PAYE and NIC hot topics Presented by: Ros Martin
General update
Introduction Number of draft proposals announced at time of Autumn Statement and Budget Some in FA2017 But this was shortened due to election Assumption most will come back into play
PAYE and Class 1 Speculation about alignment of tax and NIC Likely to be very complex But primary and secondary thresholds aligned Debt recovery period for NIC aligned with income tax
Salary sacrifice Limiting of advantages associated with salary sacrifice Perception by HMRC that this is being abused What is salary sacrifice? Way of saving tax/ni by waiving salary in exchange for benefit Works best where benefit is exempt
Optional remuneration arrangement Defined by legislation Type A: where an employee gives up right to receive an amount of earnings in return for benefit Type B: where an employee agrees to be provided with a benefit rather than an amount of earnings
Exemptions Not all schemes are caught by changes Childcare Death or retirement provision Redundancy Counselling and retraining Cycles and cyclist safety equipment Ultra low emission cars Payments connected with taxable cars and vans
Impact Imposing a notional cost on taxable benefit based on salary given up If greater than charge that would otherwise be due Removes benefit of undertaking salary sacrifice
Making good to avoid BIK charge Can reduce tax charge by making good value of benefits Legislation is amended to clarify when that must be done by On or before 6 July following end of tax year
Provision of assets to employees Amendment to legislation which imposes tax charge on employee Where using asset without transfer of ownership Tax charge is 20% of MV per tax year Clarification where not available for all year Tax now only to be charged on those days when made available for private use
Specific details Asset is unavailable if, for at least 12 hours, it is not in a condition to use Undergoing repair or maintenance Could not lawfully be used In possession of person who has lien over it Or is being used in a way that is neither use by nor use at the direction of the employee Being used by employee in performing duties
Car benefit Always announce rates well in advance Rates for 2020/21 have been announced Major change relates to electric cars
Car benefit (1) CO2 Electric range (miles) Relevant % 0 N/A 2 1-50 >130 2 1 50 70 129 5 1 50 40 69 8 1 50 30 39 12 1 50 <30 14 51-54 N/A 15 55-59 N/A 16
Car benefit (2) CO2 Relevant % 60 64 17 65-69 18 Increments of 5% of CO2 up to... 150 154 35 Gives 1% increase in relevant percentage up to... 155 159 36 160 and above 37
Termination payments New rules from 6 April 2018 New provisions will basically Retain 30,000 exemption But remove the distinction between contractual and non-contractual PILONs But only up to the level of the earnings NIC will become Removal of foreign service exemption
Termination payments to footballers Spurs paid two players for agreement to leave Argument as to whether there earnings or termination payments Early termination clauses in contract But this was not paid under those Termination was by mutual agreement but did not derive from employment So fell within termination provisions
PAYE settlement agreements Small change in legislation Removal of requirement for the PSA to be agreed with an officer of HMRC Also development of digital system
Apprenticeship levy Cost of 0.5% of gross payroll per employer But with levy allowance of 15,000 So only impacting where payroll > 3m Applies to whoever is secondary contributor Levy allowance reduced for connected companies
Trivial benefits Change from 6 April 2016 so will be lots of issues in this year P11ds So HMRC issued guidance Trivial benefit if Less than 50 cost Not cash or cash voucher Not in return for services Not part of contractual obligation or habitual Limited if close company director
HMRC example 1 You take a group of your employees out for a meal to celebrate their birthdays. Five employees attend the meal at a cost to you of 240. Each of the employees choose a different selection of food and drinks. The cost per head works out at 48, if the bill is split evenly. This can be covered by the exemption since the cost for each individual does not exceed the trivial benefit limit.
HMRC example 2 As director, you decide you want to provide your employees with two annual functions, one at Christmas and one in the summer. The first function costs 140 a head and the second costs 40. The first function is exempt by virtue of the annual parties function exemption. The second would be considered a trivial benefit in kind because it does not exceed 50.
HMRC example 3 As a director you are provided with 3 bottles of wine that cost 30, 40 and 50 respectively in a single tax year. The total cost of the benefits is 120. The total cost does not exceed the annual exempt amount of 300 and all of the benefits can be covered by the exemption
Employment allowances Increased to 3,000 for 2016/17 But restrictions changed To include one man band companies Some confusion as to how this works in practice?
NMW/NLW December Employer s Bulletin contain top five errors made in relation to NMW and NLW HMRC are increasing compliance in this area
Errors Must pay NMW regardless of nature of employer Are you making deductions from pay? Do you include top ups that are not pay for NMW purposes? Are you engaging people who should be workers? Do you include all working time?
