Presented by. Ros Martin CTA

Transcription

1 PAYE and NIC update Presented by Ros Martin CTA No responsibility for loss occasioned to any person acting or refraining from action as a result of the material in these notes can be accepted by the author or 2020 Innovation Training Limited 2020 Innovation Training Limited 6110 Knights Court Solihull Parkway Birmingham Business Park Birmingham B37 7WY Tel. +44 (0) Fax +44 (0) info@the2020group.com Website: Page 1

2 1. Update on current issues Status Termination payments Pension autoenrolment Real Time Information Employer compliance work by HMRC Case law DISCLAIMER AND COPYRIGHT The views expressed in this material do not necessarily represent the official views of the course organiser. No responsibility for loss occasioned to any person's action or refraining from action as a result of reliance upon any information in the material can be accepted by the course organiser, speaker, or other contributors. Legislation, case law, tax practice and accounting and auditing standards are complicated and these course notes should not be regarded as offering a complete explanation of every topic covered. These papers are for the personal use of those attending the seminar. Where indicated, material may be subject to Crown Copyright protection. It may be reproduced free of charge provided that it is reproduced accurately and that the source and copyright status of the material is made evident to users. Page 2

3 1. UPDATE ON CURRENT ISSUES 1.1 Simplification of expenses and benefits Following recommendations from the Office for Tax Simplification, the Government published four consultation documents looking at how they could simplify and modernise the administration of employee benefits and expenses. The core package consisted of the following changes: Introducing a system of voluntary payrolling for benefits in kind. Introducing a statutory exemption for trivial benefits. Abolishing the threshold for the taxation of benefits in kind for employees who earn at a rate of less than 8,500 a year ( lower paid employments), with action to mitigate the effects on any vulnerable groups disadvantaged by the reforms. Replacing the expenses dispensation regime with an exemption for paid and reimbursed expenses. Draft legislation was published for all of these areas in December but due to constraints on legislation in the run up to the election in May, only the final two are included in FA The intention is to include the former two and, since they are not controversial, it is unlikely that they will be shelved even if there is a change in the governing party. Payrolling benefits The idea of allowing employers to deal with the tax on benefits in kind through the payroll is not a new one, with the Government first looking at this seriously in However, this was looking at making payrolling of benefits mandatory and so gained little support from businesses. The new proposal takes a much more relaxed approach to this idea. Payrolling involves adding the taxable value of a benefit in kind to the salary so that PAYE and NIC is applied to the benefit in kind as it is to other payments within the scope of PAYE. This means the employee will pay tax on that benefit in each pay package rather than being collected (normally) after the submission of a P11D or P9D via an adjustment to the tax code. This means, arguably, that there will be little noticeable difference between the two systems other than payrolling perhaps giving a more accurate result by allowing tax to be collected in real time. That is certainly the argument that HMRC have put forward in promoting this idea. The real winners, of course, will be the employers who will be removed of an obligation to complete a form P11D or P9D for any benefits which have been payrolled. Again this is a move from the Page 3

4 current system where even if the employer informally payrolls benefits (and some do), they still have to complete the end of year forms. The finer details of the scheme have yet to be announced and the Government are going to undertake further technical consultation to iron out any final details. However we do have a significant amount of detail on how the arrangements are supposed to work. The proposals are: Payrolling should be voluntary. Employers will not be locked into the scheme but would have the opportunity to opt back out from the start of a tax year. Payrolling will be phased in with employers being able to use the system for car, car fuel, medical insurance and subscriptions such as gym membership from 2016/17 onwards (when the regime goes live). These are included due to all of these being less liable to be variable over a tax year. Further benefits will be included once the system has been established for the first tranche of benefits. There are some practical issues to be addressed such as adjusting tax codes before payrolling goes live so that employees do not claim a double tax charge (one for historical liabilities and one for payrolled liabilities). The biggest issue to which we do not yet have a firm proposal is in relation to Class 1A NICs. This issue was raised at the consultation stage and most respondents favoured the option to account for Class 1A NICs in real time at the time the benefits are payrolled but stated that this should be voluntary given the cash flow disadvantage this imposes against paying in July following the year end. Trivial benefits exemption One of the recommendations of the OTS report was the introduction of a statutory definition of a trivial BiK supplemented by a set limit. Finance Bill 2015 draft clauses implement that proposal with a declaration that trivial benefits provided to employees will be exempt from income tax. The exemption provides a number of conditions that must be met for a BiK to qualify as trivial. No liability to income tax arises in respect of a benefit provided by, or on behalf of, an employer to an employee or a member of the employee s family or household if conditions A to D are met: Condition A the benefit is not cash or a cash voucher Condition B the cost of providing the benefit, or the average cost per person of providing the benefit does not exceed 50. Condition C the benefit is not provided pursuant to relevant salary sacrifice arrangements or any other contractual obligation. Page 4

