Payroll Newsletter 17.02.10

News items at - 17^th February 2010

Introduction

The problems caused by HMRC issuing duplicate coding notices continue to be an issue and HMRC have published at least two updates to reassure employers and employees.  We have reproduced the latest announcements below.

The problem faced by employers wanting to impose new terms and conditions on employees seems to have been solved by Asda, as revealed in a recent Employment Appeal Tribunal decision.  The solution seems to be too easy so it will be interesting to see if it survives a review by the Court of Appeal.

It seems that not a week goes by without a new issue being raised on the subject of salary sacrifice schemes.  They continue to be a significant topic of discussion on the PayPerShop Forum and this week’s Employer FAQ looks further at how employers might make benefits such as cycles “available generally” where the conditions for exemption are not met.
Other uses for salary sacrifices are also appearing.  Traditionally they have been used to take advantage of tax and NICs exemptions and their use by umbrella companies for travel expenses is the subject of a new consultation document published by HM Treasury.  We also heard this week of salary sacrifice schemes being used in situations where there are no direct tax and NICs savings to be made, such as in the provision of company cars in order, for example, to reduce the risk of corporate manslaughter charges when employees use their own cars for business trips, but also simply to provide a self-financing benefit for employees and family members.

We would be interested to hear more about any such innovative salary sacrifice schemes.  You can send any information to ian@paypershop.com or post the information on the PayPerShop Forum, at www.paypershop.com/forum.

PAYE Procedures

Multiple coding notices for the same employee

Two weeks ago we highlighted a coding notice problem involving the issuing by HMRC of multiple and contradictory coding notices.  The problems reached the national press and HMRC has since published two updates on the situation.

The first was issued for distribution to employers by HMRC’s Business Customer Unit:

“Annual Coding: multiple or incorrect Coding Notices update

In January HMRC updated tax agents and employers via its website and professional representative bodies on the implementation of the new National Insurance and PAYE system and the issue of notices of coding for 2010/11.
We will shortly be able to provide more details of areas we have identified which could have caused an incorrect tax code to be sent.  We hope this information will be of use to employers and those administering payrolls to understand how we can improve the quality of information held on NPS and the accuracy of future notices of coding.  We are undertaking a review of those cases which include one or more of the issues identified and will issue revised notices of coding to the individuals as soon as possible if they have already been sent a incorrect code.  This work is being prioritised so that we deal first with those individuals who are most vulnerable if their code is incorrect.  Our plans to review codes will minimise the number of coding notices being sent to your employees or pensioners with these inaccuracies.

In most of the cases we have reviewed, where we believe the code may be incorrect, we have found a discrepancy between the data we hold and that shown by the employer or pension provider on forms P14.   Where we can we will correct the data and send out a correct code to the customer but in some cases we will need to check information with the individual before we can make a change.  In other areas we will be asking employers or pension providers to work with us more closely in the future to so that discrepancies do not creep in again.

As employers and pension providers we recognise that you will have employees and pensioners contacting you for advice on what the revised notice of coding means for them.  The numbers of inaccurate codes should be minimised going forward which will help and for any remaining enquiries we are not asking you to respond beyond providing the reassurance that this note gives about the problems being understood and addressed.  Where an employee or pensioner does contact you we would be grateful if you could:

• Reassure them that the revised notice of coding will not take effect until the first payment after 5 April and HMRC will be reviewing and correcting codes in the meantime
  
• Ask them to look at the information on our website which explains how a PAYE code is operated
  
• Ask them to telephone us on the number of their Coding Notice or 0845 3000 627 if they have any more concerns or wish to talk to us to resolve the problem.

The employer copy of the PAYE coding, form P9, will be issued in the normal way as we approach the new tax year.  If you do not receive a P9 for an employee or pensioner, you should continue to operate the existing PAYE code from the current year into next year in line with existing guidance.  We do recognise that you may receive a higher number of forms P9 this year but we will be aiming to keep these to a minimum.

