COMPLIANCE
PSAs – ensure you don’t over declare
Angela Ferguson, director – employment taxes at PSTAX discusses pay as you earn settlement agreements (PSAs) ahead of the deadline
N ow is the time when many of their PSA calculations, ready to be submitted to Her Majesty’s Revenue and Customs (HMRC). This can be an onerous task, trawling through various purchase ledger codes over the tax year to extract the information needed. This article covers a reminder of the basic requirements and highlights the available exemptions and other possible tax efficiencies. For those that aren’t aware of what a PSA is, it’s an agreement with HMRC, where the employer agrees to pay the tax and National Insurance contributions (NICs) on certain payments or rewards employers will start to gather information for the preparation they’ve provided to their employees. Categories are agreed and reported on annually. To be accepted as a qualifying category, the expenses must be minor, irregular, or impracticable. What can you include in a PSA? Some examples of minor benefits and expenses include: ● incentive awards, for example, long service awards, that don’t meet the exemption conditions or exceed the statutory £8,000 limit ● phone bills ● small gifts and reward vouchers ● staff entertainment ● incidental overnight expenses that are over the daily limit, while travelling overnight on business. Irregular benefits and expenses are items that aren’t contractual, which aren’t paid at regular intervals over the course of a tax year, for example, weekly or monthly. Examples include: ● relocation expenses that don’t meet the exemption conditions ● the cost of attending overseas conferences
● expenses of a spouse accompanying an employee abroad. Impracticable expenses and benefits are items that are difficult to place a value on, or to easily split between individual employees. Examples of impracticable expenses and benefits include: ● staff entertainment that isn’t exempt from tax or NICs ● shared cars ● personal care expenses, for example, hairdressing. In a PSA, you can’t include items such as cash payments, wages or high-value benefits like company cars, accommodation and beneficial loans. Typically, HMRC requests the calculations by 31 July following the tax year How often do you agree PSAs with HMRC and when should they be submitted? The agreements are now enduring, meaning you don’t have to renew them every year, which was previously the case. It’s advisable to agree the categories prior to the end of the tax year. We are, however, aware of current delays in HMRC’s PSA team responding to requests. Typically, HMRC requests the calculations by 31 July following the tax year, although this isn’t a statutory deadline. The calculation and payment must be sent to HMRC by no later than 19 October (22nd
when paying electronically) following the tax year in question.
How exaxtly does the PSA calculation work?
As part of the calculation, you must inform HMRC of the split of basic rate, higher rate and additional rate taxpayers (also noting any Scottish or Welsh taxpayers). This can be done on a best estimate basis where it’s too difficult or time consuming to be specific per employee. There’s much debate about how to treat employees who pay no tax, as their income could be covered by their personal allowance. Therefore, some employers have utilised an effective tax rate of 0% when calculating their PSA liabilities. However, HMRC has changed guidance in its PSA manual, basically stating there is no 0% banding, as follows: ‘Where an employee pays no tax with the employer, they should be included as being liable at their first chargeable rate of tax, the basic rate if England / Northern Ireland, and Wales, and starter rate if resident in Scotland, for PSA calculation purposes.’ We’ve heard of HMRC investigations taking up this point and recovering tax at the basic rate for previous years; however, HMRC’s position is subject to challenge. Taking into account the appropriate tax rates, tax is payable on a grossed-up basis with a special category of NICs (class 1B), payable on the value of the benefit and the grossed- up tax liability.
Remember the exemptions available
In calculating the value of the benefits to be included within the PSA, it is important that you remember not to over declare and to maximise the available exemptions. The key exemptions to consider are:
| Professional in Payroll, Pensions and Reward | June 2022 | Issue 81 16
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