The problem with voluntary payments from your employer a la Harry Redknapp

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The problem with voluntary payments from your employer a la Harry Redknapp

February 01, 2012 2012

We are not sure what the eventual outcome of the Harry Redknapp tax case is going to be but yesterday's reporting that Milan Mandaric is suggesting that the £188k payments into Harry's Monaco bank account was a "voluntary thanks without contract" certainly gives us the feeling that HMRC are likely to win this one based on past experience.

We should say that voluntary payments from a current or ex employer is nothing new, it is quite a common scenario especially in small family owned businesses where an employee might be very close friends with the owners and basically part of the furniture. Such payments are often badged up as "ex gratia" when the employee leaves which, in our opinion, is like a red rag to a bull for HMRC as the term often hides a multitude of sins.

So what is the problem with an employer giving a personal, non contractual, gift to a current or former employee ?

The issue lies with section 62 of Income Tax (Earnings and Pensions) Act 2003 which is the main charging provision for salary related employment income. The definition of employment earnings under this legislation is extremely far reaching - as well as the expected reference to salary, wages or fees, it also covers "any gratuity or other profit or incidental benefit of any kind" and also "anything else that constitutes an emolument of the employment". Basically what this means is that ANY payment made to an employee is potentially taxed as earnings of employment even if this is argued to be paid outside of the employment relationship. This applies to payments in respect of current, past or future employments.

Whenever HMRC are presented with situations where the employer has made a payment to an employee and is claiming that it is voluntary or "ex gratia", HMRC's default position is to say that the payment is earnings as defined by s.62. They usually claim that, despite best intentions by the employer to make an "extra" payment to the employee he is/was not entitled to, or as a personal gift, the employee would never have received such a payment if he had not been an employee of the business and it must therefore be a payment "by reason of the employment".

HMRC's stance does not change even if the payment comes direct from an individual's own money, e.g. a director or owner of the business. As far as they are concerned, it is still a payment arising from the employment.

Of course, such situations can always be challenged - after all, HMRC is not always right. But it has to be said that it is very, very difficult to overturn HMRC's views on voluntary payments and so PAYE (and NI) is likely to be due in most cases of this nature.

So, coming back to Harry, this could well be the tactic HMRC employ to secure a win. But should Harry be too concerned ? In normal circumstances, if PAYE is not deducted from a payment when it should have been, it is the EMPLOYER who has failed to comply with the law and so it is the EMPLOYER who has to settle all unpaid taxes and face the penalties etc. So, Milan Mandaric/Portsmouth FC would be the ones in trouble in this case. The water is certainly a lot muddier though if there is any collusion between the employer and employee so we are sure there is more to come on this before the final whistle is blown and it could well be that both parties are found guilty of something.

Reed Employment Agency loses salary sacrifice tax case costing £158m

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Reed Employment Agency loses salary sacrifice tax case costing £158m

January 24, 2012 2012

It is certainly a welcome change reading a tax case that is not involving P35 or CIS late filing penalties, but we are glad that our analysis of the 92 page judgement of this case has now finished as it was pretty heavy going at times.

This is actually a very interesting case (to some of us at least !!) and is probably one of the best examples we will get of how NOT to do a salary sacrifice arrangement !!

What is the Reed case all about ?

Between 2001 and 2006, Reed paid travel allowances to its employed temps under salary sacrifice arrangements. It is estimated that nearly half a million workers received such payments during the 5 years totalling many, many millions of pounds.

Basically, the theory (we choose our words carefully here !) was that the temps' pay was reduced in return for a tax/NI free travel payment along the same lines as many other salary sacrifice schemes in place elsewhere for things like childcare vouchers, bikes, etc etc.

The reason for these arrangements was so that Reed and its employees could take advantage of the more generous tax reliefs around employee travel that were introduced in April 1998 (we remember it well !). This would not only save the employees and Reed money in terms of reduced PAYE and NI liabilities but Reed considered that it would also give them a cutting edge against other recruitment agencies by paying their temps higher than average rates.

The main gist of the case centres around two main points, 1) whether the arrangements could, in fact, be considered to be a genuine salary sacrifice and 2) whether the travel payments made were taxable or non taxable.


