Payroll Newsletter 16.06.09
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News items at - 16th June 2009
Introduction
This week’s big story is the Law Lords’ decision in the Stringer case, supposedly bringing to an end a seven-year saga involving the payment of holiday pay to workers on extended sick leave. But the repercussions for employers and sick employees are considerable, with the HR press predicting widespread dismissals of sick employees and expensive claims to tribunals and courts for non-payment of holiday entitlements.
Two of this week’s stories involve changes to the wording of Regulations. There is an interesting contrast. In one case, a major and high-profile change involves the deletion of seven words. In the other case, a low-key change that will affect mainly Scottish employers involves extensive reworking of the relevant legislation.
HMRC has taken another step in the move towards payrolling benefits-in-kind. Any readers, whether employers, agents or payroll bureaux, who are already taxing benefits through the payroll are invited to complete questionnaires, describing their experiences.
This week’s Employer FAQ follows up on last week’s coverage of personal service companies with some details about the quite different PAYE and tax implications for managed service companies.
And, finally, who was Comenius and why is his name used for one the European Commission’s education programmes?Employment Law
Changes to government departments
On 5 June, the Government created the Department for Business, Innovation and Skills (BIS). The new Department merges the Department for Business, Enterprise and Regulatory Reform (BERR) and the Department for Innovation, Universities and Skills (DIUS).
Guidance on employment rights and employer obligations continues to be moved to the Directgov and Business Link websites.
Further information:
Changes to the machinery of Government http://www.number10.gov.uk/Page19525
Directgov http://www.direct.gov.uk/en/Employment/index.htm
Business Link http://www.businesslink.gov.uk/
Working Time Regulations
House of Lords rules on holiday pay and sick pay issues
The contentious issues raised in the case Revenue & Customs v Stringer and Others were first raised in 2002 and it was only on 10 June 2009 that the Law Lords brought them to a conclusion. However, although the legal issues may be settled, the potentially costly implications for employer are far from resolved.
Statutory issues
Coverage of the House of Lords decision requires a brief initial explanation of the statutory rules for making complaints for non-payment of holiday pay in the Employment Rights Act 1996 and the Working Time Regulations 1998.
Employment Rights Act 1996 (ERA)
- Section 13 protects workers from unauthorised deductions from wages, including a payment of wages that is less than that required contractually.
- Section 23 enables a worker to present a complaint to an employment tribunal that the employer has made an unauthorised deduction of wages if the complaint is made
- within three months of the date of the deduction, or
- if the complaint relates to a series of deductions, within three months of the date of the final deduction in the series.
- within three months of the date of the deduction, or
- Section 27 defines “wages” as any sums payable to the worker in connection with his employment, including:
- any fee, bonus, commission, holiday pay or other emolument referable to his employment, whether payable under his contract or otherwise, and
- other payments made under specified legislation, including, for example, SSP, SMP, SAP and SPP.
- any fee, bonus, commission, holiday pay or other emolument referable to his employment, whether payable under his contract or otherwise, and
Working Time Regulations 1998 (WTR)
- Regulation 13 provides workers with entitlement to 4 weeks’ annual leave in each leave year
- Regulation 13A provides workers with entitlement to 1.6 weeks’ additional annual leave in each leave year
- Regulation 14 requires payment in lieu of untaken annual leave to be made on termination of employment
- Regulation 16 requires payment for annual leave to be paid at the rate of a week’s pay for each week of leave
- Regulation 30 enables a worker to present a complaint to an employment tribunal that the employer has not permitted leave to be taken under Regulations 13 or 13A, or has failed to pay any amount due under Regulations 14 or 16, if the complaint is made within three months of the date of the breach of these Regulations.
The story so far
Two Employment Appeal Tribunal (EAT) decisions in 2002 began the story:
- Are employees entitled to paid holidays while on extended sickness absence? The ruling in Kigass Aero Components v Brown was that, under the WTR provisions:
- there is no pre-condition that a worker must be at work before taking holiday leave
- a worker absent from work on medical grounds may give notice to take paid holiday leave and, on completion of that leave, return to sick leave.
