As a number of HMRC and HM Treasury employment tax consultations are ending, Mark Groom (Deloitte) reviews the main points to emerge from the proposals so far.
A number of HMRC and HM Treasury employment tax consultations are ending this autumn. As we start to look forward to the government’s responses over the coming months, it is worth rounding up the main points to emerge from the proposals so far.
What is proposed on IR35?
In its discussion document on reforming IR35, HMRC estimates that there is 90% non-compliance, which will cost the exchequer £430m this year. This is clearly unacceptable and has resulted in proposals for a radical change to this legislation, 15 years after its introduction. The two main proposals put forward for discussion at this stage are:
to make engagers responsible for deciding if IR35 applies and, if so, accounting for PAYE and NICs on the payments made for services provided by the workers concerned; and
in recognition of the increased burden on engagers, to ‘simplify’ the rules so that IR35 will apply going forward if the worker is subject to supervision, direction or control (SDC).
However, if an individual taxpayer believes IR35 should not have been applied, they would presumably be able to file their self-assessment return on an alternative basis, requesting the repayment of any over-deducted PAYE and NICs. HMRC may still end up in dispute with numerous individual PSCs, as it does now; the difference would be that HMRC will hold the tax and NICs accounted for by engagers.
An alternative ‘comply or explain’ approach, similar to that recently introduced for intermediaries, might also be worth considering. Engagers would, in the first instance, be required to operate PAYE and NICs on payments made to PSC workers where they consider SDC applies. However, they could be absolved from doing so if they are satisfied that either SDC does not apply; or that the PSC has operated PAYE and NICs on payments for the services. Where no PAYE or NICs is operated, engagers could report gross payments under a new reporting regime as noted above. I’m not sure this completely solves the problem, but it would considerably strengthen HMRC’s position, while reducing the burden on engagers and still giving PSCs the right to self-determination.
Whichever solution is adopted, there are a number of challenges that will need to be worked through, including:
Who is the engager in a long supply chain? Is the PSC worker engaged by the end client or by an intermediary further down the chain?
An SDC test will have the effect of converting some workers into deemed employees subject to PAYE and NICs, when they might otherwise qualify as self-employed and so not fall under IR35 under current rules; for example, in the media industry, workers currently accepted as self-employed under HMRC guidelines often contract through PSCs.
Using the PAYE system as the means for tax collection comes with a health warning. RTI is not perfect and there would be considerable work for HMRC in issuing PAYE codes and for engagers in processing them, particularly for those PSC workers with numerous engagements.
In the extreme, a very simple solution would not require the engager to solve the question of hypothetical employment, SDC or any other kind of test; and would not use the PAYE system to collect tax. Instead, engagers might simply be required to apply a flat rate withholding on payments to any worker supplying any kind of services to a client through a PSC (although, of course, a PSC would have to be defined).
Clearly there is no simple solution, but the reported high levels of non-compliance clearly cannot continue.
Comments are invited by 30 September 2015.
What is proposed on intermediaries and tax relief for travel and subsistence?
The proposal here is that when a temporary worker engaged by an intermediary, such as an agency, umbrella company or PSC, comes under SDC, their travel to a client premises is akin to ordinary commuting and so should not attract tax relief. This applies whether or not salary sacrifice or some other form of flexible remuneration arrangement is involved. For this purpose, an intermediary’s business must be substantially the supply of labour services. This should at least limit collateral damage, e.g. to professional service firms which second staff to clients. Where a client requires a worker to work at multiple workplaces, such as community nurses supplied to the NHS, relief should still be due for that onward travel.
The proposals are to be bolstered by requiring the engager to confirm whether workers come under SDC, supplemented by either:
joint and several liability between engager and intermediary in the event of non-compliance and false declarations; or
intermediary liability with transfer to the engager in such circumstances.
The first option appears to have the potential for confusion and dispute between the parties, but may be more effective from HMRC’s perspective. The second option provides more certainty for taxpayers as to who is ultimately liable.
