Employer Review. The latest UK and international payroll, benefit reporting, pension and employee reward topics for employers.

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1 Employer Review The latest UK and international payroll, benefit reporting, pension and employee reward topics for employers Autumn 2017 In this newsletter: P01 Changes on the horizon for employment status and PAYE P03 Corporate Criminal Tax Evasion legislation P03 Business expenses P04 Termination payments P05 The General Data Protection Regulation ( GDPR ) and payroll P06 Taxation of lump sums from overseas pension schemes P06 Immediate auto enrolment P06 Blick Rothenberg Changes on the horizon for employment status and PAYE As you may be aware, there has been increased focus in the media recently on employment status. This follows concerns that have been raised with the employment status of the delivery company Hermes drivers and other operators in the so-called gig economy, including Uber, who have been the subject of a recent tribunal ruling that stated that their self-employed drivers should be classified as workers. The gig economy is characterised by short-term temporary contracts with workers who are classed as self-employed and have none of the rights and protections of employment, such as minimum/living wage, sick pay, holidays and pensions. The ruling came as HM Revenue & Customs ( HMRC ) announced the launch of a specialist unit to investigate companies who opt out of giving workers employment protection by using agency workers or classing them as selfemployed. In addition, the government commissioned an independent review of working practices, the Taylor Review, which was published recently. The Taylor Review proposed some significant changes to the way in which an individual s employment status is determined. The proposals may not necessarily be enacted, however, the current political and economic environment suggests that significant change is highly likely and this is something that organisations should be considering now. Taylor s proposals follow an earlier report in 2015 by the Office of Tax Simplification ( OTS ) on employment status. The OTS s report clearly highlighted the central issue: the tax system is still in many ways stuck in an out-of-date mindset: of categorising workers as either employees, firmly on the payroll, or self-employed. This made sense in the 1950s and 1960s but the huge growth in freelancing doesn t fit readily into this traditional model. Taylor echoes this sentiment and also cites other reasons for change such as the perception that the tax system acts as an incentive for practices such as bogus claiming of self-employment. 1

2 So change is inevitable and it would be wise for organisations to think about the potential impact of any changes to their own workforce and business model. There is also likely to be a cost impact for many organisations (i.e. employment is normally more costly than self-employment), as well as the challenge of dealing with a new compliance regime for PAYE and National Insurance. HMRC are expected to launch a consultation on the Taylor report later in We welcome change in this area as it is clear that the employment status rules and regulatory framework requires an update and more clarity. However, any future measures should not impede the flexibility of the labour market or stifle employment creation. What is the current position? There are many factors involved in deciding whether a worker is employed or self-employed. No precise definition of self-employment exists for either tax or National Insurance Contributions ( NIC ) purposes. In many cases, deciding the correct relationship between the parties is straightforward but in some cases it is a complex and difficult decision. To confuse matters even more, the rules for NIC specify the opposite treatment to the tax position for certain categories of worker. Examples include examiners, office cleaners and actors. Incorrect classification can result in the employer or contractor being held accountable for any tax and/or NIC not deducted. This could include interest and penalties of up to 100% of the outstanding liabilities. Whilst there are similarities, the tests for employment law (primarily determining workers rights and employers legal obligations) are different to the tests for employment status for tax purposes (primarily determining whether an employer is required to operate PAYE and NICs on a worker s remuneration). This can lead to confusion and the perverse result that someone may be treated as employed under the law but treated as selfemployed for tax purposes, or vice versa. Currently, employment status for tax purposes (i.e. whether someone is employed or self-employed) is determined mostly by case law and associated HMRC guidance, including an employment status indicator. Whose choice is it anyway? Individuals cannot choose whether they are to be classed as self-employed or as an employee. The circumstances of their engagement will determine the status and unfortunately the burden of this decision initially lies with the employer or the contractor, and then for them to make the necessary tax deductions and/or NICs, as appropriate. How is status determined? The tests are numerous, subjective and can include the following factors: control who decides where the work is done; mutuality of obligation can the worker refuse the work financial risk; integration is the individual part and parcel of the organisation; substitution/delegation is there a right to substitution equipment who provides equipment necessary to do the work; and is it a contract of or for services? None of the above criteria listed can, in isolation, be taken as determining employment status. It is the overall picture, after taking all of them into consideration, which will determine whether a worker is employed or self-employed. What is HMRC s approach? Whilst their guidance on status should in theory produce a certain outcome (i.e. an individual is self-employed or employed), the reality is not that clear-cut. Part of the reason for this is that the tests themselves are subjective and different tests carry different weight depending on the circumstances. In addition, the tests often do not reflect the reality of workers who may undertake brief stints of work for multiple companies, who operate in the gig economy and are paid on a caseby-case basis or workers who receive their work via online platforms. The current position can lead to an array of issues, including uncertainty, the risk of non-compliance for employers and those they engage to work for them, unexpected tax bills and timeconsuming disputes. As a result, HMRC will now routinely challenge the status of any workers classified as self-employed during the course of a compliance inspection. 2