- there is no pre-condition that a worker must be at work before taking holiday leave
- Can a complaint for non-payment of statutory annual leave only be brought under the WTR provisions? The decision in List Design Group Ltd v Douglas and Others was that such complaints may be brought under the ERA or the WTR. Complaints may be heard in relation to a series of deduction failures under the ERA, an option not permitted under the WTR provisions.
In February 2004, the EAT, in the case Commissioners of Inland Revenue v Ainsworth and Others (the “others” included a Mrs. Stringer), considered appeals against the decisions of four employment tribunals, all of which revolved around the issue of whether employees are entitled to paid annual leave while on extended sickness absence. Mr. Ainsworth and the other complainants had all been employees of the Inland Revenue, as it was then known. The employment tribunals had all found in their favour, in line with the Kigass and List Design decisions. However, the EAT declined to review those EAT decisions and referred the cases instead to the Court of Appeal.
The Court of Appeal, in April 2005, reached the following conclusions on the issues before it:
- The right to annual leave cannot refer to leave from sickness absence. There is no obligation for an employer to treat a worker, who is on long-term sickness absence and has been unable to attend work throughout a full leave year, as entitled to paid holiday leave under the WTR provisions.
If there is no entitlement to holiday pay during extended sickness leave, there can be no entitlement to payment in lieu of untaken annual leave when the employment is terminated.
- The inclusion of “holiday pay” in the ERA definition of “wages” brings contractual holiday pay into scope but not holiday provided “otherwise”, i.e. payments for annual leave under the WTR. The WTR is later legislation and has its own enforcement regime. Payment for annual leave was not added to the list of specified payments, such as SSP and SMP, with the result that the WTR’s annual leave provisions cannot be enforced using the deductions from wages provisions of the ERA. A complaint for non-payment of annual leave, whether during employment or after termination, must be made within three months of the date the payment was due. Unlike the ERA provisions, such a complaint cannot apply to failures to pay annual leave that are part of a series of payments that were due, but not paid, more than three months earlier.
These Court of Appeal decisions were subsequently appealed to the House of Lords but, in October 2006, the Lords referred the issues raised by the appeals to the European Court of Justice (ECJ). By that time, the case had been renamed Stringer and Others v HM Revenue and Customs. It was not until January 2009 that the ECJ published its decisions, namely that
- at the end of a leave year, the right to paid annual leave is not lost, even if
- a worker has been on sick leave for all or part of the leave year, and
- the incapacity that prevents the worker taking paid annual leave continues until the employment is terminated.
- a worker has been on sick leave for all or part of the leave year, and
- on termination of employment, a worker who has been on sick leave for all or part of the leave year and who, for that reason, was unable to exercise the right to paid annual leave, is nevertheless entitled to payment in lieu of untaken paid annual leave.
The House of Lords decision
On 10 June 2009, the five Law Lords unanimously allowed the appeals. Although the judgement was given in the context of entitlement to paid annual leave during or at the end of long-term sickness absence, it made little reference to the ECJ decision, concentrating instead on the issue of whether complaints about paid annual leave could be made under the provisions of the ERA.
As already mentioned, the WTR provisions require complaints to be made within three months of an employer’s failure to provide annual leave or to pay for it. The ERA, while imposing an equivalent requirement, also allows complaints to be made within three months of the last of a series of deductions. Only if the ERA provisions can be applied to breaches of the WTR would employees be able to enforce the decision of the ECJ retrospectively, potentially over a number of years.
In reviewing the arguments of other courts and earlier decisions, the Law Lords concluded that:
- although payments in lieu of untaken annual leave are only due when the employment is terminated, they are part of the consideration for services already performed under the contract and are, therefore, “wages” that are made in connection with the employment, not payments in connection with the termination.
- annual leave under the WTR and annual leave under the employment contract are both “holiday pay” and no plausible distinction can be drawn between them.