We are sorry for any extra work this puts you to in responding to queries but hope you will appreciate that correcting the basic data held between our systems will result in a more accurate and efficient service in the future for customers, employers and HMRC.”

The above letter refers to ‘areas which could have caused an incorrect tax code to be sent”.  Information about the main causes of the problems were later released on HMRC’s website, as follows:

“We have been working hard to identify situations where customers could receive an incorrect Coding Notice and have identified three key situations where this may occur. These are where:

• a previous employment stopped some time ago but our system has not picked this up and a Coding Notice has been sent for that employment
  
• two notices have been sent for the same employment
  
• the code BR (basic tax) or DO (higher rate tax) has been given for an employment or pension for the first time
  

We are looking to correct as many of these discrepancies as possible well in advance of the new tax year and we are doing all we can to ensure no one pays too much tax from April.”

Further information:

Annual Coding: multiple or incorrect Coding Notices update 

Protection of Wages

Employer’s contractual right to amend pay structures

In a judgement delivered on 11 February 2010, the London Employment Appeal Tribunal (EAT) ruled that, in the case Bateman and Others v Asda Stores Ltd, the employer was entitled to change and impose new pay structures without the express consent of individual employees, based on a clearly expressed term in the staff handbook.

In August 2007, Asda Stores had sought to move some 18,000 employees from an earlier pay structure to a new structure which, in some cases, reduced their rates of pay.  Following extensive consultation, some 9,300 employees transferred voluntarily to the new regime and the remaining 8,700 employees were moved involuntarily.  About 700 employees brought claims in the Employment Tribunal on the basis that they had suffered unauthorised deductions from wages under the provisions of section 13 of the Employment Rights Act 1996.  Six test claimants had their case heard by an Employment Tribunal but the decision went against them.  They appealed to the EAT.

The “Colleague Handbook”, part of the employees’ contractual terms and conditions, contained the following statement:

“The Company reserves the right to review, revise, amend or replace the content of this handbook, and introduce new policies from time to time to reflect the changing needs of the business and to comply with new legislation.”

In its decision, the Employment Tribunal had stated:

“[Asda] acted in this case in pursuance of a clear and unambiguous power to vary contractual terms. The Tribunal has considered carefully how the clause should be interpreted, in view of its wide-ranging effect, but it is entirely unambiguous. However unusual and broad this power was, and however unfettered, the Tribunal has no doubt that it permitted the respondent as a matter of contract to do what it did…. There is no contention that [Asda] acted capriciously, or arbitrarily, or in any way which breached mutual trust and confidence, in imposing [the new regime] in August 2007.”

The EAT agreed in full with the Employment Tribunal’s analysis of the situation and dismissed the appeal.

Further information:

Bateman & Ors v. Asda Stores Ltd

National Minimum Wage

Consultation on travel and subsistence expenses for temporary workers

Alongside the 2009 Pre-Budget Report, the Government announced that it intended to address the problem of potentially exploitative arrangements that are implemented for some temporary workers paid at or near the National Minimum Wage (NMW).  HM Treasury has now published a consultation document, entitled National Minimum Wage workers: Travel and subsistence expenses schemes, which explains the means by which it is proposed that NMW workers should be protected.
Many temporary workers, including those who are paid at or just above the NMW, participate in travel and subsistence schemes operated by some temp agencies and umbrella companies.  The schemes make use of the tax and NICs relief available for expense paid for travel to temporary workplaces.

For a temporary worker, the workplace for the current and each subsequent assignment is a permanent place of work and the travel from home to these workplaces does not qualify for tax relief.  However, by engaging temporary workers under an “overarching contract”, the worker has a single contract with the umbrella company or temp agency which encompasses all of the individual assignments.  The effect is that each workplace becomes a temporary place of work, the travel expenses for which qualify for tax and NICs relief.  The umbrella company normally obtains a dispensation from HMRC in order not to have to report the expenses payments.

To take advantage of both the tax and NICs relief, the workers enter into a salary sacrifice arrangement with the umbrella company or temp agency, whereby the earnings from the assignment are reduced by a defined amount, and that defined amount is then paid to the worker as legitimately untaxed travel and subsistence expenses.

