COMPLIANCE
Putting in a new salary sacrifice benefit – how complicated can it be?
Jeni Morris ACIPP, head of the national minimum wage (NMW) team and Brian Cooper, director, EY, highlight areas employers should be aware of when implementing salary sacrifice benefits
B ringing in a new benefit where the employee’s salary is reduced to ’cover’ the employer’s cost is tried and tested. In theory, it’s relatively straightforward to adjust the employee’s salary through payroll and provide a benefit in return. In practice, however, we see lots of things which can go wrong. In this article, we highlight several traps that can catch employers out when they implement these types of benefit arrangements. Why have salary sacrifice benefits become so commonplace? Many of the first salary sacrifice arrangements supported government- backed initiatives. Employers were encouraged to provide specific benefits to employees which were income tax and National Insurance contribution (NIC) favoured, but only if provided by the employer. These included: l childcare vouchers l creche / nursery facilities l cycle to work schemes l the home computer initiative (which was abolished in 2006). The government, to help encourage take-up of these ’new’ benefits, had indicated to employers that while they could simply provide these benefits on top of the employee’s existing remuneration package, they could, as an alternative, reach an agreement with the employee to reduce their future salary by an amount equivalent to the cost of the benefit the employee wanted to receive. Salary sacrifice allowed employees to ’opt- in’ to receive the benefits they wanted by agreeing to reduce their cash remuneration, without the employer having to fund the cost. In fact, as an additional incentive for
employers to introduce these benefits, salary sacrifice provided class 1 NICs savings for the employer. Implemented correctly, this was a real win-win for both employers and their employees. Optional remuneration arrangements (OpRA) legislation By 2016, the government was concerned with the rising cost of salary sacrifice schemes, as more and more benefits were being provided in this way. That year, the government issued a consultation which resulted in the OpRA being introduced, with effect from 6 April 2017. This new legislation was designed to reduce the tax effectiveness of certain salary sacrifice benefits by significantly limiting the number of benefits which weren’t taxable or exempt. Where OpRA applies, the benefit value is the higher of the benefit value under the normal benefit rules (which in the case of a tax-exempt benefit is nil) and the amount of the salary sacrifice (the salary foregone). We often work with benefit providers / employers who fail to consider the OpRA legislation when introducing new benefits, particularly where the benefits rely on specific exemptions, which no longer apply where OpRA is in point. Is a salary sacrifice arrangement always effective? In looking at some of the other potential pitfalls, such as whether the salary sacrifice is effective, it’s important to go back to basics and in particular, the fundamental question of what is a salary sacrifice? HM Revenue and Customs (HMRC) guidance tells us that a salary sacrifice is when an employee gives up the right to part of their future cash remuneration due under
their employment contract, usually in return for their employer providing them with a non-cash benefit. HMRC’s view is that to be effective, a salary sacrifice must be a permanent change to the terms and conditions of employment where the employee has permanently given up their rights to an amount of cash. This principle was established in case law (Heaton v Bell), in which HMRC challenged the effectiveness of a benefit arrangement where the employee was able to hand back their non-cash benefit in return for cash at any time. The courts agreed with HMRC that this wasn’t a permanent change to terms and conditions, and established the principles of benefits that can be taxed as ’money’s worth’ where they’re convertible to cash remuneration at any time, resulting in the value of that cash being taxed as general earnings. HMRC expects to see the contractual change to the employee’s terms and conditions to be documented. For the change to be effective, it needs to be a permanent change and, strictly speaking, a permanent change is one which is in place indefinitely. HMRC will not generally question the effectiveness of the salary sacrifice arrangements where an employee’s salary reverts to the pre-salary sacrifice level after 12 months to correspond with a benefit ceasing. HMRC does acknowledge that an employee and employer can vary the terms of an employment contract as often as the two parties choose and shorter periods may be accepted by HMRC. However, these will be subject to increased scrutiny to test the ability of the employee to give up the benefit
and convert it to cash at any time. Interestingly, HMRC allows more
| Professional in Payroll, Pensions and Reward | November 2023 | Issue 95 30
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