5 Condition D the benefit is not provided in recognition of particular services performed by the employee in the course of the employment or in anticipation of such services. If a benefit is provided to more than one person and the nature of the benefit or the scale of its provision means it is impracticable to calculate the cost of providing it to each person to whom it is provided, then the total cost can be divided amongst employees to give us an average cost and it is this average cost that is included in condition B. A relevant salary sacrifice arrangement is one under which the employee gives up the right to receive an amount of general earnings or specific employment income in return for the provision of the benefit. The exemption will work on an all or nothing basis. This will mean that a trivial BiK with a cost covered by the annual exemption will not have any liability to tax or NICs, but a trivial BiK with a cost that breaches the exemption limit will be subject to tax and NICs in full. Although the exemption works on a benefit by benefit basis, the overall limit is 300 if it is a close company. The exemption will be available at each employment that provides trivial BiKs (within the statutory definition) held by an employee in a tax year. Employees with more than one employment will benefit from more than one exemption. Abolition of the 8,500 threshold FA2015 includes provisions to repeal the 8,500 threshold which excludes lower paid employments from parts of the benefits code. This will mean that all employees will be taxed on their BiKs and expenses in the same way. The NIC provisions will also be amended to align the payment of NICs by the employer with the income tax treatment. The abolition simplifies the administration of employee BiKs and expenses as it removes the need for form P9D. Employers will also no longer need to continually monitor an employee s earnings and BiKs to see whether they fall above or below the threshold. However, the exemptions currently provided in relation ministers of religion in lower paid employment will be retained. This will mean that the reimbursement of accommodation costs, such as heat, light and water, or the payment of an allowance towards these costs for ministers of religion earning at a rate of less than 8,500 will remain exempt from income tax. Similarly, there will be no NICs liability in these circumstances. In addition, a new exemption will be introduced to cover other BiKs for ministers of religion earning at a rate of less than 8,500 which will maintain the current exemption to income tax and NICs that applies to these BiKs. Page 5

6 A further exemption will also be introduced for employees who work as carers in respect of board and lodging that is provided in the home of the person who they are caring for. This will mean that the carer will be completely exempt from income tax on this BiK, and the employer or for the person who is providing the board and lodging (depending where the liability falls) will be completely exempt from NICs on the provision of this BiK. The vast majority of employees will now be treated in the same way for income tax and NICs on their BiKs and expenses, whatever the level of the employee s earnings. It also provides equity since it means that the tax and NICs treatment of BiKs and expenses is the same for employees whether they have a single, or multiple employments. Exemption for expenses The Government has accepted the OTS s recommendation of replacing the current dispensation regime with an exemption for allowable expenses that are paid or reimbursed by employers. The legislation will apply from 6 April 2016 and its effect will be that there is no longer any reporting requirement on employers, and employees will automatically receive the tax relief they are entitled to. In addition, there will be no need for dispensations once the exemption becomes effective. Legislation will be introduced with an exemption for the amount of paid or reimbursed expenses which would be treated as earnings under the benefits code under circumstances where a deduction would otherwise be due under s336 or s337 ITEPA 2003 or similar legislation. An example of a deductible expense relates to costs necessarily incurred in travel for the performance of an employee s duties. The exemption will not apply if the payment or reimbursement is offered in conjunction with a relevant salary sacrifice arrangement. Conditions A and B need to be met in order that the exemption will apply: Condition A is that the employer, or a third party, must have a system in place to check that the employers employees are actually incurring deductible expenses of the same kind, and that they are deductible. Condition B provides a level of protection for employers and third parties operating checking systems as long as they do not know or suspect (or could not have reasonably been expected to know or suspect) that the employee is either not incurring the deductible expense or that the expense is not deductible then the system can be operated. A new section is also introduced which gives provisions for applying for a flat rate in respect of deductible expenses. This includes a requirement to provide a reasonable estimate of the actual costs incurred. The flat rate may only be applied if an officer of HMRC approves the application and issues an approval notice as provided for in that legislation. This will apply to things such as flat rate subsistence costs. Page 6

