From April onwards, several substantial changes will be introduced in the area of employment taxes. Employers should also be aware of areas that are not changing and remain under-explored, write Peter Burnside and Helen Norris.
From 6 April 2016, business expenses reimbursed to employees will no longer be reportable and dispensations will be abolished. The responsibility will be on the employer to implement a system that ensures the expenses incurred by employees are allowable business expenses and qualify for exempt status. In effect, the employer will need to self-assess.
There are many grey areas within the scope of Pay as You Earn (PAYE) and expenses, which might cause issues for small employers who do not have access to the required expertise.
It has been suggested that the changes will reduce the administrative burden on both employers and employees. However, the comfort arising from the protection of holding a dispensation will be lost. The new legislation makes the validation of all employee expense claims a statutory requirement for all employers, and it will be vital that employers ensure only confirmed business expenses are reimbursed as exempt from tax and national insurance contributions (NIC).
Set scale rates
Previous dispensations covered genuine business expenses but provided the employer correctly and completely disclosed all relevant facts to HMRC, they had legitimate expectation of protection against HMRC consequently changing its view. This safeguard has effectively been abolished, leaving the employer more exposed in the event of a visit from HMRC’s employer compliance team.
If an employer wishes to pay a set scale rate, two options are available. If they require a bespoke rate of payment, they will need to obtain approval from HMRC. They can, however, pay the new rates set by HMRC without the need for formal approval provided this is in relation to meals purchased by the employee in the course of qualifying travel. It will also be necessary for employers to have a system in place to check that employees have incurred expenditure prior to making a scale rate reimbursement.
Where a bespoke rate had been agreed after 5 April 2011, it can continue until the fifth anniversary of the original agreement.
Temporary workplaces
While the reimbursement of expenses in respect of ordinary commuting is always going to be fully taxable, special consideration should be given when dealing with reimbursement of expenses to employees who are attending a temporary workplace.
The Income Tax (Earning and Pensions) Act (ITEPA) considers a workplace to be temporary provided its duration at the outset is intended to be no more than 24 months and the secondment is part of the duties of continuing employment. If attendance at a temporary workplace exceeds 24 months, the relief may still apply provided it accounts for less than 40% of the employee’s working time.
Payrolling benefits-in-kind
It is currently possible to payroll benefits-in-kind, but they must still be reported on Form P11D. If you payroll benefits and expenses on or after 6 April 2016, you must complete HMRC’s online registration for ‘Payrolling Benefits-in-Kind’ (PBIK). This will remove the requirement to report using Form P11D. The only excluded benefits are living accommodation, interest-free and low-interest loans, vouchers and credit cards.
The tax due in respect of benefits and expenses is collected by adding a notional value to the employee’s taxable pay based on the cash equivalent of the benefit. The cash equivalent should be calculated using the normal method used when preparing Form P11D, and should then be divided by the total number of payments to be made. The tax due should be calculated as normal using the issued tax code. Once you have registered under PBIK, HMRC will automatically identify employees who have the selected benefits or expenses included within their tax code, remove these restrictions and issue an amended code.
It should be noted that if benefits and expenses are payrolled, it will still be necessary to complete and submit a Form P11D(b) annually by 6 July including any payrolled amounts. If you plan to payroll benefits and expenses for the 2016/17 tax year, you must register by 5 April 2016.
PAYE settlement agreements
Staff entertainment benefits form an annual tax exemption in respect of annual functions, which are open to all staff provided the cost per head does not exceed £150 inclusive of VAT. This is an exemption as opposed to an allowance, so any event in excess of the £150 exemption will be fully taxable upon the employees in attendance as a benefit-in-kind.
It may be considered that awarding employees with a tax liability in respect of their Christmas party negates any goodwill and, as such, PAYE settlement agreements (PSAs) are widely used to allow employers to foot this bill. Employers must renew their PSA each year by 6 July following the end of the tax year. If they are approved by HMRC before the commencement of the new tax year, however, there is much greater scope for inclusion.
Expatriate employees
European Union (EU) citizens have the right to live and work in any country within the EU. Under European Community rules, the policy ensures that employees remain a part of a single social security system and do not lose their rights when moving between member states. The general rule is that you pay social security contributions in the country in which you work, even if you are resident in another member state.
This is an area of particular interest for cross-border workers who reside in one member state but work in another, and also for those whose duties are split between two or more EU countries. The latter is becoming increasingly common in the current climate.
For these individuals whose duties are split, or who are temporarily posted to work in another member state (generally limited from the outset to a maximum of 24 months), it may be possible to apply for an A1 Certificate of Coverage from their local revenue authority so that they pay their social security fully in their home country. This would mean that all social security contributions could remain in the employee’s home country and none would be due in the other member state. An A1 Certificate is generally issued for a maximum period of two years and the length of potential coverage will vary depending upon the countries involved, but can be extended for a period of up to five years.
It is not possible to simply opt to pay your social security in your home country while working in another member state. To make an application for an A1 Certificate, it is necessary to carry out a substantial part of your activities in that country. ‘Substantial’ is generally considered in this context to be 25% and consideration should be given to working time and/or remuneration, although other relevant criteria should also be considered. Indeed, the complexities of each individual scenario should be considered to ensure the optimum outcome for both employees and employers.
Scottish Rate of Income Tax
The Scottish Rate of Income Tax will be introduced from 6 April 2016, with Scottish taxpayers ultimately paying a proportion of their income tax to the Scottish government. The rate will remain the same as the rest of the UK for 2016/17. HMRC is currently corresponding with taxpayers who live in Scotland to ensure that the address held is correct. From 6 April 2016, taxpayers living in Scotland will be issued with a tax code beginning with the letter ‘S’. While employers will need to implement these tax codes, no changes will be required to the normal methods of payroll reporting or paying HMRC. Overall, the new rules aim to promote simplification but the reality will be more bureaucracy for employers. Furthermore, the self-policing of expenses could lead to more scope for errors.
Peter Burnside is Managing Partner at BDO Northern Ireland. Helen Norris is a member of the Tax Management team at BDO Northern Ireland.