News Items – at 6th August 2007

Employee Car Ownership Schemes

New tax and NICs guidance from HMRC

HMRC has published new detailed guidance on the taxation and NICs issues for cars provided under an Employee Car Ownership Scheme (ECOS).  It appears in a new section to the internal Employment Income Manual, most of which is available publicly on HMRC’s website.  The material is unusual in that it also covers the NICs implications of ECOS, not just the tax issues.

The following notes describe the key points from the new guidance.

Identifying an Employee Car Ownership Scheme
Although it may have a different name, an ECOS is a set of arrangements whereby employees acquire cars (1) from a specified, often single source, and (2) within a specified financing framework.  It is something more organised than the employer replacing a company car with a taxable car allowance.  That arrangement leaves it up to the employee to obtain a car and employer is not involved in the purchasing or financing arrangements in any way.

In contrast, an ECOS may be designed and administered by the employer, by a company within the same group as the employer, or by a third party that specialises in provision of alternative packages to the company car.  The objective of an ECOS is to give employees similar benefits to a company car, e.g. a new car on a regular basis, central organisation of insurance and servicing, in a way that means the car benefit provisions do not apply.

Avoiding the car benefit charge
To avoid the car benefit charge, one or more of the car benefit conditions must not apply. It is only possible to escape two of those conditions while still providing benefits similar to a company car, namely that the car is provided “by reason of the employment” and “without any transfer of the property in it”. As the employer is directly involved, the first condition cannot be avoided.  The second condition does not apply if ownership of the car in an ECOS is transferred to the employee at the outset.  This would be a key test for a tax inspector, in order to determine whether or not the car benefit charge does not apply. 

A tax inspector would require to see all of the documentation relating to the scheme.  HMRC will only form a definitive view of the tax or NICs consequences of a particular scheme if it is already in operation.  If new documents are disclosed later or existing documents are amended because the scheme has changed, any earlier agreements on the status of the scheme cannot be relied on.  HMRC’s guidance is also clear that, in the context of schemes managed by third parties, approval given to one employer’s scheme does not apply to an identical scheme operated by another employer.  The other employer has to obtain separate approval.

Tax and NICs consequences
If a car is subject to a car benefit charge, the only possible additional charges are for the provision of fuel and a chauffeur.  In contrast, if a car benefit charge is avoided under the rules of an ECOS, every individual transaction must be considered for both tax and NICs, for example

• any payments made in connection with the vehicle – see below
• the provision of any benefits in kind, such as vehicle excise duty, insurance, repairs and servicing – see below
• the price at which the vehicle is sold to the employee – under the rules relating to assets transferred to a director or employee
• the amount at which the employee can resell the car to the employer or provider (commonly referred to as the ‘guaranteed future value’) – under the rules relating to assets transferred at overvalue.

Payments made in connection with the vehicle
Liabilities for tax and NICs may arise in connection with the following payments that provide the employee with a benefit:

1. Money payments received by the employee in person – there are three kinds:
   • Payments made in respect of mileage expenses of business travel, such as a flat rate per business mile, fall within the “mileage allowance payments” (MAPs) rules.
   • Payments made in respect of the use of the vehicle, including private use, e.g. toll and parking charges, are business expenses and subject to normal travel rules.
   • Payments not connected with business mileage expenses or with use of the vehicle are simply earnings for both tax and NICs.
2. Payments other than to the employee of the employee’s personal (pecuniary) liability are reported on form P11D for tax purposes and as earnings for Class 1 NICs.  For NICs purposes, if such payments would have been MAPs if they had been paid to the employee, they may be exempt if they do not exceed the statutory limit.
3. Benefits provided by means of
   • a payment by the employer of the employer’s liability, e.g. insurance under a fleet policy for the employee, or
   • the loan of an asset, e.g. a roof rack or a trailer
   are reported in full as benefits in kind and are subject to Class 1A NICs.  They cannot be apportioned in respect of business and personal use.  The employee must claim tax relief personally.
4. Payments made to the employee and payments of the employee’s pecuniary liability but which must be repaid by the employee may be exempt under the beneficial loans rules.  For NICs purposes, a loan made in connection with the business or personal use of the vehicle may be treated as a mileage payment and exempt if the statutory limit is not exceeded.

Employer’s reporting and PAYE responsibilities
As described above, where the employer makes payments in connection with the acquisition and running of the car, there may be a requirement to

• report benefits in kind on form P11D and, where relevant, pay Class 1A NICs
• add payments to gross pay for PAYE tax and/or Class 1 NICs at the time the liabilities arise
• ignore certain benefits and payments where they qualify under an exemption.