Comments are invited by 30 September 2015.
Haven’t changes also been suggested to the rules on termination payments?
Yes, there are proposals to ‘simplify’ the tax and NICs treatment of termination payments. The main proposals here are to:
Change (which in practice means reduce) the tax free limit on termination payments from £30,000 to an amount of £6,000 after two years’ service (nothing before) plus £1,000 p.a. thereafter.
Prevent the relief from applying for fixed term appointments, or where the employee has resigned.
Align the tax and NICs treatment so that, going forward, whatever limit applies for tax purposes will also apply for NICs purposes.
Allow the new tax free limit to apply across all types of termination payment, whether they would otherwise be taxable or not.
Restrict the allowance to circumstances which would broadly align with redundancy.
Remove the foreign service exemption, applying the new exemption to the extent that termination payments are sourced to the UK.
Consider a new cap for termination payments connected with injury or disability.
Of all the recent consultations, I struggle with this one the most for three main reasons.
First, ‘simplification’ appears to be a misnomer. In effect, the tests relevant to qualify for the current £30,000 exemption (basically, earnings versus compensation, which tax professionals understand), will be replaced by another set of tests based on redundancy (which HR professionals understand). A variable rate of exemption per employee cannot be simpler than a single flat rate (currently £30,000).
Second, the changes could come at significant NICs cost to employers. They could have a significant impact on businesses planning a large scale downsizing of their workforce over the coming years, particularly where they are committed to the terms of redundancy packages, such as following an agreement with unions. Employers may also need to make good a reduction in net pay.
Third, the proposed two year rule is particularly unfair to anyone who has had the misfortune to lose their job within two years through no fault of their own. A fairer test would be whether or not the employment was voluntarily terminated by the employee, regardless of length of service.
If raising additional NICs is one of the main motives for these proposals, this could be easily achieved by aligning the tax and NICs treatment and leaving all else, save possibly the treatment of pay in lieu of notice, as it is.
Comments are invited by 16 October 2015.
What about employee benefits and expenses?
A consultation recently closed (2 September) on draft legislation on the following issues:
Payrolling benefits: When enacted, employers will be absolved from having to report specified benefits on forms P11D, to the extent that they have been taxed through payroll under proposed new regulations. At this stage, the specified benefits include only cars, vans, fuel and related benefits (in ITEPA 2003 Part 3 Chapter 6); and the broad range of benefits covered by the general charging provision (in Part 3 Chapter 10). Other benefits, including for example accommodation, loans and vouchers, will need to be reported on forms P11D as usual. The regulations are well thought through and provide a clear set of instructions as to how to compute the amount to be reported in respect of any benefit through real time information each month. Employers will be able to register online for the ‘payrolling’ of benefits in kind, specifying both the particular benefits to payroll and the employees to which the payrolling will apply. Time will tell if this flexibility will carry too great a price in terms of additional administration. It should be noted that multiple benefits reported on a single line of form P11D can only be specified as ‘all-in’ or ‘all-out’ of payrolling; they cannot be selected individually. However, individual employees can be selected and de-selected as appropriate.
New exemption for business expenses and abolition of dispensations: This is a superb simplification, exempting expenses and certain benefits where deductions can currently be claimed. Exempt items need not be reported at all and dispensations will not be needed. In the case of allowances (rather than expenses reimbursed against actual receipts), they will be exempt if paid in an approved way, i.e. either they have been exempted by regulations or the employer has agreed the terms of a bespoke allowance with HMRC, with systems in place to check that expenditure is actually incurred by employees. Such agreements will have a maximum lifespan of five years, with grandfathering of existing agreements less than five years old at 6 April 2016. There is no exemption for expenses paid under arrangements whereby an employee’s earnings would be higher if the expenses were not paid, but employees can still claim tax relief under self-assessment in these circumstances. The net effect of this is to prevent relief for NICs through such arrangements.