Why did HMRC win the case ?

Even although Reed did have tax advisors throughout the whole period the arrangements were in place, our overall view of this case it that it was a complete and utter shambles. And not just from Reed's side either - HMRC didn't exactly cover themselves in glory either missing some key issues that took them a number of years to realise which had a major part to play in getting the case to Tax Tribunal eventually.

There is a lot of information contained within the 92 page judgement and many points made around the arguments on both sides which we have no desire to repeat here. We can therefore summarise the main points that decided this case as follows

  • The Tribunal decided there was no genuine salary sacrifice in place
    • Most employees did not know the facts behind the "sacrifice" they were agreeing to. In fact, many telephoned HMRC to query their payslips as there was a lack of understanding of the arrangements and this actually contributed to HMRC looking more closely at the arrangements
    • The gross pay rates were the same whether an employee participated in the scheme or not as were the normal hourly rates quoted to employees and clients of Reed
    • Net pay increases were minimal to participating employees
    • There was no correlation between the employee's travel cost and the payment of travel allowances
    • There was no evidence that travel payments were actually made to employees
    • Most of the savings went to Reed the details of which were closely guarded secret from employees
    • There was potentially cases where National Minimum Wage limits were breached because of the arrangements (although no evidence of this was produced at the Tribunal)
    • Importantly, the contracts of employment did not include any provisions for a salary sacrifice arrangement involving travel costs
    • The payslips did not support the view that a salary sacrifice arrangement was in place
  • The Tribunal decided that the travel payments were taxable as earnings of the employment
    • Rather than being a salary sacrifice arrangement whereby pay is replaced by something else, in this case it was a matter of earnings being replaced by other earnings
    • Travel to the temps' place of work could not be considered to be to a Temporary Workplace as each job the temp did for Reed was a stand-alone assignment. The main point behind this argument was the lack of an overarching employment contract stating that the temp was continuously employed by Reed even between assignments.
  • HMRC were entitled to change their view
    • Although HMRC made some mistakes in their original review of the travel payment schemes introduced by Reed, the Tribunal agreed that they were correct, and legally entitled to, revise their view on the tax position given that Reed had provided HMRC with vague and incomplete information concerning the arrangements initially which undoubtedly mislead HMRC. Therefore Reed's argument that previous HMRC agreements (namely P11D Dispensations) should stand was not successful.


The lessons to be learnt ?

Clearly Reed, and its tax advisors, will have learnt some harsh lessons from this case although we should say that it may not be finished yet as there are some references in the judgement to the case possibly being appealed and referred to the Upper Tax Tribunal at a later date (even if, in our opinion, it is highly unlikely Reed will get any success there either).

But what can WE all learn from this case ?
    • As we have said many times before, great care is needed when doing salary sacrifice, especially for large scale schemes, as things CAN and OFTEN DO go wrong. Take proper advice !
    • Never communicate with HMRC other than on a full disclosure basis when seeking agreement on any arrangements. Agreements obtained where full information has not been passed on to HMRC are worthless and not reliable
    • Contract, contract, contract ! It's not the Be-All-And-End-All some advisors think it is but a robust and appropriate contract of employment can often go a long way in supporting the tax treatment of certain payments including salary sacrifice.
    • Be upfront with employees. Being vague or secretive could come back to bite you somewhere painful later on - as Reed found out to their cost !!
    • Be very careful when introducing "aggressive" or "dodgy" tax saving schemes. If it sounds too good to be true, it usually is !
    • Clients, please ensure that you are singing from the same "hymn sheet" when dealing with external agencies/bodies/authorities. One of Reed's downfall regarding overarching employment contracts was the fact that they had been arguing in Employment Tribunals for years that there was no such contract in place (to avoid expensive ongoing employment commitments to the employee). Telling HMRC something contrary to what is in the public domain is not helpful to say the least !!
    • And this one is for the tax advisors amongst us, if a client's arrangements seem "dodgy" or there is not enough information to understand the full implications then ASK, ASK, ASK until you are completely satisfied and comfortable with things. Having a good reputation in this game is worth far more than a chunky fee from the client !!
Recent changes to HMRC's Construction Industry Scheme and Employment Income manuals

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Recent changes to HMRC's Construction Industry Scheme and Employment Income manuals

January 06, 2012 2012

As helpful as it is that HMRC publicise when they have made changes to their internal technical manuals, the difficulty tax specialists like us face is in identifying exactly what has been changed/added/deleted as there is no option to be able to check with previous editions and the information provided by HMRC is vague to say the least. Even with a deep rooted knowledge of a specific manual it is virtually impossible to solve the "clues" left by HMRC !