7 Overall these changes mean that employers will no longer be required to choose between applying to HMRC for a dispensation and reporting expenses payments to HMRC. Instead all employers would need to determine themselves whether the expenses they pay are subject to tax relief or not and treat them accordingly. The following should be noted: The exemption will apply to all qualifying expenses paid or reimbursed by an employer. There is no intention to change the rules that determine whether or not tax relief is available for expenses incurred by employees the proposed exemption is intended only to simplify the way in which employees receive that tax relief when their expenses are paid or reimbursed by their employer. The exemption will apply to all employers without any option to opt in or out. The current requirements to maintain records and perform checks where dispensations are in place will continue. One way of providing certainty for employers would be to provide one or more models of acceptable record keeping and processes for checking employee expenses. 1.2 Employment allowances As from 5 th April 2014, most employers have been entitled to claim a 2,000 reduction in the secondary NIC that they have to pay over to HMRC. As currently drafted there are exclusions from the ability to claim the allowance including: Organisations which wholly or mainly carry out work of a public nature Public authorities Individuals employed to undertake personal, domestic or household work With effect from 6 April 2015, there is a relaxation in the final of those exclusions in relation to domestic care and support employees. This means that anyone employing someone to provide domestic car and support for themselves or a family member will come within the regime and will not have to pay the first 2,000 of employers NICs due. 1.3 Abolition of employer NIC for younger employees It had been previously announced that from 6 April 2015 employers would not have to pay employers NICs in respect of earnings to an employee aged under 21 at the date of payment until the earnings exceed the Upper Earnings Limit. It has been announced that this exemption will be extended from 6 April 2016 to include apprentices up to the age of 25, again applicable for earnings up to the UEL. Page 7

8 1.4 PAYE deductions For K codes only, there is a statutory rule that deductions cannot exceed 50% of income. Whilst HMRC have normally applied this rule for all tax codes, from 6 April 2015 the rule will apply on a statutory basis for all tax codes. This prevents employers from deducting more than 50% of an employee s income which has been seen in some cases by HMRC. Page 8

9 2. STATUS 2.1 Introduction In determining the status of any individual, it is the contractual relationship between the two parties that is crucial. This would usually be judged by looking at the written contract between the two parties involved. There has been a recent case, involving a company called Autoclenz, which shows that the actual written contract can be completely disregarded even if it is not a sham contract. This is an unfortunate development and it is being quoted by HMRC officers in status cases. It makes it more important that the terms of a contract are real and not just put in place to present a particular scenario. There is no statutory definition in law for employment and self employment. The line between the two is established by case law. Whilst there is a vast body of case law, there are particular cases which have developed specific important principles. The starting point is always Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance. In this case, MacKenna J made a famous speech encapsulating the key tests of employment: A contract of service exists if these three conditions are fulfilled (i) (ii) (iii) The servant agrees that, in consideration of a wage or other remuneration, he will provide his own work and skill in the performance of some service for his master. He agrees, expressly or impliedly, that in the performance of that service he will be subject to the other s control in a sufficient degree to make that other master. The other provisions of the contract are consistent with its being a contract of service. The actual tests considered are wider than this. However, this is not a matter to be determined merely by running down a checklist or adding up the number of factors pointing towards employment and comparing that result with the number pointing toward self employment. Different factors will have more or less relevance depending on the facts being considered and it is a matter of evaluating the overall picture that emerges from a review of the relationship between the parties involved. These issues are considered below. 2.2 Control The issue of control is a difficult one because anyone providing services, whether as an employee or as a self employed worker, is subject to some element of control. It has always been seen by HMRC as an important criteria, backed by comments by Cooke J in the case of Market Investigations Ltd v The Minister of Social Security who said: Page 9

10 nor can strict rules be laid down as to the relative weight which the various considerations should carry in particular cases. The most that can be said is that control will no doubt always have to be considered, although it can no longer be regarded as the sole determining factor. However, it should be remembered that there can be control without employment being the inevitable result. In the case of Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance the owner driver of a concrete mixing lorry wore the company uniform and had to comply with company rules. It was clear the company did have control over him but he was held to be self employed. MacKenna J said An obligation to do work subject to the other party s control is a necessary though not always a sufficient, condition of a contract of service. If the provisions of the contract as a whole are inconsistent with its being a contract of service, it will be some other kind of contract and the person doing the work will not be a servant. The judge s task is to classify the contract He may, in performing it, take into account other matters besides control The real focus is on the right of control; it is often the case that HMRC will argue that even where there is no evidence that control is actually exercised that the right to control exists. They break this aspect down into the following areas. Where the work is done Even if the contract indicates that work is to be done in a place specified by the client, it can be possible that this is just part of the contractual arrangement. However the success of this argument can depend on the nature of the work. What the worker does To agree that there is no control over what the worker does, HMRC would be looking for a situation where the individual is contracted to undertake a specific task and cannot be directed to do another job. When the work is done If the client specifies the hours to be worked, then it can be difficult to argue that no control exists. However, if the worker has to accord with specific hours, for example for health and safety reasons, it is possible to argue again that this forms part of the terms and conditions of the contract only. How the work is done Control is clearly exercised if the worker is told how to do the work and their work is then checked. In relation to the latter point, a distinction has to be made between checking as an exercise of control and checking to ensure that the terms of the contract are met. Page 10