- the word “otherwise” in the phrase “whether payable under his contract or otherwise” is not confined to statutes and regulations specified in regulation 27 of ERA but to any other legal obligation on the employer, including paid holiday leave under the WTR.
- the apparent failure to refer specifically to the WTR in the list of other statutes in regulation 27 of ERA is not significant – general reference is already made to “holiday pay” and payments such as SAP and SPP were specifically added later because SMP was already listed.
- the EC law principle of “equivalence” requires limitation periods for claims arising from EU law (e.g. the WTR) to be no less favourable that for claims arising under domestic law (e.g. the ERA).
As a result, all of the appeals under consideration by the Law Lords were allowed, the decision of the Court of Appeal was set aside, and the original EAT decision was restored.
Implications for employers
The problems that the House of Lords decision sets for employers arise initially from the erroneous decisions of the Court of Appeal in April 2005, namely that
- if an employee has been absent sick for a whole holiday leave year, there is no entitlement to paid annual leave under the WTR, and
- if there is, as a result, no entitlement to paid annual leave, there is also no entitlement to payment in lieu of untaken annual leave on termination of employment.
There is no question that the application of regulations 13, 13A and 14 of the WTR gives undesirable results where workers are on long-term sickness absence. We commented at the time that the Court of Appeal’s approach to the problems seemed to be that “there is a problem here so, in order to remove the problem, we must interpret the legislation in a different way”.
In overturning the EAT’s ruling in Kigass, the Court of Appeal argued that, because the Kigass decision gives undesirable results, workers cannot take “leave” from long-term sickness absence. Therefore, even though WTR regulation 13 says that a worker is entitled to four weeks’ annual leave each year and the only exception is for a worker who has not worked for a full holiday year, a further exception must be assumed if the worker is on long-term sick leave. In that situation, the Court of Appeal decided, the annual leave entitlement is nil.
However, the only reference to sick leave in the WTR and the source European Directive is in connection with the averaging of working hours in a reference period. There is no mention whatsoever of an exception for sickness absence, whether short-term or long-term, in the context of annual leave and pay. The Court of Appeal not only inferred such an exception in the regulations but also defined a rule that said that the exception only applies if a worker has been absent sick from work for a full holiday year. But, if there is a problem in giving holiday pay to a worker who has been absent for a whole year, is there not also a problem if the absence is for less than a year? If a line has to be drawn, why a year? Why not nine months, or six months? The Court of Appeal drew the line at a year.
The law does not always say what we would like it to say. However carefully a statute may be drafted to reflect all of the issues known at the time, new factors come along that can produce undesirable results. If that happens, the correct course is to amend the legislation, not to interpret the existing legislation in a way that was not originally intended.
Unfortunately, employers that applied the Court of Appeal’s rulings are now left with the potentially costly problem of paying holiday pay spanning the whole of an employee’s sickness absence.
- Employees on long-term sickness absence whose contracts were terminated within the past three months are entitled to make a claim under the ERA provisions for payment for unpaid annual leave, both during employment and on termination, that they have been denied.
- Such employees whose contracts were terminated more than three months ago are unable to make a claim under either the ERA or WTR provisions, unless they can convince the employment tribunal that it was “not reasonably practicable for the complaint to be presented” in time. If they cannot make a claim under the ERA or WTR provisions they may instead be able to make a civil claim in a county court, where the limitation period is six years.
Employers who have employees on long-term sickness absence need to look at each situation and decide what to do. Is it better to pay up outstanding holiday pay now or end the employment and see what happens? Many employers may well conclude that, as soon as statutory and contractual obligations during sickness absence end, they will set events in motion towards fair dismissal. The Acas advisory booklet Managing attendance and employee turnover provides balanced guidance on this situation.
Further information:
Revenue and Customs v Stringer & Ors http://www.bailii.org/uk/cases/UKHL/2009/31.html
Managing attendance and employee turnover http://www.acas.org.uk/index.aspx?articleid=1183
PAYE Services
HMRC upgrade to computer systems
After a number of delays, HMRC has started its computer systems upgrade to bring all PAYE records together into a single system, accessible from all of its tax offices. Some services will be affected during June and into July while staff are trained and there will be some delays in responding to queries and correspondence.