Two of the main PAYE related manuals have been updated of late, the Employment Income Manual (EIM) just before Christmas and also the Construction Industry Scheme Reform manual (CISRM) on 4 January. In light of what we have said above, there is some uncertainty about some of the changes highlighted by HMRC but we have picked out the main highlights to share with you for now on what we think has changed:

EIM

  • A lot of amendments around Employer Funded Retirement Benefit Schemes although we cannot see much new within all the detail other than in relation to armed forces employees.
  • Further clarity around HMRC's expectations of employers in complying with P11D Dispensations, specifically in performing more "regular checks" internally where certain risk factors exist, e.g. such as the employer having little experience in monitoring expense payments, a poor history of compliance, the business being complex or there is a salary sacrifice scheme involved in the expense process

 

CISRM

  • A slight change to the definition of Mainstream Contractor (i.e. those businesses that have to apply CIS automatically) to bring some other organisations into the mix such as certain labour agencies and Local Authority owned Management Companies
  • Clarification that regular work of architects and surveyors are excluded from CIS
  • New guidance around CIS penalties when postal delays are used as the reason for late filing of returns. Basically HMRC will cancel any penalties the first time this excuse is used even if there is no evidence to support the claim by the taxpayer. However this will only be done in exceptional circumstances on any further cases by the same business.
  • New guidance on HMRC waiving penalties where there is clear evidence of no CIS activity over a period of months

 

So there you have it, our first blog of the new year and it's a techie, not very exciting one. Hopefully we're not starting the year as we mean to go on and that there will be more exciting news to blog about in the months ahead !!

Happy New Year !! Smile

Outstanding PAYE tax consultations going in to 2012

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Outstanding PAYE tax consultations going in to 2012

December 12, 2011 2011

We appreciate that there are far more exciting things than tax to be getting on with at this time of year but there is still a fair amount of tax thinking to be done by some of us before we can don the Christmas party hats.

It is fair to say that 2011 has been relatively interesting from a PAYE tax point of view (a slight contradiction many would say !), pretty fast moving at times and also confusing in parts as well. Much of the changes and confusion has been around the whole host of consultation documents published by HMRC in the last 12 months and so, in an attempt to try to move into 2012 with a "clean slate" so to speak we thought it would be useful for some of our readers if we touched on the consultations which are still live at the moment and any ones that, although have officially closed, are perhaps not off the radar quite yet.

Live Consultations

 

Consultation Closing Date Details

PAYE Pooling

15 December 2011

This is a proposal to allow employers the option of merging separate payrolls into one PAYE scheme with the aim of simplifying end-of-year reporting to HMRC e.g. on payroll payments, benefits-in-kind etc.

We said at the time the consultation document was published that HMRC appear to making a mountain out of a molehill with this as there does not seem to be much call by employers for such a solution and we have heard absolutely nothing from our clients and contacts over the last couple of months that have made us change our minds on this.

We think this one will just fizzle out in due course so nothing much to worry about in our humble opinion

Lecturers, Teachers, Instructors or those in a similar capacity

06 January 2012

This relates to whether such professionals should be treated as employed or self employed for National Insurance purposes and is a strange one to say the least.

First of all, legislation has been in place for years classifying certain teachers and the like as employees for NI even if for tax they are self employed, thus allowing HMRC to collect more in NI from both the employer and employee. Then there was an initial consultation 2 years ago suggesting that non academic tutors and the like should also be brought into the employed earners net to be consistent with other teachers, i.e. to bring in more NI for the Exchequer.