11 2.3 Substitution If the contractual obligations are to be performed by a specified individual, with no rights to send a substitute for that individual, it can often be difficult to argue that the contract represents anything other than a contract for employment rather than self employment. However, the relevance of this can be underplayed if the client would simply have no need for a substitute ie if they have a bank of people that they can use to undertake the work. The other argument made by HMRC in this area is that, even where the contract includes a right to send a substitute that because this has never been exercised it is not a real right. That is, it has only been included to try and present a self employed relationship. In the absence of any evidence to suggest that the client will not accept a substitution, this argument should be resisted. It is also important that where a substitute is sent, or can be sent, it is the worker who will continue to receive the payment and he will then be responsible for paying the substitute. In summary a real substitution right is often fatal to an argument that an individual is an employee; the absence of one is not fatal to an argument that someone is self employed. 2.4 Business operation One of the features of someone who is self employed in relation to a specific contract is that he has a business organisation and to be seeking other opportunities to exploit any skills he has. To establish self employment, there should be no restriction on any of the contractors working for other people and it may be that some do so. This can be a difficult area if, as a matter of fact, an individual is only working for one client and is not seeking other work. However, if the individual does have the trappings of a business this would include a website, stationary, business cards, paperwork then even if he is only working for one client it is possible to argue that this is a strong indicator of self employment. 2.5 Benefiting from sound financial management One marker of self employment is that an individual can benefit, in terms of increased profit, by better financial management of their business and, possibly more importantly, could make losses. A self employed person can influence his profit margin by adapting his behaviour. He will bear the loss that a poor decision may bring. This is not a risk to which an employee is exposed. This would usually be demonstrated by fixed fees for work being undertaken (rather than being paid a daily or hourly rate), clauses indicating that unsatisfactory work must be rectified at the worker s own expenses, no additional payment for expenses and no payment for overtime worked. Page 11

12 However there is an extra facet to this. Individuals who risk their own money by buying assets, bearing their running costs, paying for overheads and materials and being responsible for maintaining their expertise through training are likely to be self employed because employees simply do not bear these types of costs. This is particularly true if you can demonstrate that someone is actually incurring costs to try and get work eg travelling to speculative meetings with prospective clients at their own cost. 2.6 Mutuality of obligation The concept of mutuality of obligation basically means any relationship where one party is obliged to offer work to the other party and/or one party is obliged to accept work if offered by the other party would inevitably be treated as employment. It is often ignored as irrelevant by HMRC but a series of recent employment law cases have highlighted its importance to the extent that most employment lawyers now believe it is the only issue which is relevant in determining status. In a case called Bunce v Potsworth Ltd t/a Skyblue, a welder worked through an agency for rail track companies. He claimed unfair dismissal on the basis that he was an employee. The Court upheld a finding of fact by the employment tribunal that there was a lack of mutuality of obligations between the agency and the individual and this was fatal to his claim to be an employee. This reinforced the view in Bridges and others v Industrial Rubber plc that the contractual absence of a promise to provide work and the counter promise to do it is inconsistent with a contract of employment regardless of the other conditions of the working relationship. The decision in that case completely contradicts the view of HMRC that all that is necessary for mutuality of obligation to exist is that the engager must be obliged to pay a wage or other remuneration and the worker must be obliged to provide his or her own work or skill. This view was actually supported in Netherland Ltd v York where John Avery Jones, the Special Commissioner, commented on the fact that the agreement to pay a rate of so much per day was in effect mutuality of obligation. However, this was a case where the individual was contractually offered and obliged to work five days a week for the end client which would have probably constituted a mutuality of obligation in any case. The comments of the Special Commissioner certainly contradict a large chunk of employment law decisions. It is interesting that HMRC will often argue that an individual who had been offered and accepted work over a long period of time has established a mutuality of obligation with their client. This view does not appear to be supported by any of the above cases, even those won by HMRC. 2.7 Other factors HMRC will often look to see whether someone is part of the organisation; paying particular regard to whether an individual is presented as an employee to the outside world. The use of this test has been significantly discredited in recent legal cases on status but it is something which is still argued in status disputes by Inspectors. Page 12

