Salary sacrifice arrangements, when run correctly, are inexpensive motivation tools, but failure to follow the latest HMRC guidance can lead to some unexpected tax bills for both employer and employee says Elaine Gibson.
Salary Sacrifice (SS), you either loathe it or love it; however provision of benefits via an SS arrangement can be a powerful motivation and retention tool for employers.[1] The Institute of Payroll Professionals (IPP) has a wide range of members across a number of industry sectors and it is apparent that common themes for provision of SS are childcare vouchers (CCVs), cycles for work[2] and workplace canteens to name but a few. This is by no means an exhaustive list and so the aim of this article is to highlight imminent and pending changes to SS provision. So what do you need to be aware of? Below is a brief explanation of some of the main issues.
Childcare vouchers
There has been a lot of media interest surrounding the provision of CCVs, if we cast our minds back to 2009 the then Prime Minister, Gordon Brown, announced that tax relief was to be removed from the provision of CCVs. Employers and employer representatives were shocked by this announcement and so every effort was made to lobby against this decision. The IPP along with other interested stakeholders played an instrumental part in gaining the government’s ear, they listened to us and it was announced that tax relief would be restricted to those employees whose earnings fall within the basic rate of tax. It did not end there and in February 2010 Her Majesty’s Revenue and Customs (HMRC) produced a technical note (TN) which announced forthcoming changes.[3]
The TN announced a restriction to tax relief meaning that from April 2011, any employee entering into a CCV scheme will receive tax relief based on their level of earnings and as stated, those whose earnings fall within the basic rate of tax will receive the full tax relief; however for those who fall into the 40% and 50% tax bands will see their tax relief reduced. Also, included was the show stopper announcement that employers will need to estimate the employee earnings at the start of the tax year; however we have not yet received guidance explaining what the record keeping and reporting requirements are. Further guidance is due to be provided later in the summer.
Also, in the budget HMRC has confirmed that the term ‘available to all’ will be accepted even where employees cannot join the scheme due to NMW restrictions. Please note this only applies to CCVs!
Cycle to work schemes
HMRC has confirmed that no exemption exists where legislation prevents employees from joining the scheme, therefore not deemed to be ‘available to all’. This means that, if not all employees can partake in the salary sacrifice (SS) scheme it will not be deemed available to all by HMRC. However one of the restrictions for employers was in respect of those employees under the age of 18 years who are not permitted to sign a credit agreement. In order to facilitate the scheme the Office of Fair Trading (OFT) has issued a group consumer credit licence designed to cover employers setting up Cycle to Work (CTW) schemes so that employers need not apply individually for credit licences for this purpose. Employers will be covered by the group licence as long as they are undertaking the activities within its terms.
If you currently run a CTW scheme and think that you may be in breach of the benefit rules please note that any schemes entered into before 18 December 2009 are permitted to run their course; however schemes commencing after that time must satisfy the available to all rule. Those that do not satisfy the rule will be subject to P11D reporting. Revised guidance has been published by HMRC[4] . This includes additional guidance on the ‘available to all’ rule. HMRC has updated the Employment Income Manual in respect of the above. It has now accepted that for those employees who are on zero hours, casual employment or are incapable of using a bike can be exempt and the employer would still be deemed to be making the scheme ‘available to all’.
Bus passes
A number of employers provide bus pass schemes under a salary sacrifice arrangement; however HMRC have reiterated the rules surrounding this provision. It has come to light that some employers provide bus passes for ad-hoc journeys; however that is not permitted under the benefit rules. The HMRC guidance[5] states:
‘In order for the tax exemption for subsidy of a public bus service to be available the employer must be providing support for a specific bus route or service to enable employees to travel to work, not just a bus pass that provides general subsidised travel’
Furthermore, bus pass agreements entered into by 18 December 2009 can continue without any amendment to scheme rules as long as the bus pass is valid for no longer than 12 months, effective from 6 April 2010 at the latest. Any renewals or new agreements after 18 December must meet the conditions of the exemption. Where the exemption is lost, the benefit will be taxable and subject to Class 1A NICs and reportable via the P11D.
Workplace canteens
From 6 April 2011 legislation will be introduced to restrict the exemption for the benefit of free or subsidised meals where an employee has an entitlement in conjunction with salary sacrifice or flexible benefits arrangements to employer provided free or subsidised meals. To clarify, the removal of the exemption applies to schemes in place on or before 6 April 2011.
To conclude, the above information provides an update on provision of key benefits via salary sacrifice (SS) and is just a snippet of information relating to changes that payroll and human resource professionals need to be aware of. Earlier in this article I mentioned the benefits that SS can bring for both employee and employer so as a final thought, have you considered use of SS for personal development for yourself and/or your team for example work related training, education and professional subscriptions?
Finally, it is the role of the IPP Policy team to keep up to date with those changes and we continually update our members via various mediums, one of which is a legislation planner. The legislation planner covers the above elements discussed in this article plus many other key topics that we payroll and HR professionals need to be aware of. The legislation planner can be viewed at this link.
[1] Although written over a year ago, Ken Gurr’s article, ‘What’s a little sacrifice’ in The People Bulletin, 2 July 2009, provides useful background to salary sacrifice arrangements. This article reflects current HMRC guidance.
[2] See ‘On your bike!’ by Richard Grigsby in The People Bulletin, 28 April 2009.
[3] www.hmrc.gov.uk/employers/employersupportedchildcare.pdf
[4] http://www.hmrc.gov.uk/manuals/eimanual/EIM21664.htm
[5] http://www.hmrc.gov.uk/manuals/eimanual/EIM21855.htm