FD Intelligence

Hot topics for employers

Keep up to date with tax and other developments that could affect you as an employer.

June 2016

Reform of the intermediaries (IR35) legislation for public sector bodies

There was an announcement in Budget 2016 about a reform of the so-called IR35 rules, as the government considers that they are not working. These rules apply where a worker provides services to an end user through an intermediary (typically a personal service company (PSC)) where the worker would be an employee of that end user if there were no intermediary. Where this is the case, the intermediary has to account for Pay As You Earn (PAYE) and Class 1 National Insurance contributions (NIC) on the fees received.

HM Revenue & Customs (HMRC) has now published a consultation document, Off-payroll working in the public sector: reform of the intermediaries legislation, setting out the details of the proposal.

For these purposes, the public sector comprises bodies that are subject to the Freedom of Information Act.

If certain tests are satisfied concerning the nature of the engagement, either the public sector body or a third party such as an agency, if it engages the intermediary, will have to determine whether there would be a hypothetical employment. If yes, PAYE and Class 1 NIC will have to be accounted for by the public sector body or a third party as appropriate.  

Please contact David Reilly at david.reilly@uk.gt.com by 31 July if you would like to express an opinion as part of our response to this consultation – all contributions will remain anonymous.   

Advisory Fuel Rates from 1 June 2016

HM Revenue & Customs (HMRC) announces Advisory Fuel Rates every three months and has just published the rates that apply from 1 June 2016.

The Advisory Fuel Rates, which can be used only for employer provided cars, are accepted without question by HMRC as achieving the following objectives:

  • reimbursing company car drivers who provide their own car fuel for business journeys without giving rise to a profit
  • enabling company car drivers who are provided with fuel for private journeys to make good the cost of that fuel to their employer to avoid the fuel benefit charge.

Employers can use the previous rates for up to a month from the date the new rates apply.

May 2016

The closer alignment of income tax and National Insurance contributions (NIC) – Phase 2

The Office of Tax Simplification (OTS) published The closer alignment of income tax and national insurance in March 2016 in which it set out seven steps to a closer alignment, including:

  • moving to an annual, cumulative and aggregated assessment period for employee's NIC
  • basing employer's NIC on whole payroll costs and calling it something like Payroll Levy.

The report recommended that the OTS should explore the impact of these two recommendations on individuals, businesses, the Exchequer and the administration.

The OTS has now published its terms of reference for further review work. This comprises a review of the:

  • impact of moving employee's NIC to an annual, cumulative and aggregated basis similar to Pay As You Earn (NIC is currently calculated on a pay period basis)
  • reform of employer NIC to a payroll based charge.

In terms of output – a report before Autumn Statement 2016 – the terms of reference states:

The options and recommendations will:

  • aim to make the administration of the NICs system simpler to deal with for individuals, businesses and advisers
  • improve understanding and transparency
  • be cost effective for business and individuals (admin burden) and HMRC (operating costs) and be attainable in the medium term (5 years).

The two proposals being considered further could have a real impact on your business. The overall aim is for greater simplicity – and a reduction in administration in many cases – without necessarily increasing employers' costs. However, there are always likely to be winners and losers and you might wish to start thinking about these. The proposed timeframe of five years – if the Government decides to implement the changes – means that any reforms could take place sooner than had been previously thought.

As with the initial review, the terms of reference states also:

The merger of IT and NICs, the extension of NICs to non-earned income or to pension income, and international cross-border issues, are outside the scope of these specific reviews. However, the OTS has received (and will no doubt continue to receive) a range of views on these issues, and may reflect these where they contribute to future debate on simplification.

Taken at face value, it would appear from the statement above that more radical reform is not on the Government's agenda. However, the mere fact that these views are being collected and considered could mean that further reform may follow at some stage.

Obtaining funding from the apprenticeship levy

While a lot of attention has been paid to the amounts payable under the apprenticeship levy (AL), there has been less focus on the funding that will be made available to employers paying the AL. This may be due to the current uncertainty surrounding this important point, as it appears at the moment that the relevant authorities in England, Scotland, Wales and Northern Ireland may not adopt a unified approach.

The Department for Business Innovation & Skills (BIS) will deal only with the funding for England and should be publishing draft guidance by the end of June 2016. The devolved administrations will be setting their own rules. While BIS apparently hopes that there will be harmonised rules, it has no authority in this matter.

As far as England is concerned, BIS will make the AL paid by employers available to those employers, but limited to the proportion of their employees living in England. This will be based on employees’ addresses as notified by employers for PAYE purposes. There will be a further announcement in October 2016 concerning this matter.