None of these responsibilities are avoided where activities in connection with the scheme are performed by the ECOS provider, e.g. collecting mileage payment records and assessing them for tax and NICs liabilities.  It is not possible for the scheme provider to operate a separate PAYE scheme in respect of ECOS tax and NICs liabilities.

No monetary payments to employees under an ECOS may be included in a PAYE Settlement Agreement, although other benefits could be included.

Further information:

Payroll deadlines during the next month

August 17 – (August 19 is a Sunday) – For employers required to pay tax and NICs etc to the Accounts Office monthly, this is the deadline for payment to be received by the Accounts Office, unless made electronically.

August 22 – For employers required to pay tax and NICs to the Accounts Office monthly, this is the deadline for electronic payments to be cleared into the HMRC bank account.  Payments through BACS must be initiated by August 20 at the latest.

September 5 – This is the final day of tax month 5.  Tax and NICs etc for payments made in the tax month to September 5 are due for payment to the Accounts Office by September 19, or by September 22 if paid electronically.

Payroll FAQ's

Juror Financial Loss Allowances

Should the financial loss allowance paid for jury service be topped up to gross pay or to net pay?

The current maximum daily rates of the financial loss allowances available to jurors (from July 2007) are as follows:

The Certificate of Loss of Earning or Benefit is a document given to persons who have been appointed to jury service so that they can give the court information about the extent to which their earnings will be affected by the period away from work.  The certificate is completed and certified by the employer.

The intention is that a person should not be “out-of-pocket” as a result of jury service.  For this reason, the employer certifies that “for each day [the employee] is required by the court for jury service, the net loss of earnings is [£…]”.  The “net loss of earnings” is defined as “the amount remaining after you have subtracted income tax and National Insurance contributions from the earnings which you will not pay your employee” – in other words, the daily net pay that would have been paid if the employee had been at work during the period of jury service.  (Note that this definition is modified if the employer intends to top up the court’s payment to the employee’s normal net pay – see below) 

If the employee’s earnings are usually the same in each pay period, the employer may enter a simple average, by dividing the normal net pay by the number of working days.  But, if the employee’s earnings vary each pay period, it may be necessary to arrive at a representative average from the net pay over a number of pay periods.

Further details are entered about the days of the week that the employee works and whether the employee will be able to return to work for half a day or a whole day if attendance at court is not required on a particular day.  If the employer allows the employee to return to work for a whole day, the court will not pay any loss of earnings allowance for that day.  If the employee returns to work for a half day, only the four-hour rate will be paid by the court.

The certificate is signed by the employer to certify that the information is correct.  The court will use that information to ensure that juror allowances are only paid for periods for which the employee will not be paid by the employer.

In certain situations, it may be necessary for an employer to complete two certificates, one to cover the loss of earnings during the first two weeks, and another that would apply from the third week of jury service.  The circumstances in which this would be done are illustrated in the examples below.

There are three different ways in which employers handle the payment of juror allowances:

1. paying employees their normal pay during jury service
2. paying nothing to employees during jury service
3. topping up the juror allowances

1. Paying employees their normal pay during jury service
Some employers continue to pay employees in full during jury service.  The certificate describes this approach as “a valuable contribution to society by reducing the expenditure from the public purse”.  The Ministry of Justice says that an increasing number of employers are continuing to pay their employees while on jury service.  If the employee is to be paid as normal during jury service, the loss of earning certificate should not be completed.

2. Paying nothing to employees during jury service
However, there is no statutory requirement for employers to pay an employee anything during a period of jury service.  Some employers may simply decide that, because the employee is not available for work, no wages will be paid.  They may argue that, if the employee is out-of-pocket because the juror allowance is less than the employee’s normal net pay, that is the employee’s “contribution to society”. 

3. Topping up the juror allowances
Other employers prefer to top up the juror allowance so that the employee does not lose out financially. 

If the employer does wish to top up the allowance,

• the additional net pay amount paid by the employer must be no more than is necessary to maintain the employee’s net earnings
• the net loss of earnings entered on the certificate is the actual loss that the employee is going to suffer,  i.e. the daily net loss of earnings, minus the amount of the employer’s top-up.  For example, if the employee’s daily net loss of earnings is £80 and the employer is going to top-up the court’s payment of £59.96 to £80, the amount entered on the certificate is £59.96, not £80.