The normal situation for employees whose pay is at or just above the NMW is that they are unable to sacrifice salary as this would reduce their hourly rate to below the NMW rate.  As defined in the almost incomprehensible rules in the NMW Regulations for what does or does not count towards the NMW, expenses paid “in connection” with the worker’s employment do not count towards the NMW.  The term “in connection” is not defined and it is interpreted by HMRC as applying to the reimbursement of costs incurred by the worker in performance of the worker’s duties.  However, the time spent travelling to a temporary place of work and the costs associated with such travel are not treated as being “in connection” with the employment.  As a result, if the employer reimburses those costs, the payments, as well as enjoying tax and NICs relief, do count towards the NMW.

In the following example, the worker’s hourly rate of pay is £5.80, the adult NMW rate.  The parties agree to a salary sacrifice, reducing the gross pay by £95 for the week and replacing it with £95 of travel expenses.  Tax code is 647L and NICs Table letter is A.

The savings for both parties are considerable; £29.45 per week for the employee and £12.16 for the employing umbrella company.  The worker’s pay for NMW purposes is reduced by the £95 sacrifice but increased by the £95 expenses, so that the employee still receives £232 – enough to comply with the NMW rules.

In some cases, however, HMRC has seen such salary sacrifices operate where the employer does not pay the travel expenses in full, or deducts an administration charge.  In the following example, the sacrifice is still £95 but the expenses payment is only £72.

In this case, the employee benefits by an extra £6.45 – enough to sell the scheme to an unsuspecting worker – but the employer benefits by £35.16 – the £12.16 NICs saving, and the £23 that is withheld from the employee.  However, the arrangement is in breach of the NMW because, for NMW purposes, the total pay is £209 (£137 + £72), less than the minimum £232.

Such an abuse of the tax and NICs relief arrangements is just one of the reasons why HM Treasury, in the new consultation document, proposes to amend the NMW rules.  Other issues for lower-paid workers discussed in the document are:

• Because the gross pay is reduced by the sacrifice, the temporary worker has to work many more weeks in the year for earnings to reach the annual NICs lower earnings limit, the minimum required to have access to some earnings-related contributory benefits.  If there are gaps in assignments, earnings in the year may not even reach the LEL.
• Some umbrella companies and temp agencies refuse to operate travel and subsistence schemes for lower-paid workers, taking the view that they exploit the workers.  Such businesses are at a competitive disadvantage as a result.
• Workers who participate in travel and subsistence schemes are entitled to significantly higher tax credit payments than those who don’t.

The proposal by the Treasury is to amend the NMW Regulations so that expenses paid to an employee for the cost of travel from home to a temporary workplace along with associated subsistence costs will not count as pay for NMW purposes.  The consultation document asks for comments on a number of questions and, if the decision it to proceed with the change, it will be implemented from October 2010.

The effect of the change to the NMW rules would be that workers currently participating in travel and subsistence schemes will experience an increase in their gross pay and a reduction in their net pay.  Their pay for NICS and contributory benefits purposes will not be able to drop below the NMW.  As a result, all temp agencies will compete broadly on the same terms.

The Government anticipates two different responses to the proposed change:

1. Some temp agencies may revert to engaging workers through agency contracts, with the effect that any travelling costs to the client’s premises and associated subsistence costs would not be eligible for tax relief.
   
2. Some temp agencies may continue to engage workers through overarching employment contracts and pay tax free expenses in addition to NMW pay.

Nothing in the consultation document is intended to bring an end to the general use of salary sacrifice for the payment of travel and subsistence expenses.  The broad issue of the use of overarching employment contracts to avoid tax relief on travel expenses was consulted on in 2008 and the outcome was that no action would be taken to change the rules, only that HMRC would increase compliance checks in this area.  The current proposal is intended only to protect those workers with earnings at or just above the NMW.