13 Employment contracts would normally feature such things as sick pay, holiday pay and rights on termination of the employment. HMRC will also consider whether all individuals undertaking similar work have the same status. 2.8 Self employed status confirmed by Tribunal The taxpayer, EMS, was a company that organised the recovery of damaged motor vehicles on behalf of insurance companies. One of its contractors was DKM Services, owned by M. EMS paid M an hourly rate on presentation of invoices. For many years, DKM Services relied solely on EMS for work. HMRC said that M was an employee of EMS and that the company should deduct PAYE tax and National Insurance on M's earnings. The taxpayer said M was an independent contractor and should be treated as self employed. Decision: The First tier Tribunal said it was for the taxpayer to show M was self employed and there was no magic formula. The tribunal referred to the tests set out in the decision in Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] All ER 433. It found that EMS exerted no control over how M carried out his job after having agreed what needed to be done. As to financial risk, there was no guarantee of work from EMS and M paid for his own equipment, safety clothing and training. He also bore the risk of the customer defaulting. He had to arrange his own pension and insurance, and was paid only when he worked, ie he had no holiday entitlement from EMS. In addition, the tribunal said EMS did not have exclusive rights to M's services, even though most of M's work was derived from EMS. The tribunal concluded that M was self employed: both M and EMS believed that the latter took on M as an independent contractor. The taxpayer's appeal was allowed. EMS (Independent Accident Management Services) (TC4006) Page 13

14 3. TERMINATION PAYMENTS 3.1 The charge to tax Most people are aware that there is a relief available for the first 30,000 of any termination package but there are various hurdles which have to be overcome before this legislation can be applied. Each element of any termination package has to be considered separated and it is important to understand what the termination payment covers. 3.2 Redundancy The first thing that needs to be considered is whether the payment is for redundancy. The definition of redundancy is given by s.139 The Employment Rights Act 1996:... an employee who is dismissed shall be taken to be dismissed by reason of redundancy if the dismissal is attributable wholly or mainly to: the fact that his employer has ceased, or intends to cease, to carry on the business for the purposes of which the emplo where the employee was employed or the fact that the requirements of that business for employees to carry out work of a particular kind, or for employees to carry out work of yee was employed by him, or has ceased, or intends to cease, to carry on that business in the place a particular kind in the place where he was so employed, have ceased or diminished or are expected to cease or diminish. This definition applies whether the redundancy payments are statutory or non statutory. HMRC are increasingly considering whether the situation is one of actual redundancy. Redundancy payments will always fall within the termination payments legislation so you do not have to consider the general charging provisions, see below. 3.3 Unapproved retirement benefit schemes Payments on termination of an employment may be treated as payments under unapproved retirement benefit schemes if they are paid to individuals who are approaching retirement age. This is because the payment can be treated as a relevant benefit under s.394 ITEPA 2003 and since a retirement benefit scheme is defined as any arrangement for the provision of relevant benefits, the termination becomes such a retirement benefit scheme. The difficulty comes in knowing whether a payment on termination is really a payment on retirement. There is no statutory definition of retirement and it is clear that whilst someone cannot retire from a specific job unless the employment has ended, they could still retire from that job whilst still seeking employment elsewhere. It is common for HMRC to argue that the payment is made for retirement if the individual is over 50 at the point of termination. Page 14

15 3.4 Payment of termination If the payment is not redundancy or a payment under an unapproved retirement benefit scheme then it is necessary to consider the status of the payment. The first issue to consider is whether the payment is a payment or benefit arising from the employment such that it is taxable as earning within s.62 ITEPA This would apply if any of the payment represents pay, bonuses or any type of contractual remuneration including payment in lieu of notice. Whilst HMRC do indicate in their instruction manuals that they consider that ex gratia payments on termination of employments over a number of situations can lead to a quasi contractual entitlement to them or at the very least an expectation that they will be received this is an argument that they very rarely raise. The employment contract needs to considered in reviewing termination agreements to determine whether there is any argument that any of the payment is contractual. The second issue to consider is whether it is a payment or benefit for a restrictive covenant such that it is taxable under s.225 ITEPA This is very specific and would normally be clear from the termination agreement. Finally, if neither of these apply, s.401 ITEPA 2003 will apply if it is a payment or benefit in connection with termination. Where payments fall within s.401, the first 30,000 of any payment is exempt from tax which is why it is beneficial to argue that payments are termination payments. This section also covers payments for variation of contracts. This includes payments as: Compensation for wrongful dismissal Compensation for discrimination because of sex, disability, politics or religion (and compensation for hurt feelings in relation to any of these) Breaches of contract An example of a breach of contract is a payment in lieu of notice if there is no facility for the employer to waive the notice period by payment of wages. Payments in lieu of notice are difficult to analyse and the type of PILON determines the tax treatment. Four types were defined by Lord Browne Wilkinson in the case of Delaney v Staples: Circumstance 1 Where an employer gives proper notice of termination to his employee in accordance with a term in the contract of employment, tells the employee that he need not work until the termination date and pays him for the notice period in a lump sum (commonly called garden leave ) there is no breach of contract by the employer. Such payments would normally be taxable as arising from the contractual relationship. Page 15