It is not clear at present how funding will be made available by the devolved authorities in Scotland, Wales and Northern Ireland. If it is on a different basis to that in England – for example, will there be a 10% top up, as in England? – this may distort the way in which employers provide apprenticeships, as the amount of funding available may well influence decisions.

April 2016

Further details concerning the apprenticeship levy

The Department for Business Innovation & Skills (BIS) has published information concerning the apprenticeship levy (AL). 

Some points of interest are:

  • the AL will be payable by all employers at a rate of 0.5% of earnings subject to Class 1 National Insurance contributions (the paybill), but there will be a levy allowance of up to £15,000. In effect, therefore, the AL will actually be payable only where the paybill exceeds £3 million
  • the AL will be payable through the PAYE system
  • where employers are connected, say a group of companies, there will be only one levy allowance of £15,000 available. If there is not an employer in the group with a paybill exceeding £3 million, the group will need to decide at the start of the year how to allocate the levy allowance across two or more employers in the group to ensure that none is wasted
  • where employers already pay levies (say, in the construction, engineering construction and film industries), they will also have to pay the AL
  • employers paying the AL will be able to use a new digital apprenticeship service (DAS) account. This will be used to pay for the training of apprentices in England (separate arrangements will be in place in Scotland, Wales and Northern Ireland). The DAS will also help employers to identify a training provider, choose an apprenticeship training course and find a candidate. The DAS will be in place by April 2017, although employers can register from January 2017
  • BIS will apply a 10% top-up to monthly funds entering levy paying employers’ digital accounts
  • if the funds, including the 10% top up, are not spent on apprenticeship training within 18 months of entering the account, they will no longer be available
  • employers paying the LA will be able to use their funding (up to a cap which will depend on the standard or framework that is being trained against) to cover the costs of an apprentice’s training, assessment and certification. If the employer has insufficient funding, the Government will meet some of the excess, but the employer will have to make a contribution
  • employers not paying the AL will not need to use the DAS until at least 2018, but will have to make a contribution towards the cost of training
  • employers paying the AL and those funded in part by the Government can only spend their levy funds on apprenticeship training delivered by an approved provider (which could be the employer)
  • there are rules governing the nature of an apprenticeship and the National Apprenticeship Service can provide all the information needed
  • employers can only spend the funds in their digital account or access Government support for apprenticeship training delivered by an approved training provider.

Be careful when deciding how frequently changes can be made to salary sacrifice arrangements

Although salary sacrifice arrangements are a matter of employment law rather than tax law, there are tax and National Insurance contributions (NIC) consequences. Where there is a successful salary sacrifice arrangement, the salary that has been sacrificed is no longer liable to Pay As You Earn (PAYE) and NIC. The tax and NIC rules relating to the benefit provided then apply.

However, HM Revenue & Customs has recently updated its salary sacrifice guidance to warn that PAYE and Class 1 NIC may become due in some instances if employees can swap at will between salary and benefits. This will be the case for any benefit, whether or not the benefit itself is exempt from tax, unless it is one of the following exempt benefits:

  • workplace car parking
  • the provision of cycles and cyclist’s safety equipment
  • childcare vouchers
  • workplace nurseries and certain other childcare
  • employer made contributions under a registered pension scheme.

If you have, or are considering, a salary sacrifice arrangement, you need to consider carefully how long employees are bound by a salary sacrifice arrangement unless you are offering only the benefits listed above. While alterations to employees' terms and conditions of employment with each change to a salary sacrifice arrangement are a prerequisite for a successful salary sacrifice, HMRC does not appear to consider that this will prevent PAYE and Class 1 NIC arising if there are no restrictions as to when employees can opt in and out of a salary sacrifice arrangement.

Employer supported childcare will remain open to new entrants until 5 April 2018

There was an statement in Budget 2016 that, following an earlier announcement that Tax-Free Childcare would be phased in from early 2017, the current tax and National Insurance contributions exemption for employer provided childcare vouchers would will remain available to new entrants until 5 April 2018 (as well as continuing for existing participants). This extends the duration of the exemption for new entrants by a further year from the date announced in Summer Budget 2015.

If you offer childcare vouchers under a salary sacrifice arrangement, this can be financially advantageous both to you and your employees. If employees consider that enrolling for childcare vouchers is more beneficial than Tax-Free Childcare, they will be able to do so until the end of 2017/18.

March 2016 (post Budget)

A reform of termination payments

Included in the proposed reforms are that, from 6 April 2018:

  • termination payments over £30,000 that are subject to tax will be liable to employer's NIC
  • all pay in lieu of notice will be subject to tax and NIC
  • the current exemption in relation to foreign service will be removed.