However, this latest consultation is going the other way and suggesting that the NI rules should mirror the tax rules in that if a teacher or lecturer etc qualifies as self employed for tax then they should be treated the same for NI. This is a major shift from what we had before and HMRC has actually pre-empted the consultation process by withdrawing their previous guidance on the NI position. Very strange indeed.

This consultation clearly only affects a certain type of worker of hiring organisation but it is one of those consultations that will surely have a happy ending for many

 

Improving the Operation of PAYE: Collecting Real Time Information

09 January 2012

This consultation is much further down the line than the others and is actually the third and probably final stage of the process. As a result, RTI is certainly going to be introduced and will start to be phased in after 6 April 2012 with the aim that all employers will be using RTI by 6 October 2013. Just to recap, RTI is all about how employers provide payroll data to HMRC and how this then interacts with tax codes, etc. The intention is that RTI will resolve most of the timing issues around tax codes that we have at the moment which will effectively happen through employers submitting data electonically to HMRC in "Real Time", i,e, every month instead of after the tax year has ended. Another key point is that such a system should hopefully significantly reduce admin for all concerned.

This latest consultation document is basically crossing the t's and dotting the i's in how RTI is going to work and what the legislation is going to look like which is being run in conjunction with ongoing discussions HMRC is having with key employers and industry groups.

All in all, we do believe that RTI will be a positive step for employers, employees and HMRC although we do think that more thought is needed around some of the practicalities involved which is hopefully what will come from this latest phase of discussions.

 

Closed (for now) consultations to be mindful of

The two main ones we feel it is right to mention are

1) The Integration of Tax and National Insurance legislation

This consultation closed in September this year but a Next Steps document published last month with the findings of the consultation made it clear that, despite aligning NI legislation with tax possibly being one of the hardest things for our Government to tackle, there is a real impetus forming in ensuring that this will ultimately happen, helped a great deal by some excellent input from the Office of Tax Simplification.

The Next Steps document outlines a 5 year plan with legislative changes potentially coming in to effect some time in 2017. So, whilst there is nothing doing on this right at this moment we do hope that we will see more action happening around this in 2012.

2) False Self Employment In Construction: Taxation of Workers

We make no apologies for keep on bringing this consultation up (although in fairness we haven't mentioned it much since our blog posting of 13 January 2011).

There has been absolutely nothing said or published on this one since March 2010. Believe us though when we keep on saying that this has not actually died a death. We genuinely think it is more a case of HMRC biding their time in bringing this back on to the table, probably after the 2012 Olympics as we have suggested previously.

If, or rather more likely WHEN, this consultation does come back we will ensure you are all updated as there could be huge implications for many businesses if HMRC's original wishes are granted in how self employed workers are taxed going forward.

 

 

Boutique v big firm for tax advice

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Boutique v big firm for tax advice

November 30, 2011 2011

In the absence of any PAYE "action" from yesterday's Autumn Statement we turn our attention to a non tax technical issue which crops up on a regular basis when talking to prospective clients.

We often have to talk through with employers what we can offer as employment tax advisors compared to a Big 4 or other large accountancy firm. Probably even more so, we are also faced with situations where an employer is already using a Big 4/ large firm already and cannot see any benefit in hiving off PAYE related advice to a firm such as Optimum PAYE.

With the benefit of experience on both sides we hope that the following summary provides a completely sensible and unbiased comparison of what each party can bring to the table, obviously with a particular focus on employment tax advice.

 