16 Circumstance 2 Where the contract of employment provides expressly that the employment may be terminated either by notice or, on payment of a sum in lieu, summarily, then if the employer summarily dismisses the employee he is not in breach of contract, provided he makes the payment in lieu. The payment in lieu is not a payment of wages in the ordinary sense, since it is not a payment for work to be done under the contract of employment Circumstance 3 Where, at the end of the employment, the employer and the employee agree that the employment is to terminate forthwith on payment of a sum in lieu of notice, then, once again, the employer is not in breach of contract by dismissing summarily and the payment in lieu is not strictly wages. Circumstance 4 Where without the agreement of the employee, the employer summarily dismisses the employee and tenders a payment in lieu of proper notice (by far the most common type of PILON), then the employer is in breach of contract by dismissing the employee without proper notice However, the summary dismissal is effective to put an end to the employment relationship, whether or not it unilaterally discharges the contract of employment. The Cerberus Software Development In this case there was a contractual clause stating that the employer "may make a PILON. The Court of Appeal held that the word may meant that the employer was free to give neither notice nor a PILON but instead to breach the contract and pay damages for that breach Damages will of course be mitigated by finding of alternative employment. The compensation for the breach of the contract is not an emolument therefore potentially no tax and no NIC. Clearly it will be crucial for HMRC to establish and examine the facts in such cases in order to decide whether the discretion has been exercised. There has recently been a tax case on whether payments in lieu of notice were correctly treated as termination payments within s403 ITEPA Over a five year period a company made more than 100 employees redundant, and made payments in lieu of notice. Three different groups of people were involved: office workers, non office workers employed before 1992 and non office workers employed after In 1992 various trade unions had insisted on a change to the standard contract used to include a right to certain redundancy payments. Whichever category of employee was being made redundant the company treated the payments as termination payments, so that the first 30,000 of each payment was exempt under s403. HMRC issued determinations on the basis that the payments were taxable emoluments for all employees Page 16

17 based on the companies current contractual terms, and did not qualify for exemption under s403. The company appealed. The commissioner reviewed the evidence in detail and held that where such payments were provided for in employees' contracts, they were taxable emoluments. In some cases, a Memorandum of Agreement with the relevant unions had been expressly incorporated into the contracts; in others, it was incorporated through custom and practice. In both cases, the employee's contract entitled him to a period of notice, in both cases the employee may have agreed to a lesser period of notice in return for a payment, and in both cases the payment was made under the contract as varied; hence they derived from the employment. However, payments to some office staff, where the employees had no contractual right, were termination payments rather than taxable emoluments. The payments were not for modifying the contracts but for cancelling them. The conclusion was unaffected by the division of the sum into redundancy amounts and amounts for pay in lieu of notice because it was agreement to accept payment, and the subsequent payment, of the combined sum which terminated the contract. The commissioner rejected the suggestion that where a payment in lieu is made as a matter of course by an employer over a period of time to employees on their being made redundant, such a payment amounts to an emolument from employment even if it falls short of a contractual entitlement. Any payments which fall to be taxed as termination payments are taxed in the year received; if the payments are received over a number of years, they are taxed over those years having been aggregated with other payments to which the 30,000 threshold applies. When dealing with the 30,000 threshold the payments and other benefits provided in respect of an employee or former employee are to be aggregated with those provided: (a) in respect of the same employment; (b) in respect of different employments with the same employer; and (c) in respect of employments with employers who are associated. If this was not the case it would relatively easy to circumvent the 30,000 threshold. Employers are associated if on a termination or change date: (a) one of them is under the control of the other; or (b) one of them is under the control of a third person who on that termination or change date or another such date controls or is under the control of the other. If payments and other benefits are received in different tax years, the 30,000 is set against the amount of payments and other benefits received in earlier years before those received in later years. Page 17

