PAYROLL INSIGHT
Salary sacrifice – a brief history
It seems probable that the Treasury and HMRC have been uncomfortable with salary sacrifice arrangements for many years. In this article, Mike Nicholas MCIPP takes a brief look at some important historical developments that might explain their discomfort and the decision to act
I t’s probably fair to claim that those in government – namely, the Treasury and HM Revenue & Customs (HMRC) – have historically been ambivalent about salary sacrifice. On the one hand, employers can reduce employment costs by its operation, but on the other salary sacrifice is a form of tax avoidance that means lower taxation revenues are collected. There are also recurring instances of misunderstanding and misuse – perhaps even abuse – of such arrangements. Maybe it was inevitable therefore that action would be taken to curtail salary sacrifice usage. Though salary sacrifice arrangements have been used in the United Kingdom (UK) for many years, it’s only in recent years that engagement by public and private sector employers has proliferated and extended to a range of benefits. This proliferation can be traced to 2006 when the income tax and National Insurance contributions (NICs) statutory exemption for employer-supported childcare – typically in the form of childcare vouchers – was introduced. Yet the history of salary sacrifice extends to well before 2006. Though salary sacrifice
predates 1979, this year featured in the landmark income tax case Heaton v Bell that was finally decided by the House of Lords (HoL) (the predecessor to the UK’s Supreme Court). (It may well be that the decision in this case is the original source of HMRC’s discomfort with salary sacrifice, as it had significant implications.)
legislation, the term used formerly in tax law instead of benefit in kind was ‘perquisite’ – usually shortened to simply ‘perk’.) Mr Heaton had entered into a contractual arrangement with his employer where, in return for a reduction in salary, he would have use of a ‘company car’. A feature of the arrangement was that Mr Heaton could give up the car and return to the higher salary at any time. Accordingly, the HoL judges decided that the doctrine of money’s worth applied; here, the money’s worth was effectively the additional salary Mr Heaton could obtain (i.e. the salary being sacrificed) by giving up the car. Accordingly, where an employee has the right to give up a benefit and return to the higher salary the money’s worth rule would be in point. This might mean that for purposes of reporting (or, nowadays, payrolling) the benefit, the employer would have to calculate the cash equivalent as the salary sacrificed. Though employees typically sacrifice more salary than the value of the benefit received, what is the position if the amount sacrificed is in fact lower? A peculiar aspect of applying money’s worth to salary sacrifice
...the money’s worth was effectively the
Heaton v Bell involved the doctrine of ‘money’s worth’, which had evolved through case law. This doctrine, which was written into the definition of ‘earnings’ in section 62 of the Income Tax (Earnings and Pensions) Act 2003 (‘ITEPA’), applied where a benefit in kind received by an employee was readily convertible into cash, e.g. by selling it. (Prior to ITEPA, which fundamentally consolidated, rewrote and repealed existing additional salary Mr Heaton could obtain...
| Professional in Payroll, Pensions and Reward | May 2017 | Issue 30 22
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