3 What is Taylor recommending? The Taylor Review makes a number of recommendations including: There should be greater alignment between the employment law and tax definitions of status; providing greater clarity and consistency to both employers and workers. New legislation should be introduced to determine an individual s status (i.e. rather than a heavy reliance on case law). There should also be greater clarity; perhaps with the introduction of an online tool and more definitive tests than exist currently. A new category of dependent contractor should be introduced for tax purposes (mirroring the proposals for employment law) whereby the degree of control exercised by the engager will have more importance in determining status. This new status for tax purpose is partly to reflect the array of new working arrangements (i.e. such as Uber drivers) where individuals are not clearly either employed or self-employed. NICs for the self-employed should be aligned with those of the employed, reducing the incentive for individuals to contrive bogus self-employment arrangements. How we can help? For all employers it is perhaps too early to start making any substantial changes to current arrangements. However, we would recommend that organisations: review your current workforce (i.e. numbers of selfemployed, contractual workers, full-time employed etc.); review the status of any individuals who are not engaged as employees (or otherwise on the UK payroll, subject to PAYE and NICs); and assess the potential cost and business risk associated with any future changes (i.e. in a worst-case scenario if all individuals who are currently self-employed were deemed to be employed, what would the additional cost be?). Our Employment Tax team has significant experience in this field and we can: provide specialist advice on employment status issues; manage HMRC inspections into the status of workers; make recommendations to make the arrangements more robust; and mirror an HMRC status inspection which will put you in a position to understand any strengths and weaknesses within the relationship. It can be also be used to defend a challenge by HMRC or, where appropriate, to obtain a ruling. Corporate Criminal Tax Evasion legislation A new corporate offence of failure to prevent the criminal facilitation of tax evasion applied from 30 September 2017 to both companies and partnerships. This will effectively make a business liable for the criminal acts of its employees and other persons associated with it, even if the senior management of the business was not involved or aware of the issue that gave rise to the offence. A business will have a defence if it can prove that it had put in place reasonable prevention procedures to prevent the facilitation of tax evasion taking place (or that it was not reasonable in the circumstances to expect there to be procedures in place). HMRC has published draft guidance on the offences in which it explains that there are six guiding principles that businesses should take into account in establishing reasonable prevention procedures. These are: risk assessment; proportionality of risk-based prevention procedures; top-level commitment; due diligence; communication (including training); and monitoring and review. All businesses should undertake a risk assessment to identify the risks of facilitation of tax evasion within the organisation and the potential gaps in the existing control environment. All businesses should be taking action now to ensure that they are aware of and have control over how their employees, agents or service providers are operating to reduce the risk of exposure to the new offences. Aside from the possibility of incurring a heavy fine, a successful prosecution could give rise to serious reputational damage for an organisation and is not something that businesses can afford to overlook. Business expenses Following a review of benefits in kind by the Office of Tax Simplification ( OTS ), a number of changes were introduced with regard to the reporting of expenses and benefits. These included: abolition of the threshold for the taxation of benefits in kind for employees who earn at a rate of less than 8,500 a year; a statutory exemption for trivial benefits; a system of collecting income tax in real-time through the payrolling of benefits in kind; and replacement of the expenses dispensation regime with an exemption for paid and reimbursed expenses. 3

4 Changes have also been announced with regard to the PAYE Settlement Agreement ( PSA ) process whereby employers will no longer have to agree formal PSA agreements with HMRC each year by 6 July, and also the PSA calculations can now be submitted to HMRC electronically. In addition to the above, following the OTS review the government is looking at the current system of income tax relief for employees business expenses, including those that are not reimbursed by their employer, in order to better understand: whether the current rules or their administration can be clearer and simpler; whether the tax rules for expenses are fit for purpose in the modern economy since the main principles behind the current tax rules for expenses were introduced in the midnineteenth century; and why the cost to the exchequer of the tax relief for expenses which are not reimbursed has increased. Following this review HMRC will no doubt introduce further changes to the expense process. What does this mean for employers? With the changes already introduced and further changes in the pipeline following the Government s review of expenses as well as the introduction of the Corporate Criminal tax evasion legislation, the pressure on employers to be compliant and get things right has never been greater. Employers should therefore look to ensure that their checking systems and processes in relation to expenses meet HMRC s requirements. The requirements are that: employees are in fact incurring and paying expenses of the kind reimbursed; and that the expenses incurred are business related which would qualify for tax relief. If not they are being picked up for inclusion on the form P11D, PSA or payroll. Employers should look at their expense policies and ensure that they are up to date with the latest legislation. If they do not have one, it is useful to have a policy as it sets out the guidelines under which employees can claim expenses and also provides guidance on the approval process for those that approve the expenses. Health checks Employers may find a health check beneficial, particularly where they have not been the subject of a HMRC compliance review. An Employment Tax Health Check is an independent review of your employee-related policies and procedures undertaken by an employment tax specialist. A health check can establish: whether PAYE procedures are being correctly followed, all benefits in kind identified and returns made on time; whether Class 1 and Class 1A NICs are being deducted and accounted for as appropriate; that you are making effective use of the exemptions from reporting certain expenses payments and benefits, since this cuts down the work involved, the area for inspection and liability to Class 1A NICs; and if staff dealing with PAYE and NIC related matters are competent and kept up to date with new developments. In addition, a health check should help identify the extent of any potential arrears of tax and national insurance or risk of penalties if there are any errors overseas. If the company pays for travel and hotels when the director attends a board meeting in the UK or fulfils similar UK director duties, then the UK company should report those expenses on a P11D (or PSA) and the tax should be paid by the director. All directors should be filing a UK tax return regardless of where they live. Termination payments After being put on hold for the general election, a range of measures put forward earlier this year are now back on the legislative agenda. Several of these measures relate to termination payments. Originally, new measures were due to apply to all terminations after 6 April However, the government announced on the 2 November 2017 that it would delay implementation to 6 April This provides employers with a larger window of opportunity to plan ahead. What is changing? For all terminations after 6 April 2019, the proposals are that: Payments in Lieu of Notice ( PILONs ) will be subject to tax and NIC, irrespective of whether a PILON is contractual or non-contractual. Currently, it is possible for PILONs to be tax free where they are considered to be non-contractual and, taken together with other deemed termination payments, fall under 30,000. Payments in Lieu of Notice ( PILONs ) will be subject to tax and NIC, irrespective of whether a PILON is contractual or non-contractual. Currently, it is possible for PILONs to be tax free where they are considered to be non-contractual and, taken together with other deemed termination payments, fall under 30,000. Employees who have had periods working overseas under the employment being terminated will no longer be able to claim Foreign Service Relief. Depending on the amount of 4

5 time spent working outside the UK, employees are currently able to exclude either all or part of their termination payment from UK tax and NIC. Employers NIC will be due on all taxable termination payments (i.e. termination payments which exceed 30,000). Currently, qualifying termination payments (i.e. payments which qualify for the 30,000 exemption) are not subject to employers (or employees) NIC, even where the payment exceeds 30,000. Employees will be pleased to know that there are no plans to introduce employees NIC on qualifying termination payments which exceed 30,000. What is the impact for employers? Employers should review the new rules where there are terminations, in order to ensure that any termination payments are processed via payroll in a compliant manner. HMRC may impose penalties and interest on any underpayment of tax or NIC. There will be an increasing cost for employers on terminations as a result of the additional NIC imposed on qualifying termination payments over 30,000. Where employers tax equalise or tax protect their expatriate employees (i.e. settle tax on behalf of their employees), there is likely to be a significant increase in cost where Foreign Service Relief would have applied. What should employers do? Given the upcoming changes, employers should familiarise themselves with the new rules and also factor in the potentially increased cost of any terminations. With regard to the loss of Foreign Service Relief, employers and employees should explore whether it is possible to exempt part of the termination payment under a double tax treaty. For example, in some circumstances it is possible to use a double tax treaty to argue that the termination payments should be taxed (in part or in full depending on the extent of the overseas work) in the country or countries in which the employee earned income during their employment. This may help reduce the overall tax burden in those cases where the employee worked and was taxed in a country or countries where the tax rate is lower than the UK. The General Data Protection Regulation ( GDPR ) and payroll The GDPR extends the data rights of the individuals and requires organisations to develop clear policies and procedures to protect personal data. There are 12 steps, with differing degrees of relevance to payroll, which you should be considering ahead of the legislation taking effect in May Most businesses have begun a review of client data but it is important to consider the data you hold on your employees and the processes involved in HR and payroll. These 12 steps are: Awareness decision makers in the organisation need to be aware that the law is changing. An executive sponsor may be required to agree to release the budget to accommodate the changes. They should be aware that penalties can be up to the higher of 20million or 4% of worldwide annual revenues. Information you hold You should document the nature and source of the information that you hold, including who you share it with. If information is found to be inaccurate you have an obligation to update any third-party organisations you have shared this