Payroll Newsletter 20.05.09

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Introduction

This week’s newsletter is unquestionably technical.  The lightest of the subjects covered is the £96,000 fine imposed on the owners of a restaurant for employing a number of illegal immigrants.  But I predict that few readers will cope with the whole of the “P35 Question 6” discussion and only a handful of die-hard pension payroll enthusiasts will delight in the intricacies of thirteen new types of authorised lump sum and pension payments.  But perhaps you will treat those comments as a challenge and prove me wrong.

However, before you destine this newsletter to your bedside table as the first permanent cure for insomnia, please bear in mind that there is a risk of penalties for answering the P35 Checklist question incorrectly and these 13 new authorised pension payments are, in fact, 13 payments that fall within PAYE calculation procedures for the first time.

PAYE Year-end Procedures

Clarification of Question 6 of form P35

Question 6 in the Part 3 – Checklist section of the P35 Employer Annual Return is poorly worded and confusing.  There are two parts to the question:

Employers completing either a paper or online version of the P35 need to be able to identify whether they are a “Service Company” and, if so, whether they have applied one or other of the two sets of complex legislation that relates to service companies.

In a rather apologetic article, HMRC acknowledges that the questions and the manner in which the answers have been handled have caused confusion and inconvenience.  It has not helped that, since the “IR35” service company legislation was introduced in 2000, the wording of Question 6 has changed almost every year.  It is still far from clear.

There is a detailed explanation of the meaning of Question 6 on page 18 of the E10 Employer Helpbook Finishing the tax year up to 5 April 2009.   HMRC accepts that a direct reference on the P35 to this E10 guidance would have caused less confusion and the problem will be addressed on next year’s P35.  If there really is an intention to change the wording again on the 2009/10 version of the P35, it has to be done urgently as, in principle, businesses that are closing down already need to complete P14s and a P35 for 2009/10.

For readers who are not clear as to whether their business is a “Service Company”, booklet E10 defines it in this way:

“The first question should be answered yes if:

  • an individual performed services (intellectual, manual or a mixture of the two) for a client or clients, and
  • the services were provided under a contract between the client and the company of which, at any time during the tax year, the individual performing the services was a shareholder or partner, and
  • the company’s income was, at any time during the tax year, derived wholly or mainly (that is, more than half of it) from the services performed by the shareholders or partners personally.

For the purposes of this question, ‘service company’ includes a limited company, a limited liability partnership, or a partnership.”

If an employer who actually understands that explanation answers “Yes” to it, the next problem is answering the second part of the question.  It appears to be asking the employer to identify which one of two sets of legislation apply to the service company but, in fact, it is not.  Rather, it is asking whether or not the service company has operated whichever of the sets of legislation applies to it.

Service companies that fall within the Managed Service Companies legislation are required to deduct PAYE tax and NICs from the earnings (less certain expenses) of their workers.  As a result, the answer to the second part of the question must be “Yes”.

However, in the case of service companies that fall within the IR35 Intermediaries legislation, HMRC’s guidance is that the answer to the second part of the question may be “Yes” or “No”.  In fact, HMRC’s article states that it will be “quite common for the first part to be answered 'yes' and the second part 'no'.”  The situation where the answer can be “No” is where none of the worker(s) involved would have had to have been treated as employees of the client if the contract had been made directly between the worker and the client instead of between the client and the “intermediary”, i.e. the service company.  HMRC is taking the view that, in that situation, the IR35 rules do not apply to the service company, so the correct answer to the second part of the question is “No”.

The answer is “Yes” however if at least one of the workers would have had to have been treated as an employee in the circumstances described above and the service company either

All of this leads to a key issue that has led up to HMRC’s apology.  According to guidance on page 78 of booklet CWG2 Employer Further Guide to PAYE and NICs, if a service company falling within IR35 rules is unable to calculate accurately the “deemed payment” by the P35 filing date, provisional figures may be entered on form P35 instead.  In that situation, the service company must explain that the figures are provisional in a separate letter and provide accurate figures no later than the following 31 January.