18 If more than one payment or other benefit is received in a tax year in which the threshold is exceeded: (a) the 30,000 (or the balance of it) is set against the amounts of cash benefits as they are received, and (b) any balance at the end of the year is set against the aggregate amount of non cash benefits received in the year 3.5 Payments under the ERA Compensation payments awarded under the Employment Rights Act 1996 by the Employment Tribunals, may be assessable as: As earnings, or Under s 401, depending on the particular type of the award HMRC officers are instructed to obtain a copy of the former employee s complaint to the tribunal and a copy of the tribunal s decision (setting out the provisions of ERA 1996 under which the compensation is ordered) in order to determine the tax treatment of the payment. HMRC treat the following as earnings: Guarantee payment under ERA 1996 ss 28, 34(3) Payments for infringement of employee s rights to time off for public duties or trade union duties or activities under ERA 1996 ss 51(3), 63(4) Following an order of reinstatement or re engagement for unfair dismissal under ERA s113 compensation payment for arrears of pay from date of dismissal until date of reinstatement or reengagement Payments to an employee suspended from work on medical grounds under ERA 1995 ss 64, 70(3) Maternity suspension payments under ERA 1996 ss 68, 70(3) Payments for wrongfully depressing the employee s remuneration under the Sex Discrimination Acts 1975 and 1986, Equal Pay Act 1970, Wages Act 1986, Trade Union and Labour Relations (Consolidation) Act 1992 and the National Minimum Wage Act 1988 HMRC treat the following as termination payments: Payment for compensation following a finding of unfair dismissal, where re engagement or reinstatement is not ordered (under ERA 1996 s112(4)) Payments under ERA 1996 s117 where the employer fails to comply with an earlier decision that the employee be re engaged or reinstated Payments under ERA 1996 s93(2)(b) following a claim for unfair dismissal, for the employer s failure to provide the employee with a written statement of the reasons for dismissal Page 18

19 Payment under ERA 1996 ss88/89 for wrongful dismissal of the employee without statutory notice under ERA 1996 ss86/87 Taxed only under s401 ITEPA in the same way as damages that an employer pays for breach of an employee s contractual notice rights Payments for an employer s failure to consult employees about redundancies under the Trade Union and Labour Relations (Consolidation) Act The treatment of ongoing benefits Benefits provided on or after termination are also included in the computation of liability under s.401 ITEPA There are particular rules to cover this area. The amount of the benefit which would be included as employment income if the employment had not terminated is calculated. It is added to any monetary payment made in determining whether the 30,000 limit is breached and will be taxable if it has been. It is taxed in the year in which it is received, used or enjoyed. 3.7 Payment on termination of healthcare scheme was employment income Mr Forsyth had retired from Nestlé UK in Prior to his retirement, he had been a member of its healthcare scheme. It was agreed that he would continue to benefit from the scheme in consideration of a contribution. In 2009, Nestlé offered Mr Forsyth the opportunity to leave the scheme in return for a one off payment of 29,783. Mr Forsyth accepted the offer under a compromise agreement. Nestlé made the payment after deduction of income tax. Mr Forsyth contended that the payment was capital; and, in the alternative, that it was a termination payment, so that the first 30,000 was exempt (ITEPA 2003 s 403(1)). Decision: The FTT observed that the compromise agreement could be a 'scheme' for the purpose of ITEPA 2003 s 393A(3). The issue was therefore whether it could provide a 'relevant benefit'. The FTT found that the lump sum had been paid to Mr Forsyth in connection with past services; as such, it fell within s 393B and was a 'relevant benefit' provided under an employer financed retirement benefits scheme. It must therefore be taxed as employment income. This illustrates how wide ranging this legislation is. Graeme Forsyth v HMRC [2014] UKFTT 915 Page 19

20 4. PENSION AUTOENROLMENT Auto enrolment is the name given to implementing and running a workplace pension for all employees. It is being introduced because the Government believes that as many as 7 million people are under saving for their retirement and as we are mainly living longer, healthier lives, this creates a crisis for funding of retirement. There are currently four people of working age for every pensioner but by 2050 there will be just two. In 2012 only one in three private sector workers were in a pension scheme and this figure has been on a downward trajectory for years. 4.1 The staging date The staging date is the date by which each business must have its pension and auto enrolment processes in place by. Every employer has a staging date which was set into law at 1 April This is the date when the employer needs to be prepared; not the date when the need to start thinking about getting prepared. The single piece of information needed to ascertain the staging date is the PAYE reference. The following is the web address to find the staging date: date.aspx The Pensions Regulator will send a letter 12 months and then six months before the staging date to remind the employer. This letter will include the unique letter code for the employer which is a 10 digit reference starting with 1. At the time of receipt of the letter, the Regulator will ask the employer to provide the primary contact and further information will be sent to that person. If the business is such that there is someone different who will be carrying on the day to day tasks of management of the systems, they can be nominated as a secondary contact. This information can be provided online. 4.2 Postponement Once the employer has identified the staging date they can postpone implementation for all or some of their workers this is described by the Regulator as the waiting period. The postponement is not of the staging date but of the assessment of some or all of the workers. If the employer is using postponement for all of his workers, then it will effectively delay the staging date. All workers who are subject to postponement must be notified of this. The use of postponement is not straightforward because of the following reasons: The decision must be made in advance as the deadline for issuing the postponement notice is six weeks and a day from the date from which they wish to use postponement. Postponement cannot be applied if the notice is not issued. Postponement is not designed to allow the employer to simply delay the implementation of autoenrolment but is, in reality, a facility to allow the employer more flexibility. An example given by the Regulator is that it would allow the employer to automatically enrol groups of Page 20

