COMPLIANCE
62 of ITEPA 2003. The payment is treated as having ‘money’s worth’ and so is liable to both tax and class 1 NI. The principle of ‘pecuniary liability’ comes from three different court cases, dating back to 1924 Reporting for income tax The payment that has been made wasn’t given to the employee, and so it wouldn’t be possible to deduct tax directly from the payment at source and report this via the full payment submission (FPS). Instead, the payment should be reported after the tax year end, using box ‘B’ of the P11D form. If the employer has registered to payroll benefits and has declared before the start of the tax year that they will payroll ‘payments made on behalf of the employee’ it may be possible to add the value of the bill to the employee’s earnings as a notional payment for tax purposes during the tax year. NI As the payment has ‘money’s worth’ it must be processed via the payroll for class 1 NI, to account for both employer’s secondary contributions and employee’s primary contributions. This should be done in the period in which the employer makes the payment to the third party, or if reporting after the fact, the employee’s payroll records should be adjusted as if it had been processed in this period. An amended FPS submission should be made, with the late reporting reason D – ‘payment subject to class 1 NICs but P11D for tax’. As a pecuniary liability is treated as having ‘money’s worth’, it cannot be included within an employer’s pay as you earn (PAYE) settlement agreement (PSA) for reporting. The use of a PSA isn’t normally necessary for employers aware of the concept of pecuniary liability, as the settling of the employee’s debt should be planned for and treated the same as if it were a cash payment. If an error has occurred that has caused the settlement of a pecuniary liability where this wasn’t intended, the employer may contact HMRC to discuss whether the employee’s liability for tax can be settled directly via ‘grossing up’. n
liabilities on their behalf each year. The Inland Revenue successfully argued that the settlement of a tax bill that the employee had a liability to pay should be considered as having ‘money’s worth’ to that employee, and therefore should be counted as part of his emoluments. Essentially, had the employer not paid the tax bill on behalf of Mr Hartland, then he would have had to make a payment out of his net wages to settle the tax liabilities himself. Because this didn’t happen, he was granted an advantage that was equal to the ‘money’s worth’ of the tax bill. In the second case from 1935, Nicoll (HM Inspector of Taxes) v Austin, the employer requested that the employee continue to reside in a house for convenience and prestige reasons and arranged to pay all bills incurred by the employee for residing there. The inspector of taxes successfully argued that the amounts paid on the employee’s behalf should be considered as income to the employee and should therefore be classified as earnings for tax purposes. In the most recent case from 1985, Richardson v Worral, the dispute concerned a payment made via a company credit card for petrol. Mr Worral had paid for petrol to fuel a company vehicle, but at the time of fuelling hadn’t made it clear that the petrol was to be purchased on behalf of the company. The case occurred before the introduction of the ‘fuel charge’ for company cars, and so the dispute was whether the payment for fuel should be considered as an expense incurred by the company (and therefore included within the cash equivalent value for the company car), or whether the payment should be classed as additional earnings for the employee. The judgment in this case was that because the employee would have been liable to pay for the fuel at the point of filling up the vehicle (due to it not being clearly purchased on behalf of the organisation), then the payment made by the employer could be said to be settling this personal liability – and therefore be considered a taxable emolument, separate from the company car charge. Reporting pecuniary liabilities If an employee has a pecuniary liability (meaning the employee already had a responsibility to make the payment themselves), then even if the employer doesn’t make a payment to the employee – instead, it’s paid directly to the supplier – it will be treated as earnings under Section
contract. This would be classed as a benefit for reporting reasons 2) the employee arranges a contract for a handset and monthly charge directly with the mobile phone provider, and the employer reimburses the value that the employee has paid. This would be classed as an expense reimbursement for reporting 3) the employee arranges their own handset and contract, but this time the employer makes a payment directly to the supplier for the handset and contract. The bill may even be addressed to the employer, but because the employee originally arranged the contract – and therefore has a liability to pay for the phone if the employer doesn’t – then this can be identified as the employer settling a pecuniary liability. In this example, how the employer chooses to provide the phone will change the potential liabilities for tax and NI. This is because providing a mobile phone to an employee is an exempt benefit under Section 319 of the Income Tax (Earnings and Pensions) Act (ITEPA) 2003 (as amended by the Finance Act 2006). However, if the phone were to be provided via an expense reimbursement or settling the employee’s pecuniary liability, then this exemption wouldn’t apply and there would be a requirement to report the value as earnings. Examples of some common pecuniary liabilities Some common types of pecuniary liability that employers may choose to settle include: l gas and electricity bills l council tax l mobile phone contracts l personal loans l mortgage payments l employee income tax or NI liabilities. The possibilities are endless. This means that organisations need to not only keep track of the cash payments that are made to employees, but also to expenses that are reimbursed, goods and services that are paid for and payments made to third parties on behalf of their employees. Where does this principle come from? The principle of ‘pecuniary liability’ comes from three different court cases, dating back to 1924. In the first case of Hartland v Diggines in 1924, it was the custom of the employer to regularly settle their employees’ tax
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| Professional in Payroll, Pensions and Reward |
Issue 85 | November 2022
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