A reform of IR35 for public sector engagements

At present, under the so-called IR35 legislation, where personal services are provided through a personal service company (PSC) to an end user, the PSC has to decide whether to apply PAYE and Class 1 NIC and to account for this as necessary.

From 6 April 2017, the Government intends to shift these obligations from the PSC to the public sector body which engages the PSC, or, if there is a supply chain, to the party closest to the PSC.

The existing IR35 rules will continue outside of public sector engagements.

HM Revenue and Customs will provide simplified guidance and develop a new digital tool to assist with the decisions which will need to be made.

The future of salary sacrifice arrangements

Following a number of announcements that the Government is monitoring the tax and NIC cost to the Exchequer, Budget documentation issued following the Chancellor's Budget 2016 speech contains information concerning the future of salary sacrifice arrangements.

The Government is considering limiting the range of benefits that attract tax and NIC advantages when provided under salary sacrifice arrangements. However, pension saving, childcare and health-related benefits will be excluded from any such limitations.

The future of travel and subsistence rules

In September 2015, the Government published a discussion document concerning a reform of the tax rules for travel and subsistence expenses. The Government has analysed responses and concluded that, although complex in parts, the current rules are generally well understood and work effectively for the majority of employees. The Government has decided, therefore, not to make further changes to the rules at this time.

As announced in March Budget 2015, the Government will introduce legislation in Finance Bill 2016 to restrict tax relief for home to work travel and subsistence expenses for workers engaged through an employment intermediary.

Changes to certain share scheme rules

In his Budget 2016 speech, the Chancellor announced, for the purposes of Employee Shareholder Status, a new lifetime limit of £100,000 on gains eligible for capital gains tax (CGT) exemption on the disposal of shares acquired under Employee Shareholder Agreements entered into after 16 March 2016. Prior to this change, there was no limit.

There were also a welcome measure simplifying share identification of EMI shares for CGT purposes.

Employer-arranged pensions advice

The tax relief for employer-arranged pensions advice will increase from 6 April 2017 from £150 to £500.

Payrolling benefits-in-kind

From 6 April 2017, the Government will extend the payrolling of benefits to include non-cash vouchers and credit tokens. This builds on previous announcements which allowed other benefits to be payrolled from 6 April 2016 (which includes cars, vans and medical insurance). The only benefits that will not be able to be payrolled from 6 April 2017 will be living accommodation and beneficial loans.

Fair bargain principle revised for certain benefits

From 6 April 2016, the Government will revise the legislation to 'put beyond doubt' that the principle of a 'fair bargain' does not apply to benefits which are calculated by virtue of specific rules (rather than the cost to the employer). These include employer provided living accommodation, cars, vans and loans. 

Zero-emissions vans

The Government will maintain the 20% tapered rate of the van benefit charge for zero-emissions vans for 2016/17 (which was previously set to increase to 40%). The Government have also announced that the 20% rate will be extended to the 2017/18 tax year (instead of 60%).   

This will defer the planned increase to 40% of the regular van benefit to 2018/19. This will further increase to 60% of the regular van benefit in 2019/20, 80% in 2020/21 and 90% in 2021/22.

In 2022/23, the van benefit charge for zero-emissions vans will be equal to the taxable benefit on conventionally-fuelled vans.

Consultations

The Government has also announced consultations on proposals to:

  • simplify the application and approval process for PAYE Settlement Agreements
  • align the dates by which for employees need to make a payment to their employer to 'make good' the cost of a benefit in kind that they receive.

For information about any of the issues in this update please speak to your usual Grant Thornton adviser or a member of our Employer Solutions team.

March 2016

The draft legislation for the apprenticeship levy has been published

The apprenticeship levy will be calculated as 0.5% of an employer's paybill. An employer will be treated as having a paybill if it has to pay employer's National Insurance contributions (NIC) in respect of one or more employees. The paybill will be the amount of earnings that are subject to employer's NIC, including for these purposes any earnings that are less than the employer's NIC threshold (£8,112 for 2016/17). Employers will have a levy allowance of up to £15,000 to set against the apprenticeship levy, meaning that the levy payable will be 0.5% of the paybill to the extent that it exceeds £3 million. There are rules to prevent connected companies and connected charities from claiming more than one levy allowance. The levy will be payable through the Pay As Year Earn system and there will be an accompanying penalty regime.

