PAYROLL INSIGHT
OpRA – the sting in the tale
Justine Riccomini ChFCIPP, head of taxation (Scottish Taxes, Employment and ICAS Tax Community) for ICAS, looks at how the new regime is bedding in
S alary sacrifice has been around for a long time – certainly since I began my career in taxation thirty years ago – but it became especially popular in the 1990s and has stayed in vogue ever since. Though ‘sacrifice’ implies that pay is given up, with nothing in return, it is more about salary exchange. In other words, an employee could exchange part of their gross salary and get something else in return, such as a benefit in kind, to an equivalent or lesser value. With the increasing popularity of the total reward statement and flexible benefits plans, employers and tax advisers realised the potential savings where a portion of gross salary could be exchanged for a benefit in kind free of income tax and/or National Insurance contributions (NICs). Employers were able to enhance the employee value proposition by introducing a suite of benefits and rewards through salary exchange schemes. The tax- and NICs- free items did not need to be payrolled or included in a P11D return, and those which still carried a tax liability could be declared in the return, to the extent the employee had not fully extinguished the benefit. The main reason for HMRC’s drive to change the salary sacrifice regime was
because it perceived abuse was taking place and items were being exchanged which were outside the spirit of the regime – the main one being travel and subsistence expenses. This was seen to be a form of exploitation of employee and worker rights as well as a reduction in the tax and NICs flowing in to the Exchequer. ...reduction in the tax and NICs flowing in to the Exchequer According to HMRC, so many salary sacrifice schemes had been set up that substantial revenue losses were accruing. The problem was that there was no legislation in place defining what a salary sacrifice scheme should represent, what the government was prepared to allow and how it should be reported, as employers were simply making use of available exemptions and reliefs legislation. Therefore, as a result of Finance Act 2017, provisions were inserted into the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) to create the optional remuneration arrangements (OpRA) legislation. The main aim was to restrict tax efficient OpRAs to pensions,
cycle to work and ultra-low-emission vehicles (ULEVs) to encourage pensions saving and greener travel arrangements. Consequently, the government expects to raise an additional £260 million by 2021/22 through OpRA. An item is now an OpRA if it falls into either type A or B arrangements as outlined at section 69A of ITEPA: ● Type A is where the employee gives up the right or the future right to receive salary (giving up pay, such as in a pension salary sacrifice arrangement). ● Type B is where the employee agrees to be provided with the benefit rather than the equivalent amount of cash remuneration (choosing something from a menu of flexible reward options). The value of the benefit being provided is deemed to be the greater of: the amount of pay given up; and the value of the benefit (using the usual valuation methods) ignoring any amount made good (https://bit.ly/2nG1hQG). Note that Type B arrangements extend the previous salary sacrifice regime and the valuation rule above is particularly punitive in terms of the tax due. Consequently, the employer NICs due on type B arrangements and the new valuation regime catches items which were previously thought to be paid away, reduced to nil or exempt – so care must
| Professional in Payroll, Pensions and Reward | October 2018 | Issue 44 30
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