It is clear, however, that, if the service company answers “Yes” to the second part of Question 6, that does not mean that the PAYE and NICs figures entered on the P35 are provisional.  They may or may not be.  In relation to the 2007/08 tax year, HMRC made the mistake of issuing reminders about providing final figures based on the answer “Yes” rather than because the service company had sent a separate explanatory letter.

For 2008/09 filing, HMRC has decided to drop the requirement to provide a covering letter if provisional figures are entered on the P35, despite the requirement to do so given in the 2009 CWG2.  If the second part of Question 6 has been answered “Yes”, HMRC will write to the service company later in the year reminding them that, if their P35 figures were provisional, they must file an amendment P35 and make a balancing payment by 31 January.  HMRC will assume, therefore, that if the original figures were provisional, the corrected figures will have been filed by 31 January.

Further information:
Provisional figures: those employers to whom 'IR35' applies
http://www.hmrc.gov.uk/employers/completion-08-09-p35.htm

Employment of Illegal Immigrants

Record fine for illegal working

On 13 May 2009, the UK Border Agency announced that the owners of a Colchester restaurant had been fined £96,000 for employing illegal workers - the largest fine ever handed down by a court in the UK for such an offence.  The directors were each found guilty on 12 May at Harwich Magistrates Court of six offences contrary to Section 8 of the Asylum and Immigration Act 1996.

The bosses were brought to court after UK Border Agency immigration officers, acting on intelligence, visited the restaurant on 29 November 2007.  Six illegal workers from China, Indonesia and Malaysia were arrested.

Each defendant was fined £5,000 per offence - the maximum permissible at a magistrates' court - making a total of £90,000, plus £6,000 costs and a £15 victim surcharge.

Further information:
Colchester restaurant is hit with record fine for illegal working 
http://www.ind.homeoffice.gov.uk/sitecontent/newsarticles/colchester-record-fine

Pension Schemes

Additional categories of authorised lump sum payments

Among the changes made to the tax rules for pension schemes from 6 April 2006 were provisions that allow only specified lump sum payments to be paid from pension schemes without incurring unauthorised payment charges and surcharges of up to 55%.  There are a number of such authorised payments, the most common being the pension commencement lump sums, up to 25% of the pension fund, and the trivial commutation lump sums.  The rules governing authorised payments are set out in Schedule 29 of the Finance Act 2004 and are taxed under the PAYE rules explained on pages 20 to 22 of booklet CWG2 Employer Further Guide to PAYE and NICs.

New Regulations have been made (the Registered Pension Schemes (Authorised Payments) Regulations 2009) that extend the list of authorised lump sum payments.  There are a number of situations where certain pension and lump sum payments would be taxed as unauthorised payments but the Government believes it would be fairer to treat them as authorised payments, subject, as appropriate, to the tax rules for pension payments and authorised lump sum payments.  They include:

All of the lump sum and pension payments defined in these Regulations are now liable for tax under PAYE instead of under the tax rules for unauthorised payments that operate outside of PAYE.

Some transitional measures are set out in the Taxation of Pension Schemes (Transitional Provisions) (Amendment) Order 2009, modifying the Finance Act 2004 in order to accommodate the new Regulations.

The new Regulations and Order come into force on 1 June 2009 but the Regulations apply to payments made on or after

The following notes describe the new types of authorised lump sum payments.  HMRC will publish detailed guidance in due course in the Registered Pension Schemes Manual.

Commutation payments

Any payments in this category are treated as either

and taxed accordingly under PAYE procedures.

1. Payment made after a relevant accretion

In this context, “accretion” means a sum of money that has increased the value of a pension fund unexpectedly as the result of an “event”, namely

Any of the following accretions is a “relevant accretion” if it occurs after one of the above events:

A payment made after there has been a relevant accretion is treated as a trivial commutation lump sum payment if

  1. there is no further entitlement to scheme benefits after the payment is made,
  2. the payment does not exceed £2,000 and is not more than the value of the accretion, and
  3. it is made on or before the relevant date, i.e.
    • 1 June 2010 if the accretion occurred before 1 December 2009, otherwise
    • six months after the date the accretion occurred.