data with. Communication of privacy information your privacy notices are likely to need updating. They need to include, among other things, the purposes for which the data will be processed, the categories of data, who will receive it (including whether it will leave the EEA), the period of storage and the consequences of any automated decision making and profiling. Individuals rights including the rights to be informed, to access data, to rectify errors, and the right to erasure (commonly referred to as the right to be forgotten). There is a new right to data portability that applies on where automated processing applies. Automated processing could include, for example, system-based triggers for sickness absence or attendance bonuses. Subject access requests in many cases you can no longer charge for these and the time limits for complying are reduced. Your procedures should be updated accordingly. Lawful basis for processing personal data although it seems self-evident. it is important that you identify and document the reasons. These will typically be a combination of meeting legal requirements and contractual obligations. Consent existing consents should be reviewed and may need to be refreshed. Consent can t be inferred but must be through a positive opt in. It needs to be separable from other terms and conditions. Children there are specific rights for personal data held relating to children. You need to ensure you can verify individuals ages although this is unlikely to be an issue for payroll processing. Data breaches procedures should be designed to detect, report and investigate a breach. You need to understand when you will be required to report a breach to both the authorities and the individuals concerned. Data protection by design and default organisations now need to embed privacy considerations in both operational and strategic payroll considerations. This should ensure that only the minimum data is collected and processed, is stored for no longer than necessary and is restricted to that necessary for the purpose. Data Protection Officer this is not a formal requirement for all organisations but it is considered best practice that someone takes overall responsibility for data protection compliance. 5

6 International if you operate payroll across more than one country you need to consider who the lead data processing supervising authority is. Taxation of lump sums from overseas pension schemes The global nature of employee mobility makes it increasingly common for UK residents to be in receipt of payments from an overseas pension scheme. The UK tax treatment of regular income from an overseas scheme is straightforward such income is now fully taxed in the UK (while previously only 90% was taxed, such income is fully taxed from 6 April 2017). Additionally, although the UK may have a double tax agreement ( DTA ) with the country hosting the pension scheme that allows that country to retain the taxing rights, these can be drafted differently so some review is still required. Were contributions paid before or after 6 April 2006? Was UK tax relief claimed on personal contributions? Was UK tax paid on employer contributions? Have gains and income been taxed in the UK or locally? What is the timing, form and local taxation of benefits paid by the scheme on retirement or death? What is the split between UK and foreign service before 2017? Is the lump sum defined as a benefit as such or is it merely a commutation of the right to a regular pension income? What does the relevant DTA have to say on the matter? If you are, or will be, entitled to a lump sum payment from a non- UK pension scheme, you may wish to review the situation as part of your overall retirement planning strategy. Immediate auto enrolment The UK tax position of any lump sum payments is considerably more complex. The April 2017 changes have brought some clarity (lump sum rights accruing post April 2017 are taxable in the UK, subject to the relevant DTA) but the correct treatment of pre-2017 lump sum rights remains a major challenge. The starting premise is that all lump sums will be taxed in the UK if paid to a UK resident. The nature and amount of the UK tax charge and the extent of any exemption or relief will depend upon a number of specific points: Blick Rothenberg Payroll Benefits & Expenses Expat Reward Pensions Directors UK International Any new employers from 1 October 2017 are required to comply with auto enrolment legislation straight away. There continues to be the option to apply for a postponement for three months. However, this does not leave long to establish anything above a vanilla scheme. Therefore, advice needs to be sought from an IFA, or similar professional, as soon as possible if you want to offer an enhanced scheme. In an increasingly globalised world, businesses and individuals face a wide range of tax challenges and opportunities. Blick Rothenberg is a market-leading accounting, tax and advisory practice that supports over 800 international businesses. Our specialist Employer Solutions team can help you and your employees manage tax, payroll, pension and policy issues and will work with you to find practical solutions to these complex areas. To view our new publication that highlights the services we offer please click here. Blick Rothenberg was awarded the best International and Expatriate Tax Team at the 2015 Taxation Awards. Recognised as a mark of excellence within the sector, the awards were judged by a panel of leading professionals and officers of major tax institutions. We have also been highly commended by the Chartered Institute of Payroll Professionals ( CIPP ) as being a leading firm in the provision of international payroll services. For more information, please contact: Mark Abbs Partner +44 (0) mark.abbs@blickrothenberg.com 16 Great Queen Street Covent Garden London WC2B 5AH Tel: +44 (0) November Blick Rothenberg Limited. All rights reserved. While we have taken every care to ensure that the information in this publication is correct, it has been prepared for general information purposes only for clients and contacts of Blick Rothenberg and is not intended to amount to advice on which you should rely. Blick Rothenberg Audit LLP is authorised and regulated by the Financial Conduct Authority to carry on investment business and consumer credit related activity. 6