Abolition of the £8,500 threshold for benefits in kind: When this goes ahead, some employers and employees may see an increase in tax and NICs liabilities where a benefit was previously not taxable below the limit. Ministers of religion are excluded to protect against a potentially disproportionate effect on their net income, and where a care and support employer provides an employee with board and lodging that will also be exempt. HMRC has confirmed that volunteers will not be impacted for so long as they are not employees. However, it is not proposed to protect all sectors from the potentially disproportionate effect on net income; for example, employees in cleaning or catering who might benefit from, say, a late night taxi home will likely lose out.
Is that everything?
No. There have also been recent proposals on:
Sports testimonials: The main proposal is that all monies from testimonials should be earnings for tax and NICs purposes, but a new partial exemption could be introduced. This would protect those where the taxation of testimonial monies would otherwise have a disproportionate effect. The partial exemption could apply in full for monies below a specified limit and not at all if they exceed the limit; or relief could taper off above a certain limit. The consultation closed on 2 September 2015.
NICs and apprentices under 25: The zero rate of employer’s class 1 NICs for employees under 21 was very welcome when introduced on 6 April this year. This proposal provides for a similar zero rate for apprentices under 25 from April 2016, which will be equally welcomed by many employers, and may help to offset the cost of the proposed new training levy for those it impacts. To qualify, trainees must be taken on under an approved apprenticeship framework, which could include those studying for professional qualifications. Comments are invited by 18 September 2015.
Alignment of income tax and NICs: Finally, the Office of Tax Simplification has agreed to review the closer alignment of income tax and NICs, with a view to reporting on its study ahead of Budget 2016. It will include a full assessment of the case for change and which changes could be introduced. Consideration of the alignment of the ‘taxation of earned income’ for employees, employers and the self-employed is included in the review; I presume this is also intended to include NICs, which could put an end to so many employment status compliance problems, as well as those the IR35 consultation is trying to address.
As a number of HMRC and HM Treasury employment tax consultations are ending, Mark Groom (Deloitte) reviews the main points to emerge from the proposals so far.
A number of HMRC and HM Treasury employment tax consultations are ending this autumn. As we start to look forward to the government’s responses over the coming months, it is worth rounding up the main points to emerge from the proposals so far.
What is proposed on IR35?
In its discussion document on reforming IR35, HMRC estimates that there is 90% non-compliance, which will cost the exchequer £430m this year. This is clearly unacceptable and has resulted in proposals for a radical change to this legislation, 15 years after its introduction. The two main proposals put forward for discussion at this stage are:
to make engagers responsible for deciding if IR35 applies and, if so, accounting for PAYE and NICs on the payments made for services provided by the workers concerned; and
in recognition of the increased burden on engagers, to ‘simplify’ the rules so that IR35 will apply going forward if the worker is subject to supervision, direction or control (SDC).
However, if an individual taxpayer believes IR35 should not have been applied, they would presumably be able to file their self-assessment return on an alternative basis, requesting the repayment of any over-deducted PAYE and NICs. HMRC may still end up in dispute with numerous individual PSCs, as it does now; the difference would be that HMRC will hold the tax and NICs accounted for by engagers.
An alternative ‘comply or explain’ approach, similar to that recently introduced for intermediaries, might also be worth considering. Engagers would, in the first instance, be required to operate PAYE and NICs on payments made to PSC workers where they consider SDC applies. However, they could be absolved from doing so if they are satisfied that either SDC does not apply; or that the PSC has operated PAYE and NICs on payments for the services. Where no PAYE or NICs is operated, engagers could report gross payments under a new reporting regime as noted above. I’m not sure this completely solves the problem, but it would considerably strengthen HMRC’s position, while reducing the burden on engagers and still giving PSCs the right to self-determination.
Whichever solution is adopted, there are a number of challenges that will need to be worked through, including:
Who is the engager in a long supply chain? Is the PSC worker engaged by the end client or by an intermediary further down the chain?
