Nothing can ruin a summer like getting caught with unreported taxes. Renee Dawson has provided a short guide to some common pitfalls in employment taxes.

As we start a new tax year, it is an opportune time for employers to review employment taxes for the year ahead and identify any weaknesses in tax reporting processes. This article aims to highlight some common areas where employers can inadvertently fail to report employment taxes accurately.

Staff entertainment

All payments made to or on behalf of employees should be reviewed. Are employers funding staff entertainment, which falls outside the scope of HMRC exemption of £150 per employee for annual events? The supply of meals to staff when working late or the funding of team events can lead to an employment tax liability. Employers should consider applying for a PAYE Settlement Agreement with HMRC for the 2019/20 tax year to remove the need to declare on forms P11D. 

Trivial benefits

The provision of vouchers to employees at Christmas should be reviewed in conjunction with HMRC trivial benefits exemption. This exemption allows employers to provide non-cash gifts of up to £50 per employee tax-free as long as the gift is not an incentive or reward for service and is provided to all employees. Any vouchers provided to employees exceeding £50 or as an incentive or reward must be either returned on form P11D or included in a PSA.

Termination payments

Following the changes to the taxation of termination payments in April 2018, employers must comply with the new rules regarding Post-Employment Notice Pay (PENP) whenever an employee leaves without working a full notice period for whatever reason. The notice period must be confirmed using the PENP formula and pay as you earn (PAYE) and national insurance contributions (NIC) applied. This is due to change from 6 April 2020, when ex-gratia payments in excess of £30,000 will be subject to employer’s NICs.

If the termination qualifies for £30,000 tax exemption under S 401 ITEPA 2003, any excess payment over this amount is subject to tax only and is still NIC free. This, however, is due to change from 6 April 2020, when payments in excess of £30,000 will be subject to employer’s NICs.

Cash allowances

Many employers are unaware of the full extent of the changes to salary sacrifice introduced in April 2017. Now called Optional Remuneration, the changes removed the tax advantages with the exception of pensions, childcare vouchers and cycle-to-work schemes. However, Optional Remuneration also introduced new rules where the employee has a choice of a benefit or a cash alternative. The most obvious example of this is a cash allowance in lieu of a company car. 

Where there is a clear choice available, the employee who chooses the car will be taxed on the actual car benefit calculated according to the car list price and CO2 or the cash foregone, thus removing any taxable benefit in selecting a green CO2 friendly car. 

Director current accounts

Employers should aim to closely monitor any director current accounts to establish if there is a reporting requirement. Many directors regularly use their current account for cash withdrawals and clear the outstanding balance prior to the accounts year-end by payment of a dividend. However, many employers do not realise that, even though the account has been cleared at year-end, a significant overdraft exceeding £10,000 during the year could lead to a benefit in kind reporting obligation. 

Temporary subsistence rules

Care should be taken when employees are working away at a temporary location. Employers should monitor the 24-month rule for travel and subsistence costs under temporary workplace rules. If it is known from the outset that the assignment will exceed 24 months, the payments will be taxable from day one, or if it becomes apparent during the course of the secondment tax should be applied from that date. 

Many employers will choose to place employees in rental accommodation rather than a hotel. This can cause issues for tax, especially if the amounts involved exceed £2,500 per annum.  HMRC requires the employee to complete a tax return to disclose the benefit and then make a contra-business expense claim to negate the benefit. 

Off-payroll working

Any gross payments made to individuals working off-payroll should be treated with caution. Payments to an individual who claims to be self-employed should be scrutinised to determine the status based on the tests such as control, integration, substitution and financial risk, and you should ensure that a contract of service does not apply to make the arrangement one of employment. 

However, if the individual is operating through the intermediary of a personal service company (PSC) and provides services to an engager in the private sector, the risk lies mainly with the PSC rather than the engager, at present. From April 2017, for PSCs operating in the public sector, the burden of responsibility rests clearly with the engager making the payment to the PSC. The roll-out of this legislation to businesses in the private sector will take place on 6 April 2020. It is worth pointing out that the PSC will be taxed as an employee but will not benefit from any employment rights. 

In advance of the new rules to come into effect on 6 April 2020, employers should review all engagements with PSCs. HMRC have introduced a new interactive tool called CEST (check employment status tool) to assist with this review. All payments made outside payroll should be reviewed on an individual case by case basis. This presents a risk for employers and potentially increased costs with the employer’s NICs. 

The new tax year brings a fresh opportunity to review all employment tax reporting obligations and the systems in place to ensure you are fully compliant with HMRC.

Happy new tax year!
Renee Dawson is Tax Senior Manager at BDO Northern Ireland.