Further information:

National Minimum Wage workers: Travel and subsistence expenses schemes

National Insurance Contributions

Thresholds from April 2011

In a document for payroll system software developers, HMRC has provided more information about the split of the NICs earnings threshold (ET) from April 2011 into separate employee and employer thresholds.  The legislation already defines them separately but, because they have traditionally been set at the same monetary level (e.g. £110 per week for 2010/11), they have both been known as the “earnings threshold”, even though that name does not appear in legislation.

From April 2011, the primary threshold (abbreviated to ‘PT’) will be set at a rate higher than the secondary threshold (abbreviated to ‘ST’), likely at a rate even higher than the tax threshold.

The number of columns on form P11 Deductions Working Sheet will not change, only the descriptions.  The descriptions used by computerised payroll systems will also have to be changed.

• Column 1b becomes “Earnings above the LEL, up to and including the PT”,
  
• Column 1c becomes “Earnings above the PT, up to and including the UAP”.

The five-way split of earnings around the thresholds will not change and, for in-year recording and year-end reporting purposes, the split will use the PT, not the ST.

Also, for those employers who use the manual NICs Tables, the existing method of calculation will continue with an exact percentage calculation being carried out at the ST and PT figures, in the same way as for the LEL, ET, UAP and UEL at present.  Similarly, the “mid-point” calculations within the £1 and £4 steps in the weekly and monthly tables respectively will be adjusted where necessary to take account of the exact ST and PT figures.

Further information:

Briefing Note - National Insurance Contributions (NICs) – Changes for 2011–2012  (not currently available online)

Payroll Calendar for the Next Month

The calendar includes both HMRC and employer activities over the coming month.  Employer actions are highlighted in bold text.

February
19	NIC (contracted out employers) table issue period commences
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.
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 February 18 at the latest.
March All month	Payment reminders to employers who remit monthly
5	This is the final day of tax month 11.  Tax and NICs etc. for payments made in the tax month to March 5 are due for payment to the Accounts Office by March 19, or by March 22 if paid electronically.
9	Employer Annual Return P35 issue completed
10	P11D(b) return 2008-09 second interim penalty notice scheduled
15	Supplementary bulk issue annual code forms P9 commences
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.
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 March 18 at the latest.

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GUERNSEY

Payroll Calendar for the Next Month

March 15 - For employers with 80 staff or more, this is the deadline for payment of tax deducted during February to the Income Tax Office.

ISLE OF MAN

Payroll Calendar for the Next Month

February 19 – This is the deadline for submission of the T35 Remittance Card and ITIP/National Insurance to the Income Tax Division for tax month 10.

March 5 – This is the final day of tax month 11.  The T35 Remittance Card and ITIP/National Insurance in respect of the payments made in the tax month to March 5 must be sent to the Income Tax Division by March 19.

Employment Law

Update for 2010

The Department of Trade & Industry has issued the following employment law updates:

• The guide Isle of Man Employment Rights and Responsibilities: a Guide for Employers, Employees and Workers has been revised and expanded.  Recent changes include
  
  • new work permit exemptions
    
  • the Employment Tribunal Rules 2008
    
  • new compensation limits
    
  • new minimum wage rates
    
  • the Points Based System.
    
    There are also new sections on topics such as medical reports and health records and additional information on areas such as wrongful dismissal, constructive dismissal and unfair dismissal.
    
    
• The minimum wage rate for workers aged 18 years or over will increase from £6 an hour to £6.10 from 1st April 2010.  Other rates will remain unchanged.  The maximum accommodation offset increases from the same date from 91p to 96p per hour, from £5.20 to £5.50 per day, and from £36.40 to £38.50 per week.

Further information:

Employment Rights and Responsibilities Guide

Minimum wage rates

JERSEY

Payroll Calendar for the Next Month

March 15 – For employers with 80 staff or more, this is the deadline for payment to the Social Security Department of the contributions calculated for February.

March 15 – This is the deadline for submission of the monthly return and payment of tax deducted in February to the Income Tax Office.

