In his first (and last!) Autumn Statement Philip Hammond focused on measures to support infrastructure and innovation. However, the continuing drive for simplification of the UK tax system and the battle against tax avoidance mean that the Autumn 2016 policy paper contained several announcements affecting employers, employees, partners and workers. Some of these have been well trailed, but some were unexpected if perhaps not surprising.
Employee Shareholder Shares (ESS)
ESS has been beset with controversy since its introduction in 2013 with a view to providing more flexible workforces. The very generous tax reliefs which participants received in exchange for relinquishing a bundle of employment rights meant that ESS plans became very popular but perhaps not with the groups for which the legislation was originally intended. This led to the introduction in the 2016 Budget of new limits providing a substantial reduction in the capital gains tax relief which in practice meant that using the arrangement for tax planning purposes was far less widespread. However in the Autumn Statement the tax relief was withdrawn in respect of ESS agreements entered into on or after 1 December 2016. This means that if a potential participant had not had independent advice in respect of their potential entering into of an ESS agreement before the Chancellor sat down, they would not be able to benefit from ESS relief.
In practice many companies used ESS where the benefits of Enterprise Management Incentive (EMI) schemes were not available to their employees due to their ownership structure. Since EMI is not available to companies under the control of another corporate body (including corporate trustees), many entrepreneurial businesses with PE or VC backing would not be able to use this tax advantaged way of incentivising employees by way of an equity stake in the business. Since ESS was not subject to the same restriction it was often used for the same commercial purpose. This unexpected measure will leave many companies needing to structure a share-based incentive without an upfront funding requirement which can render the incentive unattractive to the potential participants.
The tax treatment of termination payments has been in the news following a number of proposals for change included in HMRC consultations. The 2016 Budget included an announcement that the £30,000 exemption for termination payments will apply equally to income tax and NI – this means that from April 2018 the excess over £30,000 will no longer be NI-free. Historically where pay in lieu of notice was not contractual nor habitual it fell to be treated as a termination payment and potentially subject to the £30,000 exemption, but it had been proposed that any amounts that an employee might expect to receive if they had worked their notice period would now be subject to income tax (if their notice period was not worked). Therefore this potentially included bonus payments, commission etc and would be extremely hard to ascertain. The Autumn Statement included the very welcome news that this deemed taxable payment will be limited to basic pay which from April 2018 will be treated in the same way as a contractual PILON.
New rules will be introduced to phase out the perceived tax advantages of salary sacrifice arrangements. The policy statement suggests that this reform is to promote fairness and broaden the tax base. However what the Treasury appear to have lost sight of is the fact that the vast majority of salary sacrifice schemes (better known as "flexible benefit schemes") are introduced to enable employees to structure their benefits to best fit their personal circumstances: for example, a 24 year old woman with no children may want a very different set of benefits to a married man in his forties with two children at university, and their employer may not be able to afford to provide a package which includes all the benefits required to suit both their needs. A flexible benefit scheme allows them to spend an "allowance" on the benefits that form the package that fits their personal circumstances at no (or little) additional cost to the employer. Alternatively these arrangements are used to align benefit arrangements on mergers and acquisitions or to allow employees access to their employer's bulk buying power. Very few plans are designed with the primary aim of producing tax/NIC savings.
Changes in the law which result in these plans being more complex and expensive to operate will reduce cost effectiveness and agility in the way UK businesses can reward their employees. The element of good news is that arrangements in place before April 2017 will be protected until April 2018 and arrangements for cars, accommodation and school fees will be protected until April 2021. The reliefs for arrangements relating to pensions (including advice), childcare, Cycle to Work and ultra-low emission cars (ULECs) will not be removed. This will give employers some time to plan and communicate with their workforce.
Further action on disguised remuneration – the disguised remuneration rules are wide ranging and have been effective in closing down a large number of tax avoidance structures. The government is now proposing to extend them to the self-employed to similarly ensure that they pay their fair share of tax and NIC. Using such plans will also become less attractive for employers as tax relief for employers' contributions will be denied until tax and NIC are paid within a specified period. Finally advisers are also being targeted and will be subject to a new penalty if they enable another person or business to use a tax avoidance arrangement which is later defeated by HMRC – this last provision would seem to require a degree of "crystal ball gazing" and the resultant uncertainty will be unwelcome.
Partnership taxation – although not strictly part of the Government’s drive to tackle disguised remuneration, new rules relating to the taxation of partnerships were introduced in the Finance Act 2014 to ensure that members of LLPs who were more akin to employees than owners would be taxed as though employed (the "disguised employment" rules). A new consultation has been announced with a view to introducing legislation to ensure that profit allocations to partners are "fairly calculated". It will be interesting to see whether these new rules are aimed at further alignment of the taxation of members of LLPs with that of employees. Draft legislation will be published for consultation.
Benefits-in-kind and expenses
Legal support – from April 2017 legal support provided by employers to employees required to give evidence in court will no longer be taxable. This is a welcome change.
Valuation – a review is to be undertaken into the way benefits-in-kind are valued. A consultation on the valuation of living accommodation is to be issued and at the 2017 Budget there will be a call to evidence in respect of the valuation of all other benefits. It will be important that any responses consider how employers can practically apply new rules on valuation without requiring recourse to professional valuers as a matter of course.
The 2017 Budget will also include a call to evidence in respect of the use of income tax relief for business expenses including those not reimbursed by employers. Any removal of this relief would appear to be unfair.
Company car tax bands – in 2020/21 new lower bands will be introduced to encourage the use of ULECs as well as an increase of 1% for cars emitting more than 90g CO2/KM.
'Making good' on benefits-in-kind – where employees make a payment in return for a non-pay rolled benefit-in-kind, thereby reducing its taxable value, such payment must be made by 6 July following the end of the relevant tax year. This will apply from April 2017.
Private use of business assets – New legislation will be introduced to clarify that employees will only be taxed in relation to the period for which business assets are made available for their private use. This is most welcome.
Pay As You Earn (PAYE) and National Insurance (NI) compliance
Off-payroll working rules – as expected, where workers provide services to public sector bodies through service companies, it has been announced that the body paying the worker's company will be responsible for operating the off-payroll working rules and paying the correct tax.
Simplifying the PAYE Settlement Agreement (PSA) process – the process for applying for and agreeing PSAs is to be simplified as announced in the 2016 Budget. This welcome measure will take effect for the 2018/19 tax year onwards.
Alignment of the primary and secondary NI thresholds – from April 2017 both employees and employers will start to pay NI on weekly earnings above £157.
Class 2 NIC to be abolished from April 2018 – simplifying NI for the self-employed.
NI – what we didn’t see. What is surprising is that we did not see the introduction on an annual cumulative basis of calculating NIable earnings for employees generally – perhaps next time.
- Executive Tax
- Employment Tax