To this day, there are still some employers who do not have a PAYE Settlement Agreement (PSA), and some don't even know what one is. This is worrying as we believe that EVERY employer, other than the very smallest of businesses, should have a PSA in place every year and, given that we are bang in the middle of P11D and PSA 'season', now is as good a time as any to do an overview of PSAs.

What is a PAYE Settlement Agreement?

Basically it is an agreement with HMRC that allows the employer to:

  • Report certain taxable employee benefits or payments separately, i.e. not on form P11D
  • Settle the tax and NI on such benefits and payments on behalf of employees

Why would an employer want or need a PAYE Settlement Agreement?

There are many reasons why employers would use a PSA. The most common ones being:

  • The employer does not want the employee to suffer a tax charge on the item or payment given or it would be highly inappropriate for this to happen. This is often the case where the item or payment is a gift or as a mark of achievement
  • A tax charge arising is unexpected but the employer has agreed to bear the cost e.g. where there are genuine business reasons for the taxable payment arising
  • Where something is paid or provided to a number of employees and it would be difficult and more time consuming for separate figures to be reported on each employee's form P11D

Advantages and disadvantages of a PAYE Settlement Agreement

It is generally accepted by employers and HMRC (more on HMRC's view later) that a PSA is a good thing to have in place and we certainly encourage all of our clients and contacts to have one. But, as with most things in life, there are both positives and negatives with PSAs which we can summarise as follows:

 

Pros Cons
  • Reduced admin
In comparison to identifying and reporting individual items on forms P11D
  • Cost
This is the biggest disadvantage due to the grossing-up of payments (the payment of tax for employees is a benefit in itself). In many cases the cost to the employer of providing the item to the employee is nearly doubled or worse when the tax and NI is taken into account (see example below)
  • Control and flexibility
A PSA gives the employer more options on how to manage the tax burden on employee benefits compared to the rigid P11D regime
  • Increase in year-end diligence
It is vital that all PSA items are captured for reporting purposes at year-end and therefore additional procedures around nominal codes and analysis may be needed to split out items from P11Ds
  • Staff welfare
Paying the tax cost on behalf of employees where it is appropriate can help employers avoid situations where staff are unhappy or ungrateful
 
  • HMRC
Having a PSA in place is usually a sign to HMRC that the employer is taking PAYE compliance seriously which can help with the overall tax  'risk rating'
 

 

Example calculation (assuming 2011/12 rates of NI)

Employer provides £10,000 of taxable benefits to employees, all of whom are 40% taxpayers.

Tax normally due (£10,000 x 40%) = £4,000

Grossed-up tax for PSA (£4,000 x 100/60) = £6,666

Class 1B NI due on benefit (£10,000 x 13.8%) = £1,380

Class 1B NI due on grossed-up tax (£6,666 x 13.8%) = £920

 

Total tax/NI payable by employer (£6,666 & £1,380 & £920) = £8,966

i.e. an extra 90% on top of the benefit provided in the first place.

 

What can be included in a PAYE Settlement Agreement?

HMRC's formal guidance states that the only items that can be included within a PSA are:

  • Minor items, i.e. those of a low value
  • Irregular items, i.e. typically one-off situations where taxable items are provided (one example they give is relocation expenses over the tax-free limit of £8,000)
  • Where it is impracticable to operate PAYE or to determine a value per employee where the benefit or cost is shared

In our experience, a commonsense approach usually works with this. There may be occasions where the item doesn't strictly fall within any of the three categories but as long as the rules are not being blatantly flouted, and that the employer doesn't make a habit of putting things in that shouldn't normally be allowed, HMRC are usually quite happy to agree to the settlement.

What is normally excluded from a PAYE Settlement Agreement?

Basically the opposite of the last paragraph, i.e. anything which is provided regularly or is of a significant value or where there is no reason why the cost cannot be declared on individual P11D forms.

Some examples of what would NOT normally be allowed within a PSA include:

  • Company car (regular and substantial)
  • Ordinary commuting costs (regular and could also be substantial)
  • Cash payments including round sum allowances (will apply to specific individuals and PAYE must be operated)

That said, however, it IS sometimes possible to slip some of these through depending on circumstances, the business case for doing so, the attitude of the local Inspector and, of course, your advisor's negotiating skills!! For our part we have had some good agreements for our clients which have included items such as company car, company car fuel, private travel and private accommodation costs, many of which have been for substantial amounts and all of which would not normally fall within the definition of allowable items.

How it works

Unlike a P11D Dispensation which lasts indefinitely, a PSA is an annual agreement and must be applied for and agreed each year with HMRC.

There are four basic stages to entering into a PSA:

  1. The employer makes a request to HMRC to include specific items within the PSA for the year. This can be done at any time but no later than 6 July following the end of the relevant tax year. The sooner the better is our view, even before the tax year begins, as timing can have an impact on the NI position in certain cases e.g. for items that normally attract a Class 1 NI charge (e.g. vouchers). Class 1 NI continues to be payable through payroll if the PSA was not in place before the item was provided. Clearly this is a disadvantage as it is only Class1B NI that is payable via a PSA which is an employer only charge.
  2. A formal agreement is issued by HMRC confirming the items within the PSA
  3. The employer submits the PSA calculations to HMRC for agreement. This is usually done in either July or August to give HMRC sufficient time to agree the figures before the payment date.
  4. The employer submits the agreed tax and NI payment to HMRC by the due date of 19 October (or 22 if paying electronically)

HMRC's view

HMRC love PSAs !! For the simple reason that they are getting their money on taxable employee payments much earlier than they would do via the P11D route. More importantly, they are also getting more money as everything is paid on a grossed-up basis by the employer.

Which is why most PAYE Inspectors will fully support a PSA application. Although, as we have said above, there are certain limits to what can be agreed within PSAs and of course there still remains a pedantic element within HMRC that can make life difficult at times even where there is a clear advantage to HMRC in putting things in the PSA.

One point which we always like to make on this is that HMRC EXPECTS employers to have a PSA in place each year as it is very unusual nowadays for employers not to provide ANY taxable employee payments or benefits despite many not declaring any such items on forms P11D. It is absolutely true in our experience that the lack of a PSA is usually questioned by HMRC and can in fact be (one of) the triggers for a more thorough review of the employer's PAYE records.

Conclusion

We know PSAs can be expensive but there is no getting away from the fact that they are incredibly useful tools for the modern employer to be more flexible around employee payments, reduce year-end pain and in keeping employees happy.

For those employers who fear an HMRC audit just for applying for a PSA for the first time despite being in business for many years we would say that there is a bigger risk of a PAYE Employer Compliance Review by continuing to operate without a PSA.

If you don't have a PSA already, please do get in touch with us. NOW is the time to do something about it before it's too late for 2010/11. It is also an ideal time for getting the 2011/12 one in place at the same time.

 

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