An SDC test will have the effect of converting some workers into deemed employees subject to PAYE and NICs, when they might otherwise qualify as self-employed and so not fall under IR35 under current rules; for example, in the media industry, workers currently accepted as self-employed under HMRC guidelines often contract through PSCs.
Using the PAYE system as the means for tax collection comes with a health warning. RTI is not perfect and there would be considerable work for HMRC in issuing PAYE codes and for engagers in processing them, particularly for those PSC workers with numerous engagements.
In the extreme, a very simple solution would not require the engager to solve the question of hypothetical employment, SDC or any other kind of test; and would not use the PAYE system to collect tax. Instead, engagers might simply be required to apply a flat rate withholding on payments to any worker supplying any kind of services to a client through a PSC (although, of course, a PSC would have to be defined).
Clearly there is no simple solution, but the reported high levels of non-compliance clearly cannot continue.
Comments are invited by 30 September 2015.
What is proposed on intermediaries and tax relief for travel and subsistence?
The proposal here is that when a temporary worker engaged by an intermediary, such as an agency, umbrella company or PSC, comes under SDC, their travel to a client premises is akin to ordinary commuting and so should not attract tax relief. This applies whether or not salary sacrifice or some other form of flexible remuneration arrangement is involved. For this purpose, an intermediary’s business must be substantially the supply of labour services. This should at least limit collateral damage, e.g. to professional service firms which second staff to clients. Where a client requires a worker to work at multiple workplaces, such as community nurses supplied to the NHS, relief should still be due for that onward travel.
The proposals are to be bolstered by requiring the engager to confirm whether workers come under SDC, supplemented by either:
joint and several liability between engager and intermediary in the event of non-compliance and false declarations; or
intermediary liability with transfer to the engager in such circumstances.
The first option appears to have the potential for confusion and dispute between the parties, but may be more effective from HMRC’s perspective. The second option provides more certainty for taxpayers as to who is ultimately liable.
Comments are invited by 30 September 2015.
Haven’t changes also been suggested to the rules on termination payments?
Yes, there are proposals to ‘simplify’ the tax and NICs treatment of termination payments. The main proposals here are to:
Change (which in practice means reduce) the tax free limit on termination payments from £30,000 to an amount of £6,000 after two years’ service (nothing before) plus £1,000 p.a. thereafter.
Prevent the relief from applying for fixed term appointments, or where the employee has resigned.
Align the tax and NICs treatment so that, going forward, whatever limit applies for tax purposes will also apply for NICs purposes.
Allow the new tax free limit to apply across all types of termination payment, whether they would otherwise be taxable or not.
Restrict the allowance to circumstances which would broadly align with redundancy.
Remove the foreign service exemption, applying the new exemption to the extent that termination payments are sourced to the UK.
Consider a new cap for termination payments connected with injury or disability.
Of all the recent consultations, I struggle with this one the most for three main reasons.
First, ‘simplification’ appears to be a misnomer. In effect, the tests relevant to qualify for the current £30,000 exemption (basically, earnings versus compensation, which tax professionals understand), will be replaced by another set of tests based on redundancy (which HR professionals understand). A variable rate of exemption per employee cannot be simpler than a single flat rate (currently £30,000).
Second, the changes could come at significant NICs cost to employers. They could have a significant impact on businesses planning a large scale downsizing of their workforce over the coming years, particularly where they are committed to the terms of redundancy packages, such as following an agreement with unions. Employers may also need to make good a reduction in net pay.
Third, the proposed two year rule is particularly unfair to anyone who has had the misfortune to lose their job within two years through no fault of their own. A fairer test would be whether or not the employment was voluntarily terminated by the employee, regardless of length of service.
If raising additional NICs is one of the main motives for these proposals, this could be easily achieved by aligning the tax and NICs treatment and leaving all else, save possibly the treatment of pay in lieu of notice, as it is.
Comments are invited by 16 October 2015.
What about employee benefits and expenses?