REPUBLIC OF IRELAND

Payroll Calendar for the Next Month

February 23 – For employers who make their payments (and file form P30) through Revenue On-Line Service (ROS), whether required by law to do so or not, this is the deadline for P30 monthly PAYE/PRSI payments.

March 14 – This is the deadline for P30 monthly PAYE/PRSI payments to the Collector General for February by employers who pay monthly, unless they pay (and file form P30) through Revenue On-Line Service (ROS).

 (Note: These dates also apply to equivalent RCT payments and returns made by principal contractors.)

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Payroll FAQ's

Salary Sacrifice Schemes

In what ways can a benefit be made “generally available” in order to meet the statutory conditions for some tax and NICs exemptions?

(In January, we published a new Employer FAQ that considered the issues that arise when one of the conditions for the use of a tax exemption in conjunction with a salary sacrifice scheme requires that the benefit be available generally to all employees.  The article generated a lot of discussion and raised some additional issues, which are discussed in the following new article.)

A number of tax and NICs exemptions are, or could be, used for salary sacrifice purposes but most require a number of defined conditions to be met.  In some cases, one of these statutory conditions is the requirement for the particular benefit to be made “generally available” to all employees or, in the case of childcare vouchers, to all employees at a particular location.

Examples of schemes (not an exhaustive list) that require this general availability are:

• the use of a works bus
  
• employer support for public bus services, e.g. a bus pass
  
• the loan of a cycle and cyclist’s safety equipment
  
• in-house recreational facilities, e.g. an on-site gym
  
• childcare vouchers up to the defined monetary limit
  
• childcare facilities provided externally up to the defined monetary limit
  
• childcare facilities provided in-house
  
• transport between the mainland and oil and gas rigs.

As explained in a related article, where such a “generally available” condition is not satisfied, the tax effectiveness of a salary sacrifice scheme fails for all employees in the scheme, even if they personally meet all of the other conditions.  Using the “cycle-to-work” scheme to illustrate the point, three conditions must be met

1. the cycle (and any related equipment) must continue to be the employer's property
2. the employee must use the cycle mainly for commuting journeys
   
3. the loaned cycles must be available to all employees generally.

The difference between the first two conditions and the third is important. The first two conditions must be met by each employee, but the third must be met in respect of all employees. In order for employees participating in the scheme to meet all three conditions and thereby enjoy the tax and NICs savings, they must meet the first two conditions personally but the employer must ensure that the third condition is met across the business.

A related article makes the point that condition 3 does not require a salary sacrifice arrangement to be made available to all employees.  Rather, every employee must have the opportunity of loaning a cycle and cyclist’s equipment in some way even if that way is not tax advantageous.

In what ways can an employer ensure that the “generally available” condition is met across the workforce?  Continuing in the context of the cycle-to-work scheme, we can consider four different options and consider their potential use for, say, employees in a business who work at home and do not routinely travel to the employer’s premises.  They must be given the opportunity of loaning a cycle but they cannot meet condition 2 because they do not commute to work.

Option 1:  The homeworkers could still be offered participation in the cycle-to-work salary sacrifice scheme, even though, in their case, it will not be tax effective because they cannot meet all of the conditions for the statutory exemption.  A salary sacrifice is simply a contractual change to employment terms so an employee could agree to take a reduction in pay and be given a benefit of equivalent value instead, even though all of the tax/NICs saving available by means of the exemption cannot be realised.

If this option is used, the employee’s salary is reduced contractually so the employee pays less tax and lower NICs, and the employer pay lower NICs.  But, because the arrangement is not tax/NICs effective, the loan of the cycle must be reported on P11D as a benefit (using the costs incurred by the employer in making the cycle and any equipment available), with a resulting tax charge for the employee and a Class 1A NICs charge for the employer.  The employee, however, benefits from not paying any Class 1 NICs.  Note: The amount of the salary sacrifice is not a deduction from salary towards the employer’s costs and cannot therefore be used on the P11D to reduce the taxable amount reported.

