The good news is that the law changed this month so that you may now be able to purchase an additional six years of state pension contributions by paying Class 3 contributions.  Unfortunately, as a result of this new right, the rate of Class 3 contributions increased from £8.10 per week to £12.05 also from April 2009. The Pension Service website states that this is necessary to ensure that the change is cost neutral.

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HMRC has now introduced an advisory system of 'benchmark' scale rates which employers can use to make subsistence payments to employees free of tax and NICs. The new advisory system was implemented from 6 April 2009.

The system only covers scale rates for day subsistence payments. There are detailed requirements on notifications and conditions but once set up the following tax payments can be paid, tax free and with no P11D reporting obligations:

Breakfast rate for irregular early starters up to £5.00 per day

One meal (5 hour) rate - up to £5.00 may be paid

Two meal (10 hour) rate – up to £10.00 may be paid

For further details see www.hmrc.gov.uk/briefs/income-tax/brief2409.htm.

Comment on this blog in the space provided below, or visit my profile for details of how to contact me. 

Cathy Corns is a Corporate Tax partner at Mercer & Hole. 

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Some of the reasons for employers adopting flexible benefits are to make staff more aware of the value and cost of each benefit, and give more choice on the range of benefits provided. However, flexible benefits systems require tax compliance, management time and additional investment, so you have to make sure that the benefits of introducing flexible schemes outweigh the management time and set-up costs.

Under a salary sacrifice arrangement employees opt to exchange gross income for an employer provided benefit. Using this planning can avoid income tax and both employee’s and employer’s national insurance.

Some of the benefits that can provide tax and NI savings are:

• pension contributions
• death-in-service benefits
• HMRC-approved employee share schemes
• childcare vouchers
• bikes for work scheme
• health screening
• mobile phones
• holidays
• car schemes
• bus travel
• carbon offsetting
• staff discounts
• staff canteen
• training

If you are looking for some less costly ways to incentivise your staff at the moment, this may be an option.

Comment on this blog in the space provided below, or visit my profile for details of how to contact me. 

Cathy Corns is a Corporate Tax partner at Mercer & Hole. 

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With effect from 6 April 2009 employers with 50 or more employees must send their employee starter and leaver information – P45s, P46s and P46(Pen) for pensions – online. Failure to do so could result in a penalty. Forms are filed online using HMRC’s PAYE Online for Employers service, with which employers must first register at www.hmrc.gov.uk. 

Comment on PAYE penalties in the space provided below, or visit my profile for details of how to contact me.

Cathy Corns is a Corporate Tax partner at Mercer & Hole. 

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Less than 50 employees? If so - if you file your employer's returns on line this year you will receive a £75 bonus from the Revenue - see link for further details. 

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HMRC’s new look P45s, introduced to accompany the shift to online filing that begins in April, could increase the potential for fraud.

The new forms P45 are A4 sized, and come in the same four parts, but also include fields for the employee’s date of birth and gender.

The new forms and data fields will have to be completed from 6 April (though employers who employ fewer than 50 people may still submit old-style paper P45s that are given to them by new employees).

Pre-printed P45s can be ordered from HMRC’s Employer Orderline. However, employers will have the ability to print copies on plain white paper (from HMRC Online or payroll software). This has raised concerns that the forms may be confused with photocopies.

HMRC has not publicised the arrival of plain paper, black-and-white P45 printouts. On this basis payroll officers may not be aware of the changes and so may be reluctant to accept them.

However, once the initial confusion is over there is a concern that the new forms may be open to manipulation. In theory, P45s could be mocked up in Word and printed out with a high previous tax paid figure. The fraudster could then obtain a false tax rebate.

You should be aware that it is the employer’s responsibility to check the tax figures are correct. If the numbers do look odd you should verify that the tax and NIC paid are correct before you start paying out any rebates.

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H M Revenue & Customs have announced that the bonus rates paid on SAYE Sharesave Schemes have been reduced in line with other interest rates.