2. Payment under the Financial Services Compensation Scheme

A payment made by way of compensation under the Financial Services Compensation Scheme is treated as a trivial commutation lump sum if

3. Payments made to members who had been untraceable

A payment made to, or in respect, a scheme member who is at least 75 years old is treated as a trivial commutation lump sum payment if

  1. at the time the member reached the age of 75 the scheme administrator had taken reasonable steps to trace the member but had been unable to do so,
  2. there had been no communication from the member for at least 5 years before the administrator
    • succeeded in tracing the member, or
    • learned about the member’s death
  3. there are funds under a pension scheme available to the member but no payments have been made
  4. the payment is made on or before the relevant date, i.e. the later of
    • 1 June 2010, and
    • 12 months after the date on which the scheme administrator traced the member or learned of the member’s death
  5. the payment does not exceed £2,000, and
  6. there is no further entitlement to scheme benefits after the payment is made.

4. Payments to members receiving annuities

A payment that would have been a trivial commutation lump sum if the scheme member were not continuing to receive payment of an annuity after the payment is made is treated as a trivial commutation lump sum payment if

  1. the payment is made before the end of the commutation period, i.e. the period of a year following the day on which a trivial commutation lump sum was first made, or
  2. where the member is not a member of any other registered pension scheme,
    • the member has not previously received either a trivial commutation lump sum or an authorised payment under this regulation, and
    • the member’s pension rights immediately before the payment does not exceed 1% of the lifetime allowance.

5. De minimis rules for pension schemes

A payment made by a public service pension scheme or an occupational pension scheme is treated as a trivial commutation lump sum payment if

  1. the scheme member is at least age 60 but not yet 75
  2. the member is not a controlling director of a sponsoring employer of the pension scheme, or connected with such a director
  3. the payment does not exceed £2,000
  4. the commutation value of the benefits to which the member is entitled under this and any related scheme does not exceed £2,000
  5. there is no further entitlement to scheme benefits after the payment is made, and
  6. no recognised transfer was made from the scheme or any related scheme within a period of 3 years before the date of the payment.

6.  Payment made by larger pension schemes

A payment made by a public service pension scheme or an occupational pension scheme is treated as a trivial commutation lump sum payment if

  1. there are at least 50 members
  2. any of the following conditions is met
    • the scheme was in existence on 1st July 2008,
    • the payment is in respect of a defined benefits arrangement, and the aggregate amount of the sums and assets held for the purposes of the arrangement is more than half of the aggregate amount of all the sums and assets held for the purposes of this scheme, or
    • in respect of at least 20 members, the aggregate amount of the sums and assets held for the purpose of the arrangement exceed £2,000.
  3. the scheme member is at least age 60 but not yet 75
  4. the member is not a controlling director of a sponsoring employer of the pension scheme, or connected with such a director
  5. the payment does not exceed £2,000
  6. there is no further entitlement to scheme benefits after the payment is made
  7. no excluded transfer was made into this scheme in relation to the member during the 5 years preceding the date of the payment, and
  8. no recognised transfer was made out of this scheme in respect of the member during the 3 years preceding the date of the payment.

Pension errors

Any payments in this category are treated as a pension payment made under a registered pension scheme, in full unless otherwise stated, and taxed accordingly under PAYE procedures for pension payments.

7. Pensions paid in error

A payment made in error that was intended to be a permitted pension payment is treated as a pension payment if

  1. the scheme administrator or insurance company believed the recipient was entitled to it and to the amount actually paid, and
  2. the error is not that the member is no longer alive (in which case see 9. Pension continuing to be paid after death, below).

If the recipient was entitled to an authorised payment under other provision, only the amount of the payment that exceeds the authorised payment is treated as a pension payment.

