News Items – at 11th April 2007

Sick Pay and Disability Discrimination

Applying the “reasonable adjustment” principle

On 30 March 2007, in the case O’Hanlon v HM Revenue and Customs, the Court of Appeal rejected the employee’s continued claims that the employer had discriminated against her on the grounds of disability by counting the time she was absent sick due to her disability against her sick pay entitlement, thus preventing her from receiving sick pay when absent for reasons unrelated to her disability.  The original Employment Tribunal and Employment Appeal Tribunal (EAT) had both rejected Mrs O’Hanlon’s arguments.

Mrs. O’Hanlon suffered from clinical depression and was absent from work for extended periods of time between 2001 and 2004.  The HMRC sick pay scheme allowed full pay for up to 6 months, followed by up to 6 months at half pay, followed by the pension rate of pay.  Mrs. O’Hanlon’s absences meant that, from 2003, she was receiving her pension rate of pay during her continuing absences.

In 2005, Mrs. O’Hanlon made a claim to the Employment Tribunal that she should have received full pay for all disability-related sickness absences, that she was substantially disadvantaged by the sick pay rules and that, because the employers had failed to make a reasonable adjustment to counter the disadvantage, she had suffered discrimination on the grounds of disability.

The Disability Discrimination Act 1995 requires employers to make adjustments to provisions, criteria, practices or physical features that put disabled persons at a substantial disadvantage in comparison with persons who are not disabled.  An employer discriminates against a disabled person if he cannot demonstrate that less favourable treatment is justified or refuses to make reasonable adjustments. 
The Act gives specific examples of what factors should be considered in deciding whether or not it would be reasonable for an employer to make adjustment.  These include the financial and other costs that would be incurred.  The Act also gives examples of reasonable adjustments, such as giving some of the employee’s duties to someone else, transferring the employee to another job, and altering the employee’s hours of work.

Although the Tribunal decided that HMRC’s sick pay scheme did put Mrs. O’Hanlon at a substantial disadvantage, it ruled that HMRC had taken such steps as were reasonable in all the circumstances, and that, in view of a likely additional annual cost of £6 million to change the scheme rules, it was not reasonable for HMRC to pay her salary in full.

In considering Mrs. O’Hanlon’s initial appeal, the EAT had agreed with the Tribunal’s view that the purpose of the legislation is to assist disabled persons to obtain employment and integrate them into the workforce.  All of the examples of reasonable adjustments that employers might make are of this nature.  It is true that they are only examples and are not an exhaustive list, but none of them suggests that it will ever be necessary simply to put more money into the wage packet of the disabled.  The Act is designed to recognise the dignity of the disabled and to require modifications which will enable them to play a full part in the world of work.  It is not intended to treat them as objects of charity which, as the Tribunal had pointed out, may tend to act as a positive disincentive to return to work.

The EAT agreed that, where it would cost a very significant sum to pay full pay to all disabled employees, it would be reasonable for an employer to argue that such an adjustment would be unreasonable.  However, the EAT also observed that “the justification could simply be the fact that the employer considered it appropriate to pay those who attend work and contribute to the operation more than those whose absence prevents that.”

The Court of Appeal, in considering Mrs. O’Hanlon’s latest appeal, agreed fully with the decision of the EAT.  In the view of Lord Justice Sedley, “justification has been established by (HMRC) on an objective as well as a subjective basis.  While collectively agreed pay structures for a very large establishment are not in principle beyond the reach of the 1995 Act, they are not ready candidates for individual variation.  The whole point of a comprehensive pay scale and scheme is that it applies to everyone, so that individual departures are likely to create justified resentment and require the exercise of discretion in both the legal and non-legal sense of the word.

He further stated: “It is relevant that the aspect of the scheme with which we are concerned is not a term of a kind which every contract of employment has to contain.  An employee who is absent for 6 months or more because of chronic illness, whether or not it amounts in law to a disability, might well find that at common law the contract has been frustrated by illness and that a consequent dismissal is held to be fair.  A scheme which preserves the contractual relationship in such circumstances and assures first full pay and then half pay for extended periods of time therefore goes well beyond anything required by law.  This is not of course to say that it is permissible, much less justified, to construct or administer such a scheme so that it operates arbitrarily to the disadvantage of the disabled.  But any unplanned discriminatory impact may well be justified on the ground that such exceptions as can fairly be made in favour of disabled employees are already programmed into the scheme.”

Further information:
O’Hanlon v HM Revenue and Customs  http://www.bailii.org/uk/cases/UKEAT/2006/0109_06_0408.html
O’Hanlon v HM Revenue and Customs http://www.bailii.org/ew/cases/EWCA/Civ/2007/283.html

Part-time Workers and Time Off in Lieu of Bank Holidays

Court of Session decision breaks with established DTI guidelines

On 30 March 2007, in the case McMenemy v Capita Business Services, the Inner House of the Court of Session (Scotland’s equivalent of the Court of Appeal) ruled that a part-time employee who did not work on Mondays and was not allowed time off in lieu of Monday bank holidays, was not treated less favourably than full-time employees who, if they worked on Mondays, were given the day off on Monday bank holidays.  The reason for the different treatment was because the part-time employee did not work on a Monday, not because the employee worked part-time.