PAYE forms can be filed online as normal but both online and paper submissions will be stored until the upgrade is complete.
Further information:
New PAYE service launch
http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageOnline
Services_ShowContent&propertyType=document&id=HMCE_PROD1_029552
PAYE Services
Recovery of debts and payment plans
The Finance Bill 2009 includes a number of measures that will assist HMRC in the prevention and handling of debt.
- Clause 96 and Schedule 49 provide HMRC with powers to obtain the contact details of debtors from third parties.
- Clause 109 and Schedule 58 give HMRC the power to collect small debts through the PAYE system, allowing debtors to spread payments and reducing HMRC’s costs.
- Clause 110 provides for HMRC to introduce managed payment plans.
HMRC has published draft Regulations and guidance to clarify how these arrangements will operate when they are introduced.
If the address held by HMRC for a debtor, including a company, is incorrect and it is not possible to trace the address through existing internal systems e.g. commercial facilities and, where legislation permits, government departments, HMRC will be able to ask a third party for the information, if there are reasonable grounds for believing it knows the address. The new powers will not permit other information about a debtor to be requested and HMRC may not approach friends, neighbours or relatives, other government departments, charities or individuals who have not had a business relationship with the debtor. If a third party does not provide the information voluntarily, authority to issue a formal notice will be obtained from a senior HMRC officer. A penalty of £300 may be imposed for failure to comply with the notice and appeal arrangements will be available.
Existing powers allow HMRC to collect small underpayments of income tax and capital gains tax, and small overpayments of tax credits, i.e. less than £2,000, by an adjustment to an employed taxpayer’s tax code. The new powers will allow established debts in respect of other taxes to be collected in the same way. A debt will be treated as having been settled at the start of the tax year in which the adjusted tax code applies.
Managed payment plans will only be available to income tax and corporation tax self -assessment taxpayers. The arrangement will allow payments to be made monthly, by Direct Debit or Standing Order, in instalments, during the six months before payment is otherwise due and six months afterwards. If the taxpayer adheres to the payment schedule, no interest or penalties will apply to the payments made after the normal due date. The arrangements will not be available to employers for the payment of PAYE tax.
Further information:
Draft Regulations: Recovery of Debts under PAYE Regulations http://www.hmrc.gov.uk/finance_bill2009/paye-regs-draft-guid.pdf
Managed Payment Plans: Draft Guidance http://www.hmrc.gov.uk/finance_bill2009/managed-pyment-plans.pdf
Recovery of Debts under PAYE Regulations: Draft Guidance http://www.hmrc.gov.uk/finance_bill2009/recovery-debts-paye-guidance.pdf
Information Powers: Contact Details for Debtors - Draft Guidance http://www.hmrc.gov.uk/finance_bill2009/Inf-powers-contact-det.pdf
Expenses and Benefits
Questionnaires of payrolling benefits
HMRC is continuing to gather information about the tax and NICs issues raised by the proposals to process the provision of benefits-in-kind through the payroll rather than by P11D/P9D reporting.
To learn about the experiences of employers who already use this method of taxing benefits under informal arrangements with their tax offices, HMRC has produced two questionnaires, one aimed at employers and another at agents and bureaux. HMRC provides assurances that the information collected will only be used for research, i.e. not for compliance purposes.
The questionnaires reveal many of the potential issues and problem areas with payrolling of benefits, such as:
- expenses and benefits that are, and are not, taxed through the payroll, and why
- whether some employee or employee groups are excluded, and why
- situations where estimates of value have to be made
- whether there is any special treatment for ex-pats
- what is reported, if anything, at the year end
- how Class 1 and 1A NICs are calculated and accounted for
- how changes to benefits are handled if they occur early in the year, mid-year, or late in the year
- whether any lower limit to take-home pay is operated
- how employees entitled to P9D reporting are identified
- how staffing levels would be affected if P9Ds/P11Ds were completed instead
- how long it took to introduce payrolling initially
- how much time is spent handling employee enquiries
- what information is given to employees at the start of, during and at the end of the year, and when they leave
- what information has been asked for by employees in connection with tax credit claims.