8. Pension paid after discovery of error

A payment made after discovery of an error is treated as a pension payment if

  1. either
    • it is paid after the error in 7. Pensions paid in error, above, is discovered, or
    • if it had not been discovered until after payment, it would have met the conditions in 7. Pensions paid in error, above
  2. and
    • the payer took reasonable steps to prevent it being made, or being made in the amount actually paid, or
    • the scheme rules for the kind of payment in question were being considered for change, or were in the process of being changed, and the amount of time taken to reach a decision or make the change was not unreasonable.

If the recipient was entitled to an authorised payment under other provision, only the amount of the payment that exceeds the authorised payment is treated as a pension payment.

9. Pension continuing to be paid after death

A payment made in error that was intended to be a permitted pension payment is treated as a pension payment if

  1. the recipient has died
  2. the payment is made no later than six months after the date of the person’s death
  3. the payment would not have been an unauthorised payment if it had been made on the day before the person died, and
  4. either
    • the payer did not know, and could not reasonably have been expected to know, that the person had died., or
    • the payer knew that the person had died and took reasonable steps to prevent the payment being made, or being made in the amount actually paid.

10. Payments of arrears of pension after death

A payment of a pension to, or in respect of, a scheme member who has died is treated as a pension payment if

  1. the payment is in respect of a defined benefits arrangement
  2. the scheme member is not yet age 75
  3. the member is not a controlling director of a sponsoring employer of the pension scheme, or connected with such a director, and
  4. either
    • the payment represents accrued arrears of pension
    • the payment was allowed or required by the scheme rules as they stood immediately before the member died, and
    • the existence of the rule or rules concerned would not have prejudiced approval of the scheme by HMRC,

      or, where the member dies before 6 April 2006

    • the payment represents accrued arrears of pension, entitlement to which could not be established until after the member’s death
    • the payment would not have been an unauthorised payment if it had been made immediately before the member’s death and the member had been entitled to it, and
    • the scheme administrator could not reasonably have been expected to make the payment before the member’s death.

      Only that part of the payment that does not exceed the amount accrued between

    • the date that the member could have required payment if the member had been entitled to it, and
    • the date of the member’s death,
      is treated as a pension payment.  Any excess is an unauthorised payment.

If the member died on or after 6 April 2006, payment of the amount that is a pension payment is treated as a benefit crystallisation event for the purposes of the lifetime allowance charge.

Lump sum errors

Any payments in this category are treated as a pension commencement lump sum under a registered pension scheme and taxed accordingly under PAYE procedures.

11. Commencement lump sums based on pension errors

A payment of a lump sum which is intended to be a pension commencement lump sum but which exceeds the permitted maximum because

If it is discovered that the lump sum exceeds the permitted maximum before the payment is made, that does not prevent these conditions being met if the payer took reasonable steps to prevent it being made, or being made in the amount actually paid.

Entitlement to the pension commencement lump sum that exceeds the permitted maximum is treated as a benefit crystallisation event for the purpose of the lifetime allowance charge and the amount for that purpose is the excess payment.

12. Commencement lump sums paid in error – money purchase arrangements

A payment of a lump sum which is intended to be a pension commencement lump sum but which exceeds the permitted maximum because

If it is discovered that the lump sum exceeds the permitted maximum before the payment is made, that does not prevent these conditions being met if the payer took reasonable steps to prevent it being made, or being made in the amount actually paid.

Entitlement to the pension commencement lump sum that exceeds the permitted maximum is treated as a benefit crystallisation event for the purpose of the lifetime allowance charge and the amount for that purpose is the excess payment.

13. Commencement lump sums paid after death

A payment of a lump sum to or in respect of a member who has died is treated as a pension commencement lump sum if

  1. the payment is in respect of a defined benefits arrangement
  2. the member’s entitlement to the payment was not established until after the member’s death
  3. the scheme administrator could not reasonably have been expected to make the payment before the member’ death
  4. the payment would have been a pension commencement lump sum if it had been made immediately before the member’s death and the member had been entitled to it
  5. the payment is made within one year, beginning with the earlier of
    • the day on which the scheme administrator first knew of the member’s death, and
    • the day on which the scheme administrator could first reasonably be expected to have known of it, and
  6. the member was not a controlling director of a sponsoring employer of the pension scheme, or connected with such a director.