The Part-Time Workers (Prevention of Less Favourable Treatment) Regulations 2000 state: “A part-time worker has the right not to be treated by his employer less favourably than the employer treats a comparable full-time worker (a) as regards the terms of his contract, or (b) by being subjected to any other detriment by any act, or deliberate failure to act, of his employer.”

The Directive on part-time work, from which the UK Regulations derive, states: “In respect of employment conditions, part-time workers shall not be treated in a less favourable manner than comparable full-time workers solely because they work part time unless different treatment is justified on objective grounds.”

The Court of Session noted a significant difference between the Directive and the Regulations, namely the use of the word “solely”.  The less favourable treatment of part-time workers which is prohibited by the Directive must be for the reason that they work part-time and for that reason alone.

Where appropriate, in order to determine whether less favourable treatment has occurred, the “pro-rata principle” may be applied.  This states that “where a comparable full-time worker receives or is entitled to receive pay or any other benefit, a part-time worker is to receive or be entitled to receive not less than the proportion of that pay or other benefit that the number of his weekly hours bears to the number of weekly hours of the comparable full-time worker”.  This means, for example, that, if a full-time worker working 40 hours a week were entitled to 200 hours holiday in a year (i.e. 5 weeks), a worker with the same type of contract and  working 20 hours a week would be treated less favourably if given only 80 hours holiday in a year (i.e. 4 weeks).

Mr. McMenemy worked at Capita’s call centre in Glasgow and changed from working full-time, Monday to Friday, to part-time, Wednesday to Friday.  Capita’s employment contract states specifically that employees are entitled to public holidays only where they fall on an employee’s normal working day.  There was no comparable full-time employee at the time the case was considered although, previously, the same rule had been applied to Mr. McMeneny’s full-time line manager who worked Tuesday to Saturday for a while.

Therefore, the issue that was addressed by the Employment Tribunal and subsequently by the Employment Appeal Tribunal (EAT) was whether Mr. McMenemy was treated less favourably than a comparable full-time worker and, if so, whether that was for the reason that he worked part-time and for that reason alone.
In ruling against Mr. McMenemy, the Employment Tribunal saw the distinction not as between full-time and part-time workers but between those who work Mondays and those who do not, whether or not they are full-time.  The tribunal was satisfied that a comparable full-time employee, if there had been one, would not have had the benefit of public holidays.

The EAT was satisfied that the Tribunal’s decision was one that they were entitled to reach on the evidence.  Although a comparison had been drawn with a hypothetical employee, that was appropriate when considering the reason for the treatment.  It was open to the EAT to conclude that a full-time employee who did not work on Mondays would have been treated the same as the claimant as regards Monday holidays.

The EAT also held that the Regulations do not provide an independent right to “pro-rata” entitlement to holidays.  The “pro-rata principle” is used to determine whether less favourable treatment has occurred but is not significant in deciding whether or not the reason for less favourable treatment is because the employee was a part-time worker.

The Court of Session, in explaining why it was upholding the decisions of both the Employment Tribunal and the EAT, confirmed that the proper comparators were the full-time employees in Mr. McMenemy’s team and that, by comparison with them, he receive less favourable treatment in respect of Monday bank holidays (although not in respect of bank holidays that fall on the days he worked).  At this point the “pro-rata principle” would come into play if it were necessary to show that there had been less favourable treatment.  If Mr. McMenemy had received a “pro-rata” amount of time off in lieu of Monday bank holidays, he would not have been less favourably treated.
The next issue, however, was whether the less favourable treatment was solely because Mr. McMenemy was a part-time worker.  The reason why he received less favourable treatment was through the accident of his having agreed with the respondents that he would not work for them on Mondays or Tuesdays.  At this point it becomes appropriate to consider the hypothetical full-time employee and it was clear that Capita’s policy was that full-time employees who do not work on Mondays would not get time off in lieu and that part-time employees who do work Mondays would get Monday bank holidays off.

The Court of Session’s decision does, however, leave one issue unresolved.  Mr. McMenemy’s legal representative made reference to the DTI guidance on the part-time workers Regulations.  It says:

“The rights of part-timers in relation to public holidays and bank holidays may not always be clear.

Under the regulations, part-timers should not be treated less favourably than comparable full-timers in their entitlement to public/bank holidays.  Allowing full-timers the day off, but not part-timers, is clearly less favourable treatment and unlawful under the regulations unless there is objective justification.

To comply with the law, an employer must treat part-time workers as favourably as they treat full time workers.  In some circumstances it may be enough simply to give workers a paid day off if their day of work happens to coincide with the public holiday, without giving time off in lieu to those who would not ordinarily work on that day.  This may produce a fair result, for example where a shift system means that full-time and part-time workers are equally likely to be scheduled to work on a public holiday.  However, where workers work fixed days each week, such a practice could