The worker is not required to work set hours but has agreed

deadlines • Does the worker have to provide not only minor items

but also major items of equipment needed to do the job? • Doe the worker have to pay the cost of all material and

supplies needed to do the job?

Questions asked

• ‘Status is an inaccuracy like any other and recovery action should be taken for all years where there has been a failure to operate PAYE and/or NICs’.

Collecting tax

• establish the facts for all in date years during which there is a potential failure

• consider whether in respect of each year HMRC has a strong case

• concede any or all years where HMRC has a weak position and document the reason(s) for the decision which has been taken.

• The decision whether or not to settle a case and for what years must be made on the basis of an honest and realistic assessment of the strength of the case for each year. A strong case should be viewed as one in which you believe that for the year in question there is at least a 60% chance of success at the First-tier Tribunal.

Specific guidance

• Tax can be collected from employer using Regulation 80 determination

• But have to consider if Regulation 72F might apply • Then if Regulation 72 might apply • Both of these cannot apply once Reg 80 issued • Can subsequently consider Reg 81 issues

Process

• Often called ‘Demibourne’ principle • This addresses situation where individual paid tax as

self employed • But where HMRC then wants to collect from

employer • Demibourne confirmed that HMRC do not have to

do offset • But HMRC decided to bring in Reg 72F as

appreciated inequity

Regulation 72F

• Direction issued which relieves employer of PAYE liability

• Must meet specific conditions • HMRC do have discretion as to whether apply

Process

• Relevant payments made on which PAYE should have applied

• the employer has deducted or accounted for less tax under PAYE than is required

• HMRC are satisfied tax paid on this under self assessment

• Trigger event has occurred

Conditions

• Four possible triggers – the employer has been issued with a notice of determination

which includes tax on the relevant payment; – the employee's self-assessment return has been received and

includes an adjustment for a PAYE credit in relation to the relevant payments;

– the employee's amended self-assessment return, or an overpayment relief claim (previously error or mistake claim), has been received and includes an adjustment for a PAYE credit in relation to the relevant payments; or

– HMRC have received a letter of offer to agree an amount in settlement of the employer’s liability to pay an amount of tax, including tax on the relevant payment in question.

Trigger

• HMRC indicated that where condition for direction apply will always issue

• Unless evidence of collusion • No right of appeal by employer • But failure to issue should be challenged • Employee can appeal against it • NB Employer still remains liable to penalties on

liability if HMRC want to levy

Discretion?

• Transfers liability from employer to employee • Must meet condition A or condition B

Regulation 72

• HMRC satisfied that employer – took reasonable care to comply with PAYE regulations – Failure to deduction was error in good faith

• Only applicable in status cases in rare cases • Only if status was truly marginal • Employees can appeal against determination

Condition A

• The employee or director received payments knowing that the employer had wilfully failed to deduct the correct amount of PAYE from their earnings and

• The prospects of recovery from the employee or director are reasonably good

• Tend to be in cases where directors have defaulted • So again rare to apply in status cases as rare to find

employee that involved

Condition B

• Where Reg 80 issued to employer • But not paid within 3 days • Again must show employee received payment

knowing employer wilfully failed to deduct • Similar to Condition B • Again rare in status situations

Regulation 81

• Falls within the general provisions outlined above • The employer will always have to bear their own NI

liability • No wider ability to reclaim NI over tax

NI recovery

• Class 1 employers NIC • Marginal Class 4 benefit for self employed • But this may not continue • Likely to be the employment law impact which is

more important

Tax cost of recategorisation

Employer compliance

• HMRC have authority to examine all records held by employer

• Will also be looking at following aspects – NMW – Student loan repayments – Tax credits – RTI – Pensions – going forward

Starting point

• Have PAYE and NICs been deducted from all relevant payments?

• At the right rate? • Are all relevant persons on the payroll?

PAYE

• 1 Have all reportable expenses and benefits payments been identified and reported?

• 2 Have all vouchers or electronic cards given to directors or employees been reported appropriately, and are credit and debit cards used correctly?

• 3 If any directors or employees have employment related loans, has beneficial loan interest been reported appropriately?

• 4 Have any loans waived or written off during the period been taxed or reported as necessary?

Toolkit

• Vehicles • 5 Have all company vehicles available for private use been identified? • 6 Has the correct list price been used to calculate the car benefit charge? • 7 Have all van benefit charges been reported? • 8 Have any company vehicles made available to a member of the

directors' or employees' family or household been reported appropriately?

• 9 If a car or van is regarded as pooled have all the necessary conditions been met?

• 10 If fuel is provided for company vehicles has the correct fuel benefit charge been reported?

• 11 Where a director or employee uses their own vehicle for business journeys, have all mileage payments which exceed the approved amount been reported?

• 12 If an Employee Car Ownership Scheme arrangement has been used, have all of the necessary conditions been met?

•

Toolkit

• Travel, subsistence and entertainment • 13 Have payments for travel and subsistence been

reviewed and reported appropriately? • 14 If travel and subsistence payments have been

made for travel to a temporary workplace, have all the conditions been met?

• 15 Has the cost of entertaining been reported appropriately?

• 16 Have all staff functions been reviewed to ensure that they qualify as exempt from tax?

•

Toolkit

• Personal bills • 17 Have all directors' or employees' personal bills

been identified and treated appropriately? • 18 Have all payments made for household expenses

been reported?

Toolkit

• Use or transfer of assets • 19 If the employer provides living accommodation has the

benefit been reported appropriately? • 20 Has the annual value of the use of land and buildings

(other than living accommodation) placed at the directors' or employees' disposal been reported?

• 21 Has the annual value of the use of any asset (other than land and buildings) placed at the directors' or employees' disposal been reported?

• 22 If an asset has been transferred to a director or employee has the correct value been used?

• 23 Has the residual cost of any in-house benefits, for example goods or services provided by the employer been reported?

Toolkit