The Early Leavers’ Rate, paid where employees’ SAYE contracts are cancelled before the agreed date, has been reduced, from 3% to 2%.

These changes took effect from 27 December 2008.

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Whilst the provision of medical insurance is a taxable benefit in kind, you may be interested to know that employer provided health screening and medical check ups can be exempt from tax, provided the screening and/or check ups are available to all employees on similar terms.

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There have been a lot of cases recently, the most well-known being Dragonfly, and the question as to whether or not individuals are employed or not now seems to be even less clear cut.

There are several key aspects to consider, including:

1. Is there a formal contract in place? Does it set out who is responsible for what, reporting to whom, and at what price?
2. Does the engager actually want the specific worker with whom the contract is entered into? If any person with the right skill set would do, that may be a different position.
3. Who controls what is happening? The key area tends to be whether there is control over what is being done as opposed to how it is being done.
4. Factors that point to non-employment include matters such as commercial risks, investment in equipment, fixed price contracting and reparation for unsatisfactory work.
    

If you are a contractor or you have contracted staff and you are concerned that this may be an issue, it may be worth having a health check undertaken in some way, shape or form. If not, the cost could be significant.
 

 

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Just a quick reminder that there is one area where employers can increase the amount included in a dispensation without needing to go back to HMRC. Under the heading “Annual increase in amounts included in a dispensation” HMRC’s manual states:

“Where expense payments included within a dispensation are set at a particular amount (e.g. scale rate payments…), the amount may be uprated annually by the employer without the need to seek HMRC’s agreement, as long as the annual increase is equal to or less than the annual increase in the Retail Prices Index (RPI) for the same period).

It would probably be sensible to keep a permanent record of this but it could still save some time.

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From 10 November 2008 the Revenue will send penalty notices where their records show that 2007-08 form P11D(b) Class 1A National Insurance contributions Annual returns have not been received.

These returns were due by 6 July 2008. The penalty will be £100 per 50 employees for each month the return is outstanding, from 7 July 2008 to 6 November 2008, i.e. four months.

If you have not sent your return I would recommend that you do so as soon as possible.
If you need any help please let us know.
 

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HMRC has acknowledged that the tax code changes for the new 2008-09 personal allowance due to be processed in September may cause some cash-flow problems.

HMRC has stated that initially employers should net any refunds against other PAYE deductions in September but, where these are insufficient to cover the refunds, employers may apply to HMRC for funding to cover the balance.

Full details of how to make a claim are given on http://www.hmrc.gov.uk/employers/payefunding.htm.
 

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HM Revenue & Customs (“HMRC”) have published guidance on the impact of salary sacrifices on statutory payments.

A salary sacrifice arrangement allows employees to give up taxable earnings in return for benefits or payments that are not taxed or subject to national insurance. In the right circumstances, it can yield large savings for employees (and sometimes employers).

The guidance, issued in the form of a number of questions and answers, covers a range of issues including:

• what is needed to make a salary sacrifice successful;
• when changes can be made to agreed arrangements; and
• the effect on SMP, SSP and pension contributions and the interaction with minimum wage legislation.

The guidance is available at http://www.hmrc.gov.uk/specialist/sal-sac-question-and-answers.htm; if you would like to discuss how salary sacrifice might work for you, please contact Cathy Corns or me.
 

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Further to our previous blog HMRC have decided to defer the implementation of the new PAYE system from October 2008. No new implementation date has yet been set.

Apparently it is more complicated than was first thought! Watch this space.

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HMRC have recently issued a factsheet to help you decide whether you are employed or self-employed for tax and National Insurance purposes. The leaflet covers issues such as:

• Is your employment status right?
• The special rules that apply to certain occupations and jobs 
• Working through a Company or partnership 
• Checking your employment status 
• Employment Status Indicator (ESI) tool 
• Your position if you have more than one job
• Why employment status is important 
• Your entitlement to benefits and employment rights
  

It gives links to other relevant information and provides helpline numbers.

