We return to the subject of salary sacrifice for this month's article, this time focusing on the often overlooked but absolutely vital area of HMRC agreement or approval of the arrangements.

 

General Points about HMRC "approval" of salary sacrifice.

We hear a lot of nonsense said about tax clearance of salary sacrifice schemes, often from people or organisations who should, frankly, know better. So let's start with some general FACTS to hopefully dispel some of the stupid myths and inaccuracies that is often said around this.

  1. Obtaining HMRC agreement to a salary sacrifice arrangement is NOT mandatory. However, it is a very brave (naive ??) employer who doesn't get 'sign-off' on the tax and NI treatment as schemes that are not setup properly, or that may trigger tax charges through inefficient or incorrect procedures, could leave the employer with very significant costs to pay to HMRC not to mention the hassle and embarrassment of having to change or even close down the scheme. It is for this reason that we ALWAYS recommend a formal agreement is obtained from HMRC for ALL salary sacrifice schemes, no matter the size or complexity.
  2. HMRC will not consider a salary sacrifice arrangement before it goes live so it is a waste of time and effort writing to them before anything happens. A few years ago, i.e. when salary sacrifice was not so widely understood by HMRC, it maybe did help having a friendly word in advance to "tee" them up but nowadays any correspondence with HMRC should be left until the scheme is operational and there is documentation to evidence how it all works.
  3. There is NO blanket agreement for ANY salary sacrifice scheme or provider. HMRC NEVER issues blanket agreements like this as every salary sacrifice arrangement is considered on its own merits even if the arrangements are similar to many others by the same employer or provider. Any benefit provider or consultant who says their standard scheme is "approved" by HMRC is talking rubbish !!

Payslips

There is a tendency by many employers to place too much emphasis on what the payslips say and look like when implementing a salary sacrifice arrangement. Often the payslips and payroll entries are the ONLY focus which, you may gather from our tone, is ill-advised.

Yes, there are some important "do's" and "don'ts" to remember when implementing payroll changes to accommodate salary sacrifice, such as avoiding the description of "deduction" for the salary sacrifice payment by the employee - it's not, it's a "reduction" (to contractual pay) which is a very important distinction for tax purposes. Also, making sure that the tax/NI calculations are accurate and that all the figures tie up with what they're supposed to.

It was true that in the early days, i.e. maybe 10 years or so ago, the payslip was one of the key elements of approval being granted by HMRC. In other words, if the payslip was inaccurate or vague, then HMRC might have suggested that the salary sacrifice scheme failed entirely.

However, this is not the case now and hasn't been for a few years. HMRC accepts that, even where the payslip is not entirely satisfactory in terms of tax and NI and legality, they will agree the scheme provided other elements satisfy the conditions for a genuine salary sacrifice arrangement from a tax and employment law point of view. What this means in practice is that HMRC is far more interested in how the arrangements are set up contractually in deciding whether the scheme is legal and effective - see next section.

Contractual issues

The contractual side of any salary sacrifice arrangement is THE most single important area to get right. If errors are made on the legals, the whole scheme can collapse and this can also lead to the employer being heavily penalised through the tax system and/or by Employment Tribunal where tax or legal errors have been made.

Focusing on HMRC for now, it is vital that the employer can demonstrate the following:

  • There is a legally binding change to the employee's level of pay following participation in the salary sacrifice arrangement
  • The company is using the correct pay value for internal and external pay based matters (to support the view that pay has legally changed). Where shadow or notional pay forms part of the arrangements, HMRC will want to see that this is managed correctly and is not abused.
  • There is consistency across all employee related documentation in terms of terminology used for pay e.g. within the staff handbook, pension scheme, other benefit and staff reward documentation, etc. This is necessary to avoid HMRC picking "holes" in the notion that pay has legally changed.
  • There are firm restrictions in place preventing employees reverting back to "normal" pay arrangements other than in exceptional circumstances.

Often the emphasis by employers is on the salary sacrifice agreement form signed by the employee but as we have hopefully demonstrated, there is much more to consider than that. If any salary sacrifice scheme is going to be challenged by HMRC, the chances are that it is going to be around some of the above matters not being done correctly.

Approaching HMRC

We see many HMRC "agreements" that, to be honest, are not worth the paper they are written on. For the simple reason that HMRC's decision to agree the scheme is based on minimal information, such as a two page letter used by many benefit providers as part of their standard "toolkit", and therefore is not legally binding on HMRC should they uncover issues later on, e.g. as part of a wider PAYE review. Such agreements are normally worthless in our opinion as there is absolutely no way that HMRC can truly reach a conclusion on the effectiveness of the scheme without knowing the detail of how the arrangements work in practice.

Our recommendation is therefore ALWAYS to approach HMRC on a full disclosure basis to guarantee that any agreement that is issued by HMRC is robust and legally binding unless and until the details of the scheme change or legislation changes.

What do we mean by full disclosure ? Basically, telling HMRC as much as possible about the arrangements and providing them with ALL relevant documentation e.g.

  • Detailed description of the benefit(s) being offered, how it all operates, the considered tax and NI issues, etc etc
  • Scheme "rules" or handbook
  • Employee communication materials e.g. slides, flyers, emails, letters, etc
  • Before and after payslips for some participants
  • Signed contracts of employment and salary sacrifice "sign-up" forms for some participants
  • Outputs from any IT systems used to facilitate the participation in salary sacrifice
  • Any other documentation which is impacted by the salary sacrifice scheme such as staff handbook, flexible benefits scheme, pension entitlement, etc

This not only allows HMRC to form their views based on a deep understanding of how the salary sacrifice operates but it also avoids HMRC saying later on that "you didn't tell us this, or you didn't tell us that, and we are therefore changing our view of the entire scheme".

Corresponding with HMRC on a full disclosure basis may take more time and effort upfront but please believe us when we say it pays dividends in the long run.

Conclusion

It still disappoints us how little regard is often given to obtaining comprehensive and robust tax agreements on salary sacrifice schemes, the view of many being that it isn't really necessary or HMRC approval is a given.

We can say with experience that the opposite is true and it is absolutely recommended that every single employer has a solid agreement from HMRC on each and every salary sacrifice arrangement they offer to staff.

HMRC can, and usually do, pick holes in schemes that have not been formally agreed, or have but on a "quick and dirty" basis.

As ever, if you need any assistance with obtaining HMRC approval on new or established salary sacrifice schemes then do please get in touch with us.

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