PAYROLL INSIGHT
thereby enabling them to contact HMRC. Employees who contact HMRC in such cases can have their arrears of pay reallocated at the end of the tax year in which the arrears were paid. In some cases, this will lead to cash flow issues for the employee. I understand from discussions over the years with software providers that there are some software programmes which do not allow employers to process adjustments in closed tax years. If this happens, the HMRC’s Basic Tools can be used instead to cater for this one-off event. Guidance from HMRC can be found here: http://bit.ly/2UytedE, or by using the employer’s helpline (0300 200 3200). Having established when the entitlement arose, the next most common difficulty many employers encounter is the disparate payroll treatment for income tax and National Insurance contributions (NICs). The NICs legislation Class 1 NICs are calculated based on pay periods and any lump sums of pay arrears are deemed for NICs purposes to be received in that pay period. As such, no retrospection is required. Whilst a lump sum can result in a large one-off NICs charge for that pay period which may result in a cash flow issue, in some cases it can actually save the employee money because NICs are charged at 12% until pay reaches the upper earnings limit (£50,000 for 2019–20). NICs charged on anything over that drops to 2%. HMRC’s guidance can be found at http://bit.ly/2TYbvrB. In some cases, the NICs will be the only thing processed through the current payroll run because the tax may have been settled directly or put through closed tax years. The employer should understand how to configure the payroll parameters to ensure the lump sum is chargeable to NICs but not to tax. The payment needs to be reported in a full payment submission for that pay period.
However, just because employees have agreed to receive the arrears in instalments does not necessarily mean that PAYE is not still due: earnings are treated as ‘received’ for assessment purposes, and ‘paid’ for PAYE purposes, on the earlier of the following in accordance with s.18 ITEPA: ● when a payment of earnings is actually made or when a payment on account of earnings is made ● the time when a person becomes entitled to payment of earnings or a payment on account of earnings. For company directors it’s slightly different: ● the date when earnings are credited in the company’s accounts or records ● where the amount of the earnings is determined before the end of the period to which they relate, the date that period ends ● where the amount of the earnings is determined after the end of the period to which they relate, the date the amount is determined. HMRC guidance on this can be found at http://bit.ly/2Vt6I3i. If an employer is experiencing any difficulty in paying the PAYE to HMRC, they should contact HMRC immediately to discuss time to pay arrangements. ... Pension Regulator’s website has detailed guidance What constitutes pay arrears ● ● Police housing payment arrears – The case of White v Inland Revenue Commissioners concerned arrears of police housing allowance. Mr White was a police officer who commenced working three days after the allowance was abolished; however, he had been given material about the allowance before joining the police and thought it would be a part of his remuneration. Mr White complained that he had only taken the role because he was anticipating this payment in addition to his earnings as an officer. He was initially awarded a payment but there was a dispute about how the payments should be allocated to which tax years.
Eventually it was decided that he was not ‘entitled’ to arrears for some of the years he claimed for, and that any earnings he had accrued entitlement to should be attributed to the year in which they were deemed to have been earned, in accordance with what is now section 18 ITEPA. ● ● Tronc scheme NMW arrears – The case of Annabel’s (Berkeley Square) Ltd and others v Revenue and Customs Commissioners concerned whether payments from a tronc scheme represented earnings for NMW purposes. In the case of each worker, the ‘basic wage’ was lower than the NMW and ‘topped up’ by tips by way of a tronc scheme. HMRC took the view that the employers were not satisfying their obligations to pay the NMW, and issued enforcement notices under section 19 of the National Minimum Wage Act 1998. The employer appealed those notices. Were the payments from the tronc scheme ‘money payments paid by the employer’ and thus counting towards pay for NMW purposes by virtue of regulation 30 of the National Minimum Wage Regulations 1999? The Court of Appeal held that a payment to an employee by a tronc master was not a payment by the employer and HMRC won the right to claim NMW arrears of pay. ● ● Unpaid holiday pay arrears – A number of cases of pay arrears are in connection with holiday pay and have been heard in the Employment Appeal Tribunal (EAT). Fulton v Bear Scotland Ltd and others; Woods and others v Hertel (UK) Ltd; and Law and others v Amec Group Ltd, all lost at EAT after the employment tribunal decision that payments for non-guaranteed overtime were part of normal remuneration and were to be included as such in the calculation of holiday leave taken under regulation 13 of the Working Time Regulations 1998. Pension contribution arrears – links to NMW NMW arrears can also give rise to pension contribution arrears. Where these are identified it may be necessary under automatic enrolment legislation to place the employee into a workplace pension scheme with backdated contributions calculated. The Pensions
Payment in instalments Employees might agree to sign
agreements to receive their arrears of pay in delayed stages if this helps the employer to fund the payments, which would lead to the date on which the monies are paid being delayed.
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| Professional in Payroll, Pensions and Reward | May 2019 | Issue 50
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