The payment of the lump sum is treated as a benefit crystallisation event for the purpose of the lifetime allowance charge and the amount for that purpose is the amount of the payment.

Further information:
Pensions - The Taxation of Pension Schemes (Transitional Provisions) (Amendment) Order 2009 
http://www.opsi.gov.uk/si/si2009/pdf/uksi_20091172_en.pdf
The Registered Pension Schemes (Authorised Payments) Regulations 2009 
http://www.opsi.gov.uk/si/si2009/pdf/uksi_20091171_en.pdf
Explanatory memorandum to The Registered Pension Schemes (Authorised Payments) Regulations 2009 and the Taxation of Pension Schemes (Transitional Provisions) (Amendment) Order 2009 
http://www.opsi.gov.uk/si/si2009/em/uksiem_20091171_en.pdf
Impact Assessment of widening the scope of authorised payments that may be made by registered pension schemes  http://www.hmrc.gov.uk/budget2008/widen-scope-authpyt.pdf

Payroll deadlines during the next month

May 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.

May 19 – This is the deadline date for filing, in paper form or electronically,

May 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 May 20 at the latest.

May 26 – The date after which non-receipt by the HMRC of year-end returns P14s, P35 and P38A will automatically result in late-filing penalties.

June 5 – This is the final day of tax month 2.  Tax and NICs etc for payments made in the tax month to June 5 are due for payment to the Accounts Office by June 19, or by June 22 if paid electronically.

Payroll FAQ's

Payments to and from the Accounts Office

When and how can an employer obtain advance funding for statutory payments?

Employers are entitled to recover a proportion of the statutory payments they pay out to employees.  In the case of Statutory Maternity Pay (SMP), Statutory Adoption Pay (SAP) and Statutory Paternity Pay (SPP), the amount that can be recovered is

A different rule applies to Statutory Sick Pay.  If the total amount of SSP paid out by the employer (across all PAYE schemes if there are more than one) in a tax month exceeds 13% of the total Class 1 NICs due for that month, the difference may be recovered.

The employer makes the recovery by deducting the total recoverable amount for the tax month from the monthly or quarterly payment due to the employer’s Accounts Office, i.e. payments of PAYE tax, employee and employer Class 1 NICs, student loan deductions and Construction Industry Scheme tax deductions.

If the amount to be recovered exceeds the amount due for payment to the Accounts Office, the employer may simply make no payment (although making a nil return to the Accounts Office will avoid a non-payment query) and recover the remainder the following month or quarter.  If this procedure is followed and, at the end of the tax year, the employer has been unable to recover the total amount that may be recovered for the tax year, the employer should complete form SP32, available to download at www.hmrc.gov.uk/employers/fagsp32.shtml.

However, if the employer is going to be financially embarrassed because the total of the statutory payments due for payment in a tax month is more than the total amount due to the Accounts Office, an arrangement exists for the employer to ask the Accounts Office to advance the shortfall.  The employer may decide how much is needed in advance but it is limited to,

Where payments of SMP, SAP or SPP overlap a new tax year, a separate claim for advance funding may be made for the payments due in the new tax year.  This may be done before the end of the current tax year.

The request for advance funding may be made online, using the links provided at www.hmrc.gov.uk/paye/employees/statutory-pay/funding.htm or by letter to the employer’s Accounts Office.  There is no paper form for this purpose.  In all cases, the letter must provide:

Where the claim is for advance funding for SMP, SAP or SPP, the letter should also state:

The amounts of advance funding provided by the Accounts Office must be recorded carefully as they will have to be included in the year-end reconciliation of form P35 Employer Annual Return.

 

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