Payroll Newsletter 09.06.09

News items at - 9th June 2009

Introduction

This week we have confirmation that the weekly maximum rate of Statutory Redundancy Pay will be increasing in October but there will be no change to the rate next February when it might otherwise have been expected to go down.

Our Employer FAQ on the IR35 rules for Personal Service Companies has also been updated and next week we hope to include a new FAQ that will explain the tax and NICs arrangements for workers employed in managed service companies.

The changes to Cabinet appointments, about which little information was available at the time of writing, include the merger of BERR and DIUS into a new Department for Business Enterprise and Skills (BES).  BERR is the most difficult and unhelpful of all the government departments for advisers to work with and the merger can hardly be expected to improve that lamentable situation - but at least the new department’s name is more memorable!

Statutory Redundancy Pay

Further information about the October 2009 increase

At the time of Budget 2009, the Government announced that, using powers provided by section 14 of the Work and Families Act 2006, a one-off increase in the cap on the weekly rate of statutory redundancy pay, from £350 to £380, will be made from 1 October 2009.

This exceptional one-off increase is in addition to the statutory annual review of the weekly limit that takes place in February each year.  The indexation rules, set out in section 34 of the Employment Relations Act 1999, provide that the current rate is increased or decreased by the year-on-year movement in the Retail Prices Index (RPI) at the previous September, and rounded up to the nearest £10.

In a Final Impact Assessment, published by the Department for Business (BERR) on 3 June, the following further information about this increase is provided:

• The increase will also apply to other compensation payments that use the same limit, namely
  
  
  • compensation for non-compliance with flexible working procedures
    
    
  • the basic and additional awards for unfair dismissal
    
    
  • compensation where an individual has been unjustifiably disciplined by a trade union
    
    
  • compensation where an employer has failed to consult with a collective bargaining unit
    
    
  • compensation in relation to a right not to be excluded or expelled from a union
    
    
  • compensation for failure by an employer to allow an employee to be accompanied to a disciplinary or grievance hearing
    
    
  • compensation for failure by an employer to give a statement of employment particulars
    
    
  • failure of employer to comply with duty to notify employee of date on which he intends employee to retire or of right to make request not to retire on the intended date
    
    
  • various payments due in the event of insolvency (redundancy pay, arrears of pay, pay in lieu of notice, holiday pay, unpaid compensation for unfair dismissal).
    
    
• Using powers also provided by section 14 of the Work and Families Act 2006, there will be a one-off suspension of the annual uprating due on 1 February 2010.  The RPI in September 2009 is forecast to be 4% lower than in September 2008.  In the absence of the October 2009 increase, this would have meant a reduction in the redundancy cap from £350 to £340 (£350 × 96% = £336, rounded up to £340).  Instead of a reduction, the £380 will be maintained.

Further information:
The Work and Families (Increase of Maximum Amount) Order 2009 – Final Impact Assessment 
http://www.berr.gov.uk/files/file51607.pdf

SCOTLAND

Agricultural Wages

Proposed pay increases for Scottish workers

On 3 June, the Scottish Agricultural Wages Board published proposals to increase the minimum hourly rates payable from 1 October 2009,

• from £5.73 to £5.80 per hour for those in their first 26 weeks of employment, and
  
• from £6.20 to £6.32 for those employed for more that 26 weeks by the same employer

Workers with appropriate qualifications would also be paid an additional £0.96 per hour.  Those working with dogs would be provided with an allowance of £4.80 per week for each dog up to a maximum of four.

The Board also agreed to introduce an apprenticeship rate of pay into the Wages Order.  This provision will enable employers to pay £3.50 per hour for the first 12 months to new employees who undertake a Level 2 Modern Apprenticeship in Agriculture.  Thereafter the minimum hourly rate will be the over 26 week rate.

The closing date for written representations is 17 July 2009.  The Board will meet again on August 19, 2009 to consider representations and agree on the text of an Order giving effect to its proposals.

REPUBLIC OF IRELAND

Double Taxation Convention

Agreement signed with Republic of Moldova

On 298 May 2009, representatives of the Governments of Ireland and Moldova signed a Double Taxation Convention, with comprehensive provisions relating to the taxation of income and gains.

Provisions for ratifying the Convention are expected to be completed in both countries during 2010 and it is expected to enter into force from 2011.

Ireland has currently 46 Double Taxation Treaties in force and another two in the pipeline.

Further information:
Signing of Double Taxation Convention between Ireland and the Republic of Moldova
http://www.revenue.ie/en/press/2009/pr-040609-taxation-agreement-moldova.html
Text of the Convention  http://www.revenue.ie/en/practitioner/law/double/moldova.pdf

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Payroll deadlines during the next month

June 19 – For employers required to pay tax and NICs etc to the Accounts Office monthly, this is the deadline for payment to be received by the Accounts Office, unless made electronically.