21 workers at different points post staging to smooth the overall process or to align the administration going forward (we will see later when postponement can be used once the business is post staging). Once it has been decided that postponement will apply, the employer must choose the deferral date which is the last day of the postponement period. It is the date at which the worker must be assessed and it must be included in the postponement notice. It cannot be any more than three months and one day after the staging date but could be earlier. Once that date has been chosen it cannot be changed even it is less than three months after the staging date. A template for the postponement letter which has to be issued to the employees is available at postpone. Once we get past the staging date, there are two other situations where postponement can occur: The first day of employment where this is after the employer s staging date The date that the criteria to be an eligible jobholder will be met Both of these do clearly allow an employer to streamline their processes and make the administration much simpler. Exactly the same information and notification requirements exist in either of those cases. 4.3 Bringing the date forward All employers can bring their staging date forward. The Regulator must be notified one calendar month before the new earlier staging date. This can be done online. The date which can be chosen is one from a list of available dates. Those dates are the 1 st of each month starting on 1 June 2015 and continuing until 1 January 2018 although in each relevant year 1 December is not a possible date. To bring the staging date forward, the employer must: Have an existing staging date Have contacted a pension scheme that can be used to meet the pension obligations and secured the agreement of the trustees to the earlier date and Have notified the Regulator within the timeframe indicated above. Once the notification has been submitted to the Regulator, a written acknowledgement should be received and once that has been received there is no ability to revert to the original staging date. Page 21

22 In order to notify the Regulator the employer will need their 10 digit reference (which will not be issued to them if it is more than 12 months before the staging date and can be found online at by entering the Accounts office reference and the PAYE reference). The employer will also need the PAYE reference and the Government Gateway User ID. 4.4 Enforcement The Pensions Regulator has responsibility for the compliance with autoenrolment. Their overall stated approach is to educate and enable employers to comply with the legislation. However, they do have specific tools at their disposal to enforce compliance. This falls into the following categories: Non statutory action The Regulator can issue guidance and instruction by telephone, , letter and in person or warning letters confirming set time frames for compliance with obligations. This is likely to be the first step in most cases. Statutory notices Statutory notices can be issued directing employers to comply with their duties and/or pay missing or late contributions. These fall into the following categories: Compliance notice Improvement notice Unpaid contributions notice Further discretionary power allowing estimates of liability to be raised along with interest levied on unpaid contributions; this would include a direction to calculate the unpaid calculations Powers to recover unpaid contributions on behalf of trustees or scheme managers Appoint, suspend or prohibit (including unsuitable trustees) or appointment of new trustees Penalty notices Penalty notices can be issued to punish persistent and deliberate non compliance including: Fixed penalty notice of 400 for failure to comply with statutory notice or if there is sufficient evidence of a breach Escalating penalty notice for failure to comply with a statutory notice at a daily rate of between 50 and 10,000 depending on the number of employee Prohibited Recruitment Conduct Penalty Notice for cases where an employer fails to comply with a compliance notice or there is sufficient evidence of a breach. This is set at a maximum fixed daily rate of 5,000 if there are 250 or more workers with rates from 1,000 per day for smaller firms. Civil Penalty of up to 5,000 for individuals and up to 50,000 for organisations who fail to pay contributions. Page 22

23 The Regulator has indicated that they aim to recover all penalties issues, through court action if necessary. They can also prosecute employers who wilfully fail to comply with their duties. They also have the capacity to issue Third Party Compliance Notice which can lead to daily penalties of up to 200. All enforcement decisions can be appealed to the First Tier Tribunal. 4.5 Assessing workforce The first issue is to identify if the employee is a worker who falls within one of the relevant categories. Autoenrolment only applies to workers within the UK which is someone working or ordinarily working in the UK. What is a worker? A worker is defined as an individual who works under a contract of employment or has a contract (which does not have to be written) to perform work or services personally and is not undertaking the work as part of their own business. This might include agency workers. The guidance stresses that just because someone is self employed for tax purposes does not automatically mean they cannot be a worker for these purposes. The guidance calls these personal service workers and sets out some criteria as to how those persons might be identified. If an individual is a director of a company and that company has no other employees, the individual is not a worker by virtue of any office they hold or contract of employment under which they work. The company is therefore not subject to employer duties in relation to that individual. This would apply if there is more than one director unless two or more directors have employment contracts. Where the company takes on one or more workers in addition to the directors, the company will have employer duties in relation to those workers, but will not have duties in relation to the directors unless they have contracts of employment with the company. Once it has been established that someone is a worker, then you have to categories them into: Eligible jobholders Non eligible jobholders Entitled workers The following table shows the differentiation: Page 23