Payroll insight
arrangements is that the amount (i.e. the salary sacrificed) actually chargeable to income tax can be less than the amount which would otherwise be chargeable under tax legislation for the benefit in question. However, not all benefits are within scope of the money’s worth rule. For example, a specific long-standing anti- avoidance provision for cars can be found in ITEPA at section 119. This provision, which was extended to vans in 2005, ensured that the benefit of a car (or van) provided by reason of the employment, is calculated by reference to the rules in sections 114–172 ITEPA. Section 119 provides that where in a tax year a car (or van) is made available and an alternative to the benefit of the car (or van) is offered, the mere fact that the alternative is offered does not result in an amount in respect of the benefit constituting earnings by virtue of section 62. Other benefits have not been subject to money’s worth because statutory tax exemptions apply to them. These benefits comprise: ● workplace car parking ● provision of cycles and cyclist’s safety equipment ● childcare vouchers ● workplace nurseries ● other childcare, and ● employer contributions to a registered pension scheme. Some features of employment contracts have probably proved awkward for HMRC, including contractual cessation of salary sacrifice arrangements when there is a life-changing event such as pregnancy/ birth. In order to avoid complexity and keep things relatively straightforward, HMRC has operated a rule that where the contractual variation which puts in place the salary sacrifice arrangement is for twelve months or more the convertibility of the benefit does not have money’s worth. However, this twelve-month rule has no statutory support; indeed, salary sacrifice can be for a shorter period than a year and also in respect of a specific payment such as a bonus falling due. Another awkward situation for HMRC is that for a salary sacrifice arrangement to be effective for purposes of income taxation and operation of pay as you earn (PAYE), the employee’s entitlement to the future remuneration must be given up before being treated by tax law as ‘received’.
Generally, a payment is received at the earlier of the time of: ● when payment is made of or on account of the earnings, or ● when the person becomes entitled to payment of or on account of the earnings. (A slightly different rule applies in respect of company directors.) ...salary sacrifice arrangement does not remove the statutory duty on This means that an employee entering into a salary sacrifice arrangement must agree to vary the employment contract in advance of the date (‘the received date’) when the first payment of reduced salary (or, say, a bonus) is due to be made. If the contractual change has not been completed by the received date the terms of the previous contract continue to be in force. An implication is that under PAYE legislation the employer is required to calculate and deduct income tax when a payment is ‘received’ even if payment does not actually occur then. (And, to add further complexity, a different statutory rule operates for Class 1 NICs as liability only arises when actual payment occurs.) Some arrangements do not involve a contractual reduction to salary but (mistakenly, perhaps) provide for a contractual deduction from salary. Such deductions might well be more properly made after PAYE tax is calculated and deducted i.e. tax is due on the pre-deduction earnings. However, simply showing salary sacrifice in the form of a ‘deduction’ is not of itself inherently incorrect as it depends on the terms of the arrangement which can of course be express or implied and amended almost at will. This must be near impossible for HMRC to ‘police’. There have also over recent years been instances of employers exploiting tax rules on expenses and benefits, and of not paying the national minimum hourly rate; for example: ● in Reed Employment v HMRC, the Court of Appeal dismissed Reed’s appeal against a tax tribunal decision that payments made pursuant to two sets of arrangements with the employer to pay the NMW...
employees, relating to travel expenses, were earnings liable to PAYE and NICs. An estimated £158million in income tax and NICs was at stake ● with effect 6 April 2011, to prevent exploitation of the statutory exemption for employer-provided free and subsidised meals, HMRC added a condition to section 317 ITEPA. In order for the exemption to apply, the meals must not be provided in connection with relevant salary sacrifice or flexible remuneration arrangements. A recurring source of problems for HMRC, which has enforcement responsibility for the national minimum wage (NMW), is that a salary sacrifice arrangement does not remove the statutory duty on the employer to pay the NMW to participating workers. Recently, Tesco discovered that 140,000 current and former staff had been underpaid a total of almost ten million pounds due to their post salary sacrifice pay not reaching the statutory level. (See page 14.) Furthermore, salary sacrifice may affect entitlement to some social security benefits such as statutory maternity pay (SMP) and universal credit (UC). In the case of SMP, the lower earnings will reduce the employee’s average weekly earnings and hence the amount of SMP payable to her. As regards UC, lower earnings may give rise to entitlement to a higher amount. Furthermore, as salary sacrifice reduces actual cash earnings, there can be an impact on, for example, contingent student loan deductions and maintenance orders (including attachment of earnings orders). The potentially distorting effect is illustrated by an exceptional case decided by the child support commissioner (see http:// bit.ly/2pNUTnN). The father had sacrificed much of his salary in return for substantially increased employer contributions to his pension fund which in turn was secured to pay off a large mortgage he’d taken out on a home for himself and his new partner. The maintenance amount was to be calculated on the post- not the pre-sacrifice salary. All things considered, there are probably many members of parliament, ministers and Treasury/HMRC officials who are pleased that the draft provisions in Finance Bill (No 2) 2017 will eliminate the money’s worth doctrine and curtail exploitation of salary sacrifice arrangements (now to be known as ‘optional remuneration arrangements’). n
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Issue 30 | May 2017
| Professional in Payroll, Pensions and Reward |
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