June 22 – For employers required to pay tax and NICs to the Accounts Office monthly, this is the deadline for electronic payments to be cleared into the HMRC bank account.  Payments through BACS must be initiated by June 18 at the latest.

July 5 – This is the final day of tax month 3.  Tax and NICs etc for payments made in the tax month to July 5, or in the tax quarter to July 5, are due for payment to the Accounts Office by July 19, or by July 22 if paid electronically.

July 6 – This is the deadline date for filing, in paper form or electronically,

• form P9D Expenses payments and income from which tax cannot be deducted
  
• form P11D Expenses and Benefits
  
• form P11D(b) Return of Class 1A National Insurance contributions due and Return of expenses and benefits – Employer’s declaration

Copies of forms P9D and P11D must also be given to the employees concerned by this date.

July 7 – This is the deadline date by which the responsible person for an employer-financed retirement benefit scheme must provide HMRC with details of relevant benefits provided during the previous tax year.

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Payroll FAQ's

Employment Status

What are the IR35 rules and to whom do they apply?

The so-called “IR35” legislation takes its name from the number of the 1999 HMRC press release that announced the Government’s intention to address the issue of workers avoiding the levels of tax and NICs that they would pay if they were in employment.

The IR35 rules apply where a worker sets up an “intermediary”, i.e. a limited company (sometimes a partnership), to supply services personally to a client.  The worker is a director and shareholder of the company.  The company or partnership is known as a “Personal Service Company” (PSC).  The “IR35” rules are set out in sections 48 to 61 of the Income Tax (Earnings and Pensions) Act 2003.

Some PSCs contract directly with the end client to provide the worker’s services; others contract with an agency.  In this latter situation, the end client pays the agency, which deducts its fee, and the agency then pays the PSC for the services of the worker.  The PSC then pays the worker (1) a salary, often at the national minimum wage, and (2) dividend payments, which are tax free to basic rate taxpayers.

The important requirement when identifying PSCs is to identify correctly the nature of the contracts for the personal services.

• Where the PSC contracts with the end client, there is no employment contract with the worker.
• Where the agency contracts with the end client, there is no agency contract with the worker.

If there were an employment contract or an agency contract, payments to the worker would be liable for PAYE tax and Class 1 NICs.  However, as there is no contract between the worker and the end client, the end client has no PAYE or NICs obligations.  Instead, the IR35 rules require the PSC to consider whether, for each engagement, the nature of the work for the client is such that, if the contract had been made between the worker and the end client directly, the end client would have had to treat the worker as an employer, deducting PAYE tax and Class 1 NICs.  If so, the engagement is a “relevant engagement” and the IR35 legislation requires the PSC to calculate and pay over to HMRC employed levels of tax and NICs on that part of the income from the contract that has not already been subjected to tax and NICs at the time the PSC paid the worker’s salary.

Whether a PSC must apply the special “IR35” tax and NICs rules depends critically on the employment status that would apply if the worker supplied to the client were employed directly by the client.  This employment status decision must be made by the PSC, not by the client, and uses the established criteria for determining employment and self-employment.

A PSC must be distinguished from

• a “managed service company”, where the worker or workers are not usually in business on their own account and control over the business is exercised by a third-party scheme provider, and
• an “umbrella company”, where the workers are employees of a limited company (the “umbrella company”) that supplies them to clients under individual contracts but do not perform any work for the umbrella company.

In both of these situations, the workers are liable for PAYE tax and Class 1 NICs.

The workers to whom the IR35 rules apply, based on the guidance given in the CWG2(2009) booklet, are as follows:

Where the intermediary is a limited company

Individuals who have

• beneficial ownership of, or entitlement to acquire rights entitling them to receive, more than 5% of the ordinary share capital of the service company, or
• possession of, or entitlement to acquire rights entitling them to receive, 5% of any distribution made by the company, or
• received, or could have received, payments or benefits from the company which are not salary but could reasonably be taken to represent payment for the services they provide to clients.

Where the intermediary is a partnership

Individuals working through a partnership where

• an individual worker, or a person connected with the worker, is entitled to 60% or more the partnership profits, or
• all or most of the partnership’s income in the relevant tax year is derived from the provision of services, in a form which would fall within the definition of “relevant engagements”, to a single client or associate of that client, or
• the profit sharing arrangements in the partnership provide for the income of any of the partners to be based on the amount of income generated by those partners through “relevant engagements”.

However, the IR35 rules do not apply where

• the client is an individual and not in business (e.g. householders), or
• the worker is only entitled to receive income from the intermediary that is all taxed as PAYE income and liable to Class 1 NICs, and has no other rights to income or capital from the intermediary.