A zero rate of employer's National Insurance contributions for apprentices under 25

It has been known for some time that there will be a zero rate of employer's NIC from 6 April 2016 on earnings up to what is called the secondary threshold (£43,000 for 2016/17) of apprentices under the age of 25. This means that an employer could potentially save a maximum of £4,815 of employer's NIC a year for each relevant apprentice employed, although the amount is likely to be lower in practice based on actual amounts paid. The regulations defining an apprentice have now, relatively close to the implementation date, been published. These are almost unchanged from the draft regulations published last year for consultation, which were, in our view, rather too complex. Overall, however, employers should still consider taking advantage of this government led initiative of a zero rate.

Timing mismatch for tax and National Insurance contributions for the trivial benefits exemption

The draft tax legislation exempting trivial benefits in kind will become law, assuming it passes successfully through Parliament, when Finance Act 2016 receives Royal Assent. This is likely to be in mid-July 2016. HM Revenue & Customs has announced that the corresponding National Insurance contributions (NIC) legislation will be introduced after Royal Assent. For tax purposes, the exemption will be effective from 6 April 2016, as tax is an annual charge. A liability to NIC applies on an annual basis only for directors, with employees being liable generally on the basis of the periods between payments of wages or salaries. There can be no backdating to an earlier period. This means that a trivial benefit costing, say £40, that is provided to a monthly paid employee in May 2016 will be exempt from tax, but will be liable to NIC.

Advisory Fuel Rates from 1 March 2016

HM Revenue & Customs (HMRC) announces Advisory Fuel Rates every three months and has just published the rates that apply from 1 March 2015. The Advisory Fuel Rates, which can be used only for employer provided cars, are accepted without question by HMRC as achieving the following objectives:

• reimbursing company car drivers who provide their own car fuel for business journeys without giving rise to a profit

• enabling company car drivers who are provided with fuel for private journeys to make good the cost of that fuel to their employer to avoid the fuel benefit charge.

Employers can use the previous rates for up to a month from the date the new rates apply.

Potential changes to reduce the cost of tax relief on pension contributions

It is known already that two changes that will become effective from 6 April 2016 to restrict further the tax relief given on pension contributions:

• the annual allowance will be tapered by £1 for every £2 of income – which includes pension contributions – between £150,000 and £210,000, leaving a minimum annual allowance of £10,000

• the lifetime allowance will decrease from £1.25 million to £1 million. What is uncertain at present is what measures Mr Osborne may announce on 16 March 2016.

It is being widely reported that the Chancellor will take radical steps to reduce the amount of tax relief that is currently being given in respect of pension contributions. These include a change to a flat rate of relief – perhaps between 25% and 33% – for all taxpayers, or even a more radical reform that abolishes tax relief on pension contributions, with pension payments all being tax free.

February 2016

Employment allowance to increase by 50% from 6 April 2016

The increase in the employment allowance to a maximum of £3,000 is, according to the government, being implemented to cut employment costs in order to support businesses and charities in helping them to grow. In particular, it is stated to be to help eligible employers with additional wage costs.

When introduced in 2014, the employment allowance was set at a level to offset the National Insurance contributions (NIC) cost of employing four workers full-time on the National Minimum Wage. The increase is stated to mean that employers will be able to continue to employ four workers full-time on the new National Living Wage from 2016/17 without paying any employer's NIC.

Scottish rate of income tax for 2016/17

The Scottish rate of income tax (SRIT) comes into force on 6 April 2016, although it will apply only to individuals who are treated as Scottish taxpayers. From that date, the UK rates of income tax will be reduced by 10% for Scottish taxpayers and a single rate of Scottish income tax added to the UK rates.

After some delays, the Scottish government proposed a 10 pence SRIT for 2016/17 on 16 December 2015 as part of its Draft Budget. As this rate is the same as the reduction in the UK rates, the amount of tax payable on employment income by Scottish taxpayers will be the same as for UK taxpayers. However, affected employers will still be obliged to fulfil certain payroll obligations in relation to the SRIT.

Salary and bonus clawback provisions – the tax and NIC position

Where employees have to repay salary or a bonus to their employer under so-called clawback provisions, it may be possible for the employees to reclaim the tax suffered on the amount paid back. This will depend, however, on the way in which the clawback is arranged and effected; some arrangements, therefore, may be ineffective for these purposes.

Although the Upper Tribunal accepted last year that a taxpayer could reclaim the tax suffered on a clawback, this was on the basis of the particular facts of that case. A number of principles have emerged, however, that are helpful in considering whether tax would be reclaimable under a pre-existing or proposed clawback arrangement.

For information about any of the issues in this update please speak to your usual Grant Thornton adviser or a member of our Employer Solutions team