Status and IR35
Introduction HMRC are changing IR35 where client is public authority Change will apply from 6 April 2017 Will be up to the client to determine if IR35 applies And then to deduct tax if it does
Details Normal employment status tests will apply New digital tool to help the end client to determine But worker will be able to appeal decision to HMRC Wide definition of public sector Giving rise to huge issues in practice
Status indicator Will not always give a clear outcome Also there is some confusion over some of the questions Need to be certain that clear about answers if you want to rely on any judgement
Process Worker will need to supply NINo and tax code details Payment will be within RTI If no P45 supplied, then OT or BR code will have to be used Worker will be treated as receiving employment income
Intermediary Intermediary will get a deduction Corporation tax computation will also be adjusted so no double deduction for costs associated with engagement Worker will be able to withdraw amounts from intermediary without paying tax
Calculation Each month, Rebecca IT Ltd invoices the Ministry 7200 which includes 1200 VAT. The Ministry treats 6000 as Rebecca s earnings and deducts 1400 tax and 400 employee NICs which it pays to HMRC via RTI with 700 employer NICs. Each month, the Ministry pays Rebecca IT Ltd a total of 5400, which is 4200 for the services provided plus 1200 VAT. Rebecca draws 3000 in salary each month through Rebecca IT Ltd s payroll. Tax and NICs are not deducted as these have already been deducted at source by the Ministry. This means that Rebecca will continue to be able to claim statutory payments, as she can now. From the contract with the Ministry, Rebecca IT Ltd receives: 25200 in payment from the Ministry, net of tax and NICs 7200 VAT charged for services provided The VAT and CT liabilities of the PSC remain unchanged by the proposed reforms
Agency calculation Each month, the agency invoices the NHS Trust a figure of 3600 for the cost of the labour provided. This includes 600 VAT. Mikael, through his PSC sends the agency an invoice for 2200 per month as the agreed charge for his services. Mikael Health Ltd is not registered for VAT as the company s turnover is below the VAT minimum threshold. The agency treats the full amount of the invoice, 2200 as Mikael s earnings and deducts 250 tax and 200 employee NICs which it pays to HMRC via RTI with 200 employer NICs. The agency pays Mikael Health Ltd a total of 1750. From the 36000 invoiced to the NHS Trust, the agency pays out: 21000 in payments to the PSC 3000 Income Tax, 2400 employee and 2400 employer NICs to HMRC Workers 4 U Ltd earns 7200 from this engagement before its own costs are taken into account. They give Mikael a P45 as they would for a directly employed person who leaves their employment.
IR35 in practice HMRC are still doing IR35 compliance Just had practical experience of dealing with this
Conduct of case Client contacted Contracts sent in and reviewed there were two end clients and one was declared to be low risk but the second one was pursued Meeting requested and attended by 2 HMRC officers the questions asked are shown below Meeting notes had to be agreed amendments made to misunderstandings HMRC then wrote to end client to ask for a meeting We liaised with them (as our client was still on good terms with them) and suggested that they ask if they could answer questions by correspondence Questions issued, they answered and we checked to make sure nothing directly contradicted what we had said and suggested one or two minor changes in wording HMRC agreed IR35 should not apply
Line of questioning Notes contain brief details of nature of questions asked Thorough review ignoring contract and focussing on actual practice
Partner or employee Proprietor of KW set up business as partnership Bringing employees into partnership Partner appealed saying he was employee Not entered into partnership agreement Paid a wage and bonus based on performance FTT accepted claim Substantial control over when and how the taxpayer worked Interesting to see if HMRC appeal
Delivery drivers Recent case involving delivery drivers Partnership built up pool to drive lorries Specific details were vague but no contract no guarantee of work if did not accept work then less likely to be offered did not really suffer any financial risk But found by FTT that were workers
Uber drivers Another similar case involving Uber drivers Despite huge efforts to try and establish that were self-employed But found to be workers
Compliance issues
Completing P11ds New regime since introduction of qualifying business expenses exemption Abolition of dispensation regime Some nervousness about how this will work in practice
Details of legislation Exempts expenses and benefits from reporting Which would otherwise be deductible from earnings Either as travel, business entertaining, professional fees, wholly exclusively and necessarily
Scale charges Where dispensation previously in place four options Pay HMRC benchmark rates Bespoke rates Industry/sector rates Reimburse under PAYE
Overseas travel Need to look at FCO rates 93 page document going into huge details But can make a huge difference to costs which can be claimed
System for checking Must have system in place for checking that scale rate is appropriate Detail in EIM Must ensure that expense being incurred And is deductible
Details Extent of checking depends on scale of business But legislation now specifies must have system in place And have evidence to show that process exists
Transitional provisions Bespoke rates of allowance agreed in 5 years up to 5 April 2016 can continue All must be reviewed on fifth anniversary
Partially exempt If expenses are partially exempt, qualifying part can be excluded Unless benefits are not separable In which case the total must be reported unless the employee makes good the full benefit Can claim via SA or P87 for bit deductible
Employer compliance HMRC have authority to examine all records held by employer Still a very aggressive element of reviews undertaken
Case law
Care home fees Family company paid the care home fees for Mrs B Daughter was an employee Husband was majority shareholder and MD Taxpayer (daughter) had contracted personally with the care home HMRC argued taxable benefit on her as meeting personal liability She argued was agent for company so BIK for Dad
Decision This case was effectively about who to tax Clearly being provided for family member but which takes priority FTT decided some kind of hierarchy with spouse at the top and guest at the bottom So in this case taxable on the husband Does not resolve all questions on this matter
Transfer of PAYE liability Director drew money and recorded these as loans Dividends/salary extinguished loan at year end Went into liquidation, recategorised dividends as salary as not sufficient profits No PAYE paid HMRC tried to collect from director on basis that he had received payments Found for taxpayer strange judgement?
Trade union honoraria Trade union had branches with secretary Received honorarium as % of branch members contributions Agreed taxable subject to relief for expenses element But disagreed with whether within PAYE HMRC argued were office holders FTT agreed but directed that HMRC must take account of tax already paid
SMP S became pregnant Made redundant but claimed for unfair dismissal Claim agreed without admission of liability and payment made Also dispute about SMP and what they had to pay
Issue at stake Whether bonus paid in October should be taken into account in calculating earnings Company argued that not part of normal earnings Also argued that SMP was part of compromise agreement payment
Decision FTT held that SMP purely arithmetical Look at earnings doesn t have to be normal Also could not contract out of SMP
And another on SMP Taxpayer paid SMP Claimed off-set against Class 1 HMRC then argued employee not entitled to SMP as not met qualifying earnings threshold Also imposed penalty Appealed
Decision Director argued genuine mistake HMRC had discretion not to collect underpayment FTT found law applied correctly No statutory provision to give discretion argued for