Calculating the deemed payment

If a PSC receives income from “relevant engagements”, i.e. contracts that fall within the “IR35” rules, the PSC must operate PAYE and pay NICs on payments of salary to the worker during the year.  At the end of the year, the PSC must perform a specially-defined calculation that compares the salary, expenses and benefits paid or provided to the worker with the payments received by the PSC from the client.  If the result of this calculation reveals that the worker has paid insufficient PAYE tax and Class 1 NICs during the year, the difference is a “deemed employment payment” and is treated as if it were paid to the worker on the last day of the tax year and, as a result, must also be subjected to PAYE tax and Class 1 NICs, payable to HMRC by 19/22 April immediately following.  If the worker has already received the payment, the “deemed employment payment” is not actually paid to the worker when the tax and NICs liabilities are calculated.

To ensure compliance, all employers, including service companies, are required to answer the following Question 6 in the Part 3 - Checklist section of the P35 Employer Annual Return:

• Are you a Service Company?
• If ‘Yes’, have you operated the Intermediaries legislation (sometimes known as IR35) or the Managed Service Companies legislation?

A PSC must answer “Yes” to the first question.  The answer to the second question is “No” if, although the company is a PSC, there have been no “relevant engagements” during the year, i.e. there was no requirement to operate PAYE and pay NICs on any payments received from clients. The answer to the second question is “Yes” if payments to the worker have been taxed under PAYE, or tax is due on a “deemed employment payment” at the year end.

The IR35 legislation defines precisely, step-by-step, the way in which any “deemed employment payment” is calculated at the year-end.  The procedure is as follows:

1. The total value of all payments and benefits (e.g. car or living accommodation) that were received by the intermediary from all of the worker’s relevant engagements in the tax year, reduced by 5% to cover the intermediary’s general business expenses.
   
   PLUS
   
   
2. The total value of any payments and benefits (e.g. car or living accommodation) that the worker has received under the relevant engagements other than from the intermediary, e.g. direct from the client, and that have not already been taxed under PAYE or reported by the provider on form P11D.
   
   LESS
   
   
3. The total amount of any business expenses that were incurred “wholly, exclusively and necessarily” in the performance of the contracts, that were reimbursed by the intermediary to the worker, and that would not have been taxable or that would have qualified for tax relief if the contract had been between the worker and the client.  (Examples of such expenses are: travel and subsistence expenses reimbursed by the intermediary to the worker, mileage allowance relief for a car provided by the intermediary, that the worker could have claimed if the contract had been between the worker and the client and the car had not been a company vehicle.)
   
   LESS
   
   
4. The total amount of capital allowances claimable by the intermediary that the worker could have claimed if the contract had been between the worker and the client, i.e. for plant or machinery that was necessary to fulfil the contract with the client.
   
   LESS
   
   
5. The total amount of contributions to an approved occupational or personal pension scheme made by the intermediary for the benefit of the worker.
   
   LESS
   
   
6. The total amount of secondary Class 1 NICs that have been paid and Class 1A NICs that will be paid by the intermediary in respect of the pay and benefits to the worker.
   
   LESS
   
   
7. The total value of
   
   
   • payments from the intermediary to the worker, other than those already deducted at step 3, from which PAYE and Class 1 NICs have been deducted, including mileage and passenger allowances and payments for the worker’s own vehicle that are exempt from any tax charge, and
   • benefits from the intermediary to the worker, other than those already deducted at step 3, for which the intermediary has a Class 1A liability.
     
     If, at this point, the result is nil or negative, there is no “deemed employment payment” on which tax and NICs must be paid for the tax year.
     
     If the result is positive:
     
     
8. Calculate the amount that, together with the secondary Class 1 NICs payable in respect of it, equals the amount at step 7.  (For example, if the amount at step 7 were £11,280, the step 8 calculation would give £10,000 (i.e. the employer’s contribution on £10,000 would be £1,280 at the 2009/10 rate of 12.8%).

The result is the worker’s “deemed employment payment” for the year.  Whether or not it is actually paid to the worker, it is “deemed” to be paid to the worker on the final day of the tax year and must be subjected to tax and NICs through the payroll as part of the worker’s earnings in the final pay period of the tax year.

Payment must be made to HMRC by 19/22 April.  The amount of the deemed payment, and the tax and NICs paid on it, must be included in the year-end forms P14 and P35 return that must be filed by 19 May.  Interest is charged if payment is not made by 19/22 April.  However, if the deemed remuneration calculation cannot be finalised by 19 May, provisional figures must be returned on the P14s and P35.  There is no requirement to inform HMRC that the figures are provisional, but HMRC will write later in the year to any company answering “Yes” to the second part of Question 6, reminding them that, if the figures were provisional, they must submit amendment P14s and P35 and make a balancing payment by the following 31 January.

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