Further information:
Expenses and benefits: payrolling policy review questionnaires
http://www.hmrc.gov.uk/employers-bulletin/payrolling.htm
Juror Financial Loss Allowances
Increases from 1 June 2009
With effect from 1 June 2009, the maximum daily rates of the financial loss allowances available to jurors have been increased by 3%, as follows:
Period of Jury Service |
Maximum Financial Loss Allowance | |
| 4 hours or less on any day |
More than 4 hours on any day |
|
| First 10 days | £31.56 | £63.12 |
| From 11th day up to 200th day | £63.12 | £126.25 |
| From the 201st day | £110.82 | £221.63 |
Further information:
Allowances for jurors http://www.hmcourts-service.gov.uk/infoabout/jury_service/allowances.htm
National Minimum Wage
Additional exemptions from October 2009
In an Impact Assessment document on the increases to the National Minimum Wage (NMW) from October 2009, the Department for Business, Innovation and Skills (BIS) has announced that the Regulations will be amended to exempt Erasmus students and Comenius assistants from the NMW. The Erasmus and Comenius programmes are a part of the European Commission’s Leonardo da Vinci programme, which funds work placements for trainees, workers and staff across 31 EU and other countries. An exemption from the NMW for Leonardo participants was included in the Regulations in October 2007.
Erasmus is a grant-based educational programme that enables Higher Education students and teachers to work and study for part of their degree in another country. Comenius similarly enables trainee teachers to work as classroom assistants, providing classes in their native languages.
Exemption from the NMW will mean that Erasmus students and Comenius assistants in work placements in the UK will not have to be paid the NMW. Employers and schools providing work placements are not required to pay a wage but may, if they wish, supplement the grant.
It is estimated that around 1,500 Erasmus students and 200 Comenius assistants will be covered by the exemptions each year.
Further information:
National Minimum Wage Regulations 2009: final impact assessment http://www.berr.gov.uk/files/file51722.pdf
Leonardo programme http://www.leonardo.org.uk/
Erasmus programme http://www.britishcouncil.org/erasmus
Comenius programme http://www.britishcouncil.org/comenius
National Minimum Wage
Service charges, tips, gratuities and cover charges
In order to fulfil its promise to exclude any tips whatsoever from counting towards the National Minimum Wage, the government is removing just seven words from the National Minimum Wage Regulations 1999.
Regulation 31 lists a number of payments which must be deducted from an employee’s pay before checking whether the minimum wage has been paid. They include
“any money payment paid by the employer to the worker representing amounts paid by customers by way of a service charge, tip, gratuity or cover charge that is not paid through the payroll”
The government’s objective is achieved by doing no more than removing the last seven words!
The Regulations that make this change, currently in draft form, will take effect from 1 October 2009.
Further information:
The National Minimum Wage Regulations 1999 (Amendment) Regulations 2009
http://www.opsi.gov.uk/si/si2009/draft/pdf/ukdsi_9780111480397_en.pdf
Explanatory Memorandum to The National Minimum Wage Regulations 1999 (Amendment) Regulations 2009
http://www.opsi.gov.uk/si/si2009/draft/em/ukdsiem_9780111480397_en.pdf
Double Taxation Conventions
New Arrangement with the Cayman Islands
A new Arrangement on double taxation between the UK and the Cayman Islands was signed in London on 15 June 2009.
Further information:
Exchange of Letters http://www.hmrc.gov.uk/international/cayman-eol.pdf
Court Orders
Changes to Scottish Debt Arrangement Schemes
The Debt Arrangement Scheme (DAS) was introduced by the Scottish Parliament in November 2004 to provide a means for debtors to repay their debts in full over a period of time without the threat of legal action or diligence (e.g. the use of earnings arrestments, the Scottish equivalent of attachment of earnings orders). The scheme allows debtors to make a single regular payment, by credit card, direct debit, standing order, or by payroll deduction. If the payments are to be made by deduction from wages, employers are obliged to make the deductions if they are served by the employee with a Payment Mandate.
