As mentioned in the Autumn Budget, the Government has opened a consultation into a possible extension of the rules that currently apply to “off-payroll” workers in the public sector to the private sector. This consultation is being undertaken at the same time as the consultation into employment status.
The IR35 rules introduced in 2000 are intended to ensure that people working through a Personal Service Company (PSC) who would have been employees if they had been engaged directly, pay broadly the same Income Tax and National Insurance Contributions (NICs) as if they were employed. However, it is estimated by HMRC that only 10% of individuals working in this way apply the rules properly, costing the Exchequer hundreds of millions of pounds in lost tax revenues every year.
In April 2017, the Government reformed the rules for engagements in the public sector, and early indications are that this has resulted in an increase in public sector compliance. The April 2017 change requires the public sector body or agency, not the worker, to decide whether or not the IR35 rules apply and then deduct income tax and national insurance from payments to the worker.
There are however concerns that many of such workers are being treated as quasi-employees incorrectly. The consultation document states that there is evidence that some public authorities did have difficulties implementing the reform, both understanding the new rules and resolving disputes with contractors. HMRC have introduced the Check Employment Status for Tax service (CEST) software on their website to assist employers in reviewing workers’ contracts.
As well as the possible extension of the rules that currently apply to the public sector, the consultation is requesting views on other options.
One alternative would be to require engagers to carry out due diligence into labour providers in their supply chain to ensure that they are compliant with employment and tax laws. This is already a requirement for gangmasters and other labour providers.
One suggestion apparently rejected was to create a new corporate structure referred to as a “freelance limited company” that would offer a simplified tax treatment, limited liability, a restriction on the frequency of dividend payments, and a requirement for the worker to be paid a minimum salary.
Another proposal rejected was to introduce a flat-rate withholding tax, similar to the Construction Industry Scheme for off-payroll engagements.
The consultation period ends in August and it is anticipated that the Chancellor will make an announcement about future proposals in the Autumn Budget.
Last month, we reported that the Enterprise Management Incentives (EMI) share option scheme lost its EU State Aid approval on 6 April 2018. The consequence of loss of approval being that the tax advantages of such options was temporarily withdrawn.
On 16 May 2018 the European Commission gave formal state aid approval to EMI. Qualifying companies can now resume awarding EMI options to attract and retain employees.
There are considerable tax advantages for employees and employers of introducing a tax advantaged share incentive scheme.
Please contact us if you would like to consider introducing a share incentive scheme for your employees.
HMRC have confirmed that no further MTD for business changes will be brought in before 2020 at the earliest.
The Treasury set out its revised priorities for current digital transformation projects, to make room for the additional demands on its resources of work to upgrade customs systems in preparation for Brexit.
The HMRC statement notes that the convergence of business taxes from the current range of IT systems onto a single system will now happen at a slower pace. This will slow the creation of the single account for all business customers.
For individuals, the introduction of further digital services will be delayed, with progress on simple assessments and real time tax code changes put on hold for the time being.
Note that the introduction of VAT reporting under MTD is still scheduled to commence in April 2019 for those VAT registered businesses with turnover over the £85,000 VAT registration threshold.
The Office of Tax Simplification (OTS) have been tasked with carrying out a review of Inheritance Tax (IHT) with a view to simplifying how the tax operates. IHT is perceived to be complicated and currently yields a relatively small amount of tax compared to income tax and national insurance.
There are a number of reliefs and exemptions currently available which may be withdrawn or simplified as a result of the review. Major changes to the tax are probably a year or so away and we will keep you updated as the review progresses. It may be necessary to review your Will and plans for passing on your business and estate when we see any new rules.
Care is always required when employees are made redundant or payments are made on the termination of employment. Not only are there employment law considerations, there are also important tax implications and this is an area where professional advice is strongly recommended to avoid unnecessary pitfalls. The tax treatment of these payments changed from 6 April 2018 and further changes come into effect in 2019.
Pay In Lieu of Notice
Employers now need to pay Income Tax and Class 1 National Insurance Contributions (NICs) on an element of all termination payments from 6 April 2018, whether or not they are contractual payments. The element that is now chargeable to Income Tax and NICs is the amount of the termination payment that represents payment in lieu of notice (PILON), sometimes referred to as “garden leave”.
The first £30,000 of genuine ex-gratia continues to be exempt from income tax and national insurance. The £30,000 limit includes statutory redundancy payments. Payments in excess of £30,000 are taxed as employment but there is currently no NIC on such payments. It was originally proposed that employers’ NIC would be applied to such payments from 6 April 2018 but the delayed introduction of the National Insurance Contributions Bill means that employer NICs on termination payments above £30,000 will now take effect from 6 April 2019.
Periods of Foreign service
In addition, foreign service relief on termination payments was removed for all UK residents – apart from seafarers – from 6 April 2018. Previously, this provided a further exemption from income tax and NIC depending on the period of time working abroad.
UK residents whose employment ends after 6 April 2018 who receive a payment or benefit in connection with that termination made after 13 September 2017, will not now be eligible for tax relief for any period of foreign service as part of that job.
HMRC have advised companies to consider delaying the grant of Enterprise Management Incentive (“EMI”) share options until fresh State Aid approval has been granted by the EU.
As the UK Government were late in applying for an extension (12 months’ notice is required) the existing approval expired on 6 April 2018 and EMI share options granted after that date before new approval is received may be treated as non-tax advantaged employment-related securities options.
The EMI share option scheme introduced in 2000 was the most tax efficient scheme to attract and retain key staff, providing employees in receipt of qualifying options with significant tax advantages.
Depending upon the price paid by the employee for their shares on exercise of EMI options, the receipt and subsequent sale of the shares is subject to capital gains tax at just 10% instead of PAYE and NIC.
We are expecting the scheme to be re-approved under the State Aid rules and we will let you know when this happens.
Employers need to report all Benefits in Kind (BiKs), including those under the Optional Remuneration Arrangements (OpRAs) or “salary sacrifice” arrangements, to HMRC on form P11D from 6 April 2018, unless they are registered to voluntarily payroll benefits.
OpRAs are where an employee gives up the right to an amount of earnings in return for a Benefit in Kind (BiK) and includes flexible benefit packages with a cash option, cash allowances and salary sacrifice. All BiKs are now valued at the higher of the cash given up or the value of the BiK. Many previously non-taxable BiKs are now taxable, valued on the cash given up.
Note however that cars with emissions of 75g CO2 / km or less, pensions, pension advice, childcare and Cycle to Work benefits are unaffected.
Subject to a few specific exceptions, arrangements entered into on or before 5 April 2017 kept their previous tax treatment until the earlier of a renewal or variation of the arrangement. Such arrangements moved into the new rules on 6 April 2018.