What client is looking for The perception The reality
Specialist knowledge on subject matter Big firm = more expertise There is usually not much between the two, with both sides able to offer a high degree of specialist knowledge. Of course, there are exceptions i.e. a small firm talking up their credentials without any substance or a non specialist team in a big firm (e.g. audit) dabbling with an issue on "their client" rather than passing it to their colleagues in the appropriate tax team. By and large though both sides should be able to meet this criteria.
Specialist knowledge on subject matter PLUS access to specialists on related matters. In the context of employment tax, an example could be tax expertise in overseas jurisdictions if the issue is cross border not just UK Only the big firms can offer this type of service, the boutiques do not have strength in depth Generally, it is fair to say that the largest firms (i.e. Big 4) are best placed to advise on complex, multi disciplinary tax issues such as those involving tax regimes in other countries for the simple reason that these firms have the necessary resources in place to meet the client's needs. However, in many situations, it could well be that the boutique firm has partnering arrangements in place to be able to expand their specialist knowledge to related matters. In the example we give here of overseas employment tax issues, Optimum PAYE does have resources in place to meet this need when required and we know of other tax boutiques who have varied partnering arrangements in place for their own business.
An all inclusive service e.g. not just tax but audit, corporate finance, pensions, consultancy, etc Only the big firms can offer this type of service We would say this will be true in all cases. The tax boutiques, and certainly Optimum PAYE, are not in the market of being all things to all men.
Kudos (of being advised by a top firm) This can only be offered by one of the top firms Again, we would say that if kudos is what the client is after then the Big 4 are probably best placed to tick this box. However, what we would say is that kudos is often overplayed and, when it comes down to providing best advice and negotiating settlements with HMRC, kudos doesn't usually count for much. We think some executive boards need to take a step into the 21st century to understand that there should be much more emphasis placed on other things, and less on kudos, when choosing a specialist advisor
An advisor with an excellent reputation Big firm = better reputation It is true that the Big 4/ largest firms are the best known in the marketplace and, by default, are seen to have the highest reputations. That is not to say, however, that the perception that boutiques are not as reputable is correct. Many boutiques have excellent reputations through their expert knowledge in a particular field or sector and there are many that would be able to rival their larger competitors for reputation on a like for like basis. We wouldn't dare to challenge the reputation of the largest accountancy firms which are excellent but you don't have to look too far in the press to realise that the largest, and "best" firms, can make mistakes the same as everyone else.
Sensible fees Boutique firm is slightly cheaper Boutique firms are nearly always MUCH cheaper than the big firms on fees. Despite the recession and clients' consultancy budgets being squeezed as tight as possible and only being available for absolute necessary issues, many of the biggest firms have not reduced their fee charges much from the hey days of a few years back when the economy was booming. Larger firms also have to accommodate the large team approach to doing work where one person does the work and one or two others at a more senior level review the work before it goes out the door. This usually means that there is a huge difference in fee structures between the large and boutique firms - a recent example for Optimum PAYE was a project we quoted for at £2.5k compared to £10k by one of the major players. We delivered for £2.5k and the client was perfectly happy - cheaper doesn't mean poorer quality in this context !
Generous insurance cover (for if things go wrong) Big firm = larger cover Whilst the standard level of professional indemnity insurance will generally be higher in the larger firms than in the boutique firms, the world is changing. The Big 4 and other large firms have been reducing their insurance exposure in recent years on client projects, significantly so in many cases. Therefore the gap in the level of cover nowadays between the large and small firms is negligible in many cases, especially where the work is one-off specialist tax projects. The level of insurance cover should NEVER be an issue in selecting an advisor, especially with a boutique firm who should have the flexibility, like we have, to increase/decrease the level of cover to suit each specific client (we can say this with some confidence even after a client asked us recently for £5m worth of cover for a project worth just a few thousand pounds)
A timely response Big firm = quicker/more efficient Again, we have no desire to knock the big firms as they usually provide an excellent service to clients. However, it is fair to say that boutique firms have a much better chance of getting back to the client with a speedy response than the larger firms, mostly due to the structure of their business. There may be one senior specialist within the boutique firm who is responsible for all matters on the client's affairs as this is their specialist area, who will provide the advice personally. Compare this to the larger firms who operate a pyramid structure with junior people doing the work and a myriad of senior personnel having to "see" or "sign-off" the advice before it gets to the client which can all take time. Of course in smaller teams there is more chance of delays if the senior specialist is busy with other things or not available but most boutique firms do have other resources available to avoid this ever becoming an issue.

So, there you have it. Despite being a boutique firm ourselves, we do believe that there is a place for all types of firms providing employment tax advice to employers with pros and cons on each side. From our point of view, there probably is still some work to do though in educating employers on some of the above points as we still get (too) many sticking to outdated views on why they remain with their big firm advisors despite moaning (to us) about their high fees.

 

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