An important requirement of the Scheme as it was originally introduced was the involvement of a “money adviser”, who would advise and assist the debtor in preparing a “debt payment programme” and liaise with the creditors.
A review of the DAS in November 2008 indicated that, although the Scheme was effective for those who were able to make use of it, the requirement to involve a money adviser was affecting the take-up of the Scheme. As a result, the Scottish government decided to remove the role of the money adviser completely from the procedures, although individuals may still consult an adviser if they wish.
The change, which is effective from 1 July 2009, involves a considerable number of amendments to the Debt Arrangement Scheme (Scotland) Regulations 2004, to remove references to money advisers from the procedures and forms, and transfer most of their duties to the DAS Administrator, to whom online applications to join the Scheme will now be made.
The changes, as they affect employers, are as follows:
- form 6, the Payment Mandate issued by the debtor to the employer, no longer includes a money adviser’s name and address
- the employer must make the payments as instructed until the mandate is recalled by the debtor (because payments are to be made in some other way) or a notice is issued by the DAS Administrator (no longer by the money adviser).
Further information:
The Debt Arrangement Scheme (Scotland) Regulations 2004
http://www.opsi.gov.uk/legislation/scotland/ssi2004/ssi_20040468_en.pdf
The Debt Arrangement Scheme (Scotland) Amendment Regulations 2009
http://www.opsi.gov.uk/legislation/scotland/ssi2009/pdf/ssi_20090234_en.pdf
Executive Note to the Debt Arrangement Scheme (Scotland) Amendment Regulations 2009
http://www.opsi.gov.uk/legislation/scotland/ssi2009/en/ssien_20090234_en.pdf
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.
Payroll FAQ's
Employment Status
What are the tax and NICs requirements for workers in “Managed Service Companies”?
Like Personal Service Companies (PSCs), Managed Service Companies (MSCs) are also intermediary companies through which the services of a worker are provided to an end client. In structural terms, they may be “composite companies”, where up to perhaps 20 workers become shareholders in the same limited company, or “managed personal service companies”, where there is just one worker per company, as with PSCs. The key difference from PSCs is that the worker in an MSC is usually not in business on his own account and does not exercise control over the business. This control lies with a separate business, known as the “managed service scheme provider”, which sets up and administers the MSC on behalf of the worker.
Prior to April 2007, MSCs fell, in principle, within the legislation for PSCs (IR35). However, due to widespread non-compliance by MSCs and their failure to tax all travel, accommodation and subsistence expenses, the government removed MSCs from the scope of the IR35 legislation. MSCs now have had to treat payments made to workers, including expenses payments for commuting journeys and related accommodation and subsistence, as employment income and deduct PAYE tax and Class 1 NICs as if they were employees of the MSC. The MSC is the secondary contributor for NICs purposes.
An MSC must be distinguished from
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A limited company or partnership is a Managed Service Company (MSC) if its business consists wholly or mainly of providing the services of workers, directly or indirectly, to other persons and
- the greater part of the payment for the provision of the services of a worker is made, directly or indirectly, to the worker or an associate of the worker (e.g. the worker’s spouse), and
- the provider of the scheme under which the services are provided, or an associate of the scheme provider, (and not the workers), exercises control over the finances or general management of the company or partnership.
An MSC is treated as having made a “deemed employment payment” to a worker if
- the services of the worker are provided by an MSC (or some other person) in this way, and
- the worker, or associate of the worker, receives a “payment or benefit” which, however it is described, may reasonably be taken to be in return for the services provided, and
- the payment or benefit is not paid by the MSC as wages or salary that have already been subjected to PAYE tax and NICs.
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?
An MSC must answer “Yes” to the first question. The answer to the second question must also be “Yes” if all payments and benefits to the worker have been taxed at the time they were provided under PAYE.