The following examples illustrate the different situations that can arise.  The examples all assume that the employee’s tax code is 522L and NICs table letter is A.

Example 1: loss of earnings is less than the maximum allowance for the first 10 days
An employee is on jury service for 15 days.  The employee’s weekly gross pay for a five-day working week is £383.22, for which the net pay would be £295.  The employer enters £59 on the certificate as the daily net loss of earnings. 

For the first 10 days of jury service, the maximum daily financial loss allowance is £59.96.  From the 11th day, the maximum allowance is £119.93.  The employee’s net daily loss of earnings is less than the maximum allowance throughout the period of jury service.  The employee’s loss of earnings is therefore fully covered by the court’s payment of £59 per day.

Example 2: loss of earnings is more than the maximum allowance for the first 10 days but less than the maximum allowance from the 11th day
Another employee is on jury service for 15 days.  The employee’s weekly gross pay for a five-day working week is £693.02, for which the net pay would be £505, or £101 per day.  The design of the current Certificate of Loss of Earning or Benefit does not correctly accommodate this situation.  As a result, the employer completes two certificates at the beginning of jury service, one to reflect the loss of earnings in the first 10 days, the other to reflect the loss from the 11th day.  The certificate can be photocopied or extra copies obtained from the Jury Central Summoning Bureau (08458 038003) or the court via the employee.  Both certificates are given to the employee to present to the court at the appropriate time.

The first certificate should show the net loss of earnings as £59.96, the maximum that the court will pay each day for the first 10 days.  It would be incorrect to enter £101 as the net loss because the employer is going to top up the court’s payment to £101 per day.

The second certificate should show the net loss of earnings as £101 per day and that is the amount that the court will pay.  The employee’s loss of earnings is therefore fully covered by the court’s payment of £101 per day.  It would be incorrect to enter £59.96 as the net loss because that would limit the court’s payment to that amount.

The Ministry of Justice acknowledges that the current loss of earning certificate does not allow an employer to state that the employee, after the first 10 days of jury service, will actually be losing a higher amount and will be claiming that higher amount.  The design of the form is under review.

Example 3: loss of earnings is more than the maximum allowance from the 11th day
An employee is on jury service for 15 days.  The employee’s monthly gross pay for a five-day working week is £3898.35, for which the daily net pay would be £128. 
The employer completes two certificates at the beginning of jury service, one to reflect the loss of earnings in the first 10 days, the other to reflect the loss from the 11th day.

The first certificate should show the net loss of earnings as £59.96 per day, the maximum that the court will pay each day for the first 10 days.  It would be incorrect to enter £128 as the net loss because the employer is going to top up the court’s payment to £128 per day.

The second certificate should show the net loss of earnings as £119.93 per day, the maximum that the court will pay each day from the 11th day.  It would be incorrect to enter £128 as the net loss because the employer is going to top up the court’s payment to £128 per day.

In the rare event that an employee’s jury service lasts for more than 200 days, the employer should complete another certificate.  The employer should enter

• the full amount of the employee’s net loss of earnings, where that is more than the maximum allowance from the 11th day but less than the maximum allowance from the 201st day
• £210.54, where the employee’s net loss of earnings is more than the maximum allowance from the 201st day.

Calculating the amount of the top-up
In order to top up the payment that an employee receives from the court, the employee’s gross pay is increased by an amount that, after the deduction of tax and NICs, will give the necessary additional net pay.  Most payroll systems have this “net to gross” calculation facility.

However, the practice of some employers is simply to reduce the employee’s gross pay by the amount of the allowance paid by the court.  As a result, the employee has more take-home pay than normal.  This procedure is wrong and fraudulent. 
Employers may be prosecuted if such a fraud came to the knowledge of the court.  The court’s payment is intended to maintain an employee’s net earnings and it is the net loss of earnings that the employer has certified.  By making a gross payment that results in the employee’s net pay being higher than that declared is an abuse of the juror loss of earnings arrangement.

The correct and incorrect methods of calculating the top-up is illustrated in the following Table, based on the figures used in Example 2 above.  The figures in column 2 show that, if the court’s payment were deducted from gross pay, the employee would take home over £96 more than normal.  The correct method, as shown in column 3, ensures that the employee’s take-home pay is the same as it would otherwise be.

Employers should also note that the incorrect method shown in column 2 is also unnecessarily expensive for the employer.  The employer has paid £144.22 more in gross pay and £18.46 more in secondary NICs than was necessary. 

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