A consultation recently closed (2 September) on draft legislation on the following issues:
Payrolling benefits: When enacted, employers will be absolved from having to report specified benefits on forms P11D, to the extent that they have been taxed through payroll under proposed new regulations. At this stage, the specified benefits include only cars, vans, fuel and related benefits (in ITEPA 2003 Part 3 Chapter 6); and the broad range of benefits covered by the general charging provision (in Part 3 Chapter 10). Other benefits, including for example accommodation, loans and vouchers, will need to be reported on forms P11D as usual. The regulations are well thought through and provide a clear set of instructions as to how to compute the amount to be reported in respect of any benefit through real time information each month. Employers will be able to register online for the ‘payrolling’ of benefits in kind, specifying both the particular benefits to payroll and the employees to which the payrolling will apply. Time will tell if this flexibility will carry too great a price in terms of additional administration. It should be noted that multiple benefits reported on a single line of form P11D can only be specified as ‘all-in’ or ‘all-out’ of payrolling; they cannot be selected individually. However, individual employees can be selected and de-selected as appropriate.
New exemption for business expenses and abolition of dispensations: This is a superb simplification, exempting expenses and certain benefits where deductions can currently be claimed. Exempt items need not be reported at all and dispensations will not be needed. In the case of allowances (rather than expenses reimbursed against actual receipts), they will be exempt if paid in an approved way, i.e. either they have been exempted by regulations or the employer has agreed the terms of a bespoke allowance with HMRC, with systems in place to check that expenditure is actually incurred by employees. Such agreements will have a maximum lifespan of five years, with grandfathering of existing agreements less than five years old at 6 April 2016. There is no exemption for expenses paid under arrangements whereby an employee’s earnings would be higher if the expenses were not paid, but employees can still claim tax relief under self-assessment in these circumstances. The net effect of this is to prevent relief for NICs through such arrangements.
Abolition of the £8,500 threshold for benefits in kind: When this goes ahead, some employers and employees may see an increase in tax and NICs liabilities where a benefit was previously not taxable below the limit. Ministers of religion are excluded to protect against a potentially disproportionate effect on their net income, and where a care and support employer provides an employee with board and lodging that will also be exempt. HMRC has confirmed that volunteers will not be impacted for so long as they are not employees. However, it is not proposed to protect all sectors from the potentially disproportionate effect on net income; for example, employees in cleaning or catering who might benefit from, say, a late night taxi home will likely lose out.
Is that everything?
No. There have also been recent proposals on:
Sports testimonials: The main proposal is that all monies from testimonials should be earnings for tax and NICs purposes, but a new partial exemption could be introduced. This would protect those where the taxation of testimonial monies would otherwise have a disproportionate effect. The partial exemption could apply in full for monies below a specified limit and not at all if they exceed the limit; or relief could taper off above a certain limit. The consultation closed on 2 September 2015.
NICs and apprentices under 25: The zero rate of employer’s class 1 NICs for employees under 21 was very welcome when introduced on 6 April this year. This proposal provides for a similar zero rate for apprentices under 25 from April 2016, which will be equally welcomed by many employers, and may help to offset the cost of the proposed new training levy for those it impacts. To qualify, trainees must be taken on under an approved apprenticeship framework, which could include those studying for professional qualifications. Comments are invited by 18 September 2015.
Alignment of income tax and NICs: Finally, the Office of Tax Simplification has agreed to review the closer alignment of income tax and NICs, with a view to reporting on its study ahead of Budget 2016. It will include a full assessment of the case for change and which changes could be introduced. Consideration of the alignment of the ‘taxation of earned income’ for employees, employers and the self-employed is included in the review; I presume this is also intended to include NICs, which could put an end to so many employment status compliance problems, as well as those the IR35 consultation is trying to address.
HM Treasury employment tax consultations are ending this autumn. As we start to look forward to the government’s responses over the coming months, it is worth rounding up the main points to emerge from the proposals so far.
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