Calculating the deemed payment
A “payment or benefit” means anything that, if it were received by an employee for performing the duties of the employment, would be earnings from the employment. If the payment or benefits include unidentifiable sums that relate to matters other than the services provided by the worker, the payment may be apportioned on a fair and reasonable basis.
The “deemed employment payment” is treated as having been made to the worker by the MSC, whether or not the MSC actually made it, and is subject to PAYE tax and NICs. The liability arises at the time the “deemed employment payment” is made to the worker.
If the worker receives a non-cash benefit, it is treated as earnings and given the value of its cash equivalent, using the standard P11D reporting rules. There is no P11D reporting arrangement; non-cash benefits are taxed in full at the time they are provided.
The amount of the “deemed employment payment” is calculated in three steps:
Step 1: Calculate the value of the payment and the cash equivalent of any non-cash benefits.
Step 2: Deduct from the value at Step 1 the amount of any expenses that the worker has met which, if the worker had been employed by the client (the person to whom the services were supplied), would have been allowable. Because the worker is not treated for this purpose as an employee of the MSC, any travel to the place where the services are provided is a commuting journey, not a journey to the worker’s temporary place of work. As a result, no travel, accommodation or subsistence costs in connection with the commuting journeys can be taken into consideration. If, after deducting the permitted expenses, the result at this step is nil or negative, there is no “deemed employment payment”.
Step 3: The result at stage 2 is treated as including the amount of employer NICs due on the payment. It is therefore reduced by that amount to give the amount on which there is a liability to PAYE tax and employee NICs. For example, if the Step 2 amount is £1,548, the Step 3 calculation gives £1,420 (i.e. the employer contribution on £1,000 – after deducting the first £420 – is £128 at the 2009/10 rate of 12.8%).
The expenses deducted at Step 2 can include any mileage allowance relief, to which the worker would have been entitled as an employee of the client, in respect of a car that is provided by the MSC or, in the case of a partnership, by the worker for the purposes of the business of the partnership.
If the MSC is a partnership, any expenses incurred by the worker on behalf of the partnership may also be deducted at Step 2.
The MSC is only treated as the employer, with the responsibility of handling the PAYE tax and NICs liabilities, where those liabilities would have fallen on the client if the worker had been an employee of the client. If, in such a situation, the client would not have had any tax and NICs liabilities, i.e. because the worker is resident, ordinarily resident and domiciled outside of the UK, or the client is resident or ordinarily resident outside of the UK, or the services are provided outside of the UK, neither does the MSC have any tax and NICs liabilities on the “deemed employment payment”.
Transferring PAYE and NICs debts
To prevent the problem of MSCs closing down order to avoid the payment of tax and NICs assessments and moving the workers into a new MSC, the MSC legislation allows the debt to be collected from a third party. Such third parties are defined as
- a director or other office-holder, or an associate, of the MSC,
- the scheme provider,
- a person who (directly or indirectly) has encouraged, facilitated or otherwise been involved in the provision by the MSC of the services of the individual, and
- a director or other office-holder, or an associate, of a person within point (b) or (c).
The wording at point (c) brings into the scope of the legislation:
- an employment agency that advises workers approaching it for work to incorporate and tells them to use a particular scheme provider, but not an agency that simply provides a worker to an end client and that did not know and could reasonably not be expected to know the worker was operating through an MSC.
- an end client who told workers that they had no choice but to incorporate through an MSC or offered higher rates of pay to encourage workers to move to an MSC, but not an end client who used workers from an employment agency without knowing whether the workers were operating through MSCs.
- workers in an MSC who are aware that they are providing their services through the MSC.
However, professional advisers, such as accountants and lawyers, are excluded from the scope of the legislation.
Only if the debt cannot be recovered from the MSC will HMRC move to issue a Transfer Notice against a third party – initially those listed at point (a) or (b) above. Only if it is either impossible or impracticable to recover from those parties will the debt be transferred to those at point (c). The legislation sets time limits for transfers and provides an appeal procedure.