Option 2: The employees may simply be given the option of hiring a cycle and equipment.  There is no salary sacrifice, so the salary stays the same and, as a result, there are no tax and NICs savings.  There is a potential P11D tax charge for the use of the cycle (still the employer's property) but whatever the employee pays in hire charges offsets the costs incurred by the employer.

Option 3: The employees could be invited to buy a cycle instead of hiring it.  That appears to meet the requirement for cycles to be “made available”.  However, there must be a doubt that that is the intention of the exemption, on the basis that condition 1 does not permit the cycle to become the employee's property.  On the other hand, that is a condition that must be met by the employee personally, not generally.  So, selling a cycle to the employees is a possible option but its acceptability to HMRC would have to be checked.

Option 4: The employees could be offered a loan to use in obtaining a cycle.  For example, if the cycle-to-work scheme allows employees to choose a cycle with a value of up to £1000, a loan up to that value could be offered.  There is no tax liability because the amount of the loan is below the £5000 exempt tax threshold.   There are two problems, though.  First, the employer is making a loan available, not a cycle, so the “generally available” condition may still not be met.  Second, the employer has no control over how the loan is spent, even if the loan is provided specifically for the purchase of a cycle.

Disposal at the end of the hire period

One further issue merits consideration.  The disposal of a cycle at the end of the hire period is yet another issue that needs to be considered where the conditions for tax exemption are not met.  This issue only arises in the context of cycles/cycling safety equipment and company cars, and we will consider the issue still in the context of cycles.

The statutory method of reporting the sale to an employee of any asset that has been provided as an employment benefit is set out in section 206 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA). The amount to be reported is (1) the market value of the asset when it was first provided as a benefit, less (2) the total of the amounts that have been reported on P11D as the taxable value of the benefit in each of the tax years since it was first provided, i.e. 20% of the market value when first provided, in each tax year.

Considering first the situation that exists where all of the statutory conditions are met for the provision of a cycle, there is no reporting requirement, so nothing is reported on form P11D.  Applying the rule above, it would mean that, if the cycle is sold to the employee at the end of the hire period, the taxable value is the market value of the cycle when it was first provided, not when it is sold.  There have been no taxable values reported on P11D during the hire period, so the original market value cannot be reduced.

To avoid this situation, section 206 exempts cycles and company cars from this reporting requirement.  Instead, the reportable value of the sale of a cycle to an employee is its market value at the time of the sale.  This allows the employer to estimate a reasonable second-hand value for the cycle and, as long as the employee doesn’t pay less than that value, there is no taxable benefit from the sale.

However, the exception in section 206 of ITEPA for cycles only applies "in circumstances in which the conditions set out in section 244 were met", i.e. all three of the conditions that provide the tax exemption for loaned cycles and cycling equipment.  If any of the conditions were not met, as in the case of the homeworkers considered above, the benefit valuation when the cycle is sold to the employee cannot be based solely on the market value at the time of transfer.  Rather, it must be based on the original market value, less the amounts reported on P11D while it was on loan.

Example: We can illustrate the problem with a cycle that, when it was originally loaned to the employee had a market value of £750 - the price it could be bought for at the time from the retailer. The conditions for tax exemption are not met in full.  The reportable benefit is 20% of £750 for each tax year. If the cycle was on loan for 18 months, the employer will have reported, say, £150 for one full tax year, and £75 for half of a second tax year - £225 in total.  The reportable value when the cycle is eventually sold to the employee is, therefore, £525 (i.e. £750 - £225), less whatever the employee pays for it.  The resulting taxable value is likely considerably more than the market value of the cycle at the time of transfer.

On that basis, the employee may well decide not to buy the cycle, leaving the employer to dispose of it, and get a new one through the cycle-to-work scheme.  Or, he may decide to retain it on loan without any further payments to you - leaving the employer with the responsibility for the cycle's ongoing maintenance - and simply continue to pay tax on the £150 reported on P11D each year. In five years, of course, the employee can have the cycle for nothing as the £750 original market value is wiped out by five years reporting of £150.

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