The sheet can be found at http://www.hmrc.gov.uk/leaflets/es-fs1.pdf.  

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The Employment Appeals Tribunal recently ruled in HM Revenue & Customs’ favour by supporting current National Minimum Wage legislation relating to tips.

This means that employers have to pay their staff at least the National Minimum Wage regardless of any tips, gratuities, service or cover charge unless the tips are paid directly through the employer’s payroll.

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Just to confirm that the amount payable tax free to employees working from home, without the need to keep receipts, had risen from £2 to £3 from 6 April 2008.

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The Revenue have recently issued a number of documents regarding their procedures and rights on PAYE inspections, together with some details on their obligations, what you can do, etc. You can find full details at www.hmrc.gov.uk/leaflets/c6.htm.

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Loan accounts are increasingly being looked at by HMRC with a view to collecting national insurance contributions (NIC).

Often a director operates his loan account such that regular amounts are debited to the accounts to meet his mortgage, school fees or other living expenses; the amount overdrawn is subsequently cleared by voting a bonus to bring the account back into balance. In HMRC’s view in this situation the director is receiving an advance of his remuneration and so there is a payment of earnings.
HMRC’s view is that NIC liabilities for company directors arise at the earlier of payment or entitlement. This should not increase the NIC due but requires the payment to HMRC to be made earlier.

There are also occasions where a director operates a loan account but on the understanding that he will clear the overdrawn amount by either introducing some of his own income or he will give up or repay a dividend. These overdrawn amounts are not in anticipation of future remuneration and NIC liabilities will only arise if the amount overdrawn is not cleared in full and the balance is written off. Such written off amounts attract liability.

Remember also to Class 1A NIC liability which will arise on the benefit of the loan.

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Many employers reimburse subsistence expenses by way of scale rate payments.

HMRC has now agreed that employers may use the benchmark rates published by the Foreign and Commonwealth Office when paying accommodation and subsistence expenses to employees who travel abroad on business without the need for the employees to produce expenses receipts. The rates can be found at http://www.hmrc.gov.uk/employers/wwsr-april08-revisions.pdf.

Accommodation and subsistence payments at or below the published rates will not be liable for Income Tax or National Insurance contributions and employers need not include them on forms P11D. However, if an employer decides to pay less than the published rates its employees are not automatically entitled to tax relief for the shortfall. They can only claim expenses supported by receipts, less any amounts paid by their employer.

These tax/NIC free amounts are in addition to the incidental overnight expenses that employers may reimburse tax/NIC free (http://www.hmrc.gov.uk/manuals/eimanual/EIM02710.htm).  

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Apparently, such arrangements do not meet the new requirements that are being introduced from 6 April 2008.

HMRC is aware that over the years some employers have reached agreements with their local tax office, for example with regard to:

• Using substitute forms P46. 
• Not following the P46 procedures where forms P45 not received. 
• Not using tax code BR (Basic Rate) as the form P46 default tax code. 
• Sending data on CD-ROMs.

These local agreements are now being ended and may lead to the rejection of the information submitted.

HMRC is reviewing all local arrangements with a view to terminating them and any affected business should urgently conduct a similar review to avoid having your data rejected.

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HMRC has recently increased the guideline rate for tax and NIC free payments to employees who work at home. This is the amount the employers can pay without the employees keeping records. From 6 April 2008 the rate is increased from £2 to £3 per week.

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HMRC has published new guidance on the new penalty provisions that will apply from April 2008.

HMRC states that it has designed the new penalties so that:

• If people take reasonable care when completing their returns they will not be penalised.
• If they do not take reasonable care errors will be penalised, and the penalties will be higher if the error is deliberate.
• Disclosing errors before HMRC find them will substantially reduce any penalty due.

The new penalties initially apply to VAT, PAYE, National Insurance, Capital Gains Tax, Income Tax, Corporation Tax and the Construction Industry Scheme.

Further information can be found at:
http://www.hmrc.gov.uk/about/new-penalties/penalties-leaflet.pdf
http://www.hmrc.gov.uk/about/new-penalties/faqs.htm  

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The shortage of skilled staff is encouraging businesses to incentivise their workforce by giving greater control over the make-up of their remuneration package – “flexible benefits”.

The employees’ participation in a flexible benefits scheme is usually funded by agreeing to reduce salary in return for a non-cash benefit.

Savings can be realised where the benefit provided to staff is tax and/or NIC free. Typical examples include employer’s pension contributions; employer-provided childcare arrangements; and ‘bikes for work’, as well as alternative options, such as a reduction of pay in return for increased holiday entitlement, All of these need to be implemented correctly for the sacrifice to be effective.

Generally, salary sacrifice arrangements are effective where the contractual right to cash is reduced, and the employee is not freely able to revert to their original higher salary in place of the benefit being provided. It is important that the employee’s contractual entitlement to future pay must be relinquished before the point at which it is treated as received for both income tax and NIC purposes. The revised contractual arrangement must also genuinely entitle the employee to a reduced cash payment, in exchange for the provision of a benefit by the employer.

Usually, HMRC’s approach will be that in cases where there is a variation to the contract, lasting for a minimum period of a year, it will accept the position. However, if the agreed period is less than twelve months, the risk of HMRC challenging the arrangement is considerably higher. In a worst case the sacrifice is ineffective and tax and NIC is charged on the gross amount.

It is worth taking time to get this right but done correctly both employer and employees can be winners.

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The Government has recently announced the annual increase to the National Minimum Wage to apply from 1 October 2008:

The proposed increases to the current rates are as follows: 

	CURRENT	PROPOSED
ADULT	£5.52	£5.73
18-21 year olds	£4.60	£4.77
16-17 year olds	£3.40	£3.53

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An employer is obliged to deduct tax and insurance from any payments made to their employees. But what happens if they get this wrong – perhaps because they mistakenly thought the “employee” was self-employed?

This was the point decided in a 2005 tax case, Demibourne Limited v Revenue & Customs Commissioners. The individual (an odd-job man called Mr Bone) had paid tax on the basis that he was self-employed. However, having concluded that Mr Bone was in fact an employee of the company, the Special Commissioner required the company to “gross up” all the payments they had made to Mr Bone and to pay PAYE and national insurance on this gross amount, without any allowance for the income tax he had already paid. In effect tax was being paid twice on the same income.

This will seem to many to be an most unfair outcome, but one that, in our experience, the Revenue have applied consistently following the Demibourne case. Fortunately, in recent months the Revenue have tried to find a way to avoid double taxation in this type of situation and draft proposals were issued on 28 February 2008.

If these proposals become law, it will become possible – in specified circumstances – for some of the PAYE liability to be transferred to the employee. The liability transferred will not exceed the tax assessed on, or paid by, the employee, leaving him no worse (or better) off.

The new rules would effectively take us back to where we thought we were, before the Demibourne case.

What they do demonstrate, though, is that the Revenue can – and will – work to remove iniquities, even where doing so might leave them worse off.

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Companies thinking of offering EMI share options to employees will have three new factors to consider: 

•  the market value (at the date of grant) of the shares covered by the option is to increase to £120,000; 
• the company offering the option must have fewer than 250 employees; and
• new restrictions are being placed on the company’s activities.
  

The last of these is unlikely to affect most companies (as shipbuilding, coal and steel production tend not to be that prevalent in the SME market) but the first two are potentially of greater relevance.

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As many of you out there will be aware a new cost burden in the form of the National Pension Scheme (NPSS) or Personal Account (as it is also confusingly called) will be imposed on employers in 2012; or will it? Continue Reading...

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In a recent article by Mike O’Brien, the current Minister for Pensions Reform, on the Department for Work and Pensions’ website, some further details on the proposed changes to pensions in 2012 were outlined.

Essentially the Government’s view is that people are not saving enough for when they retire.

To tackle the problem of under-saving, from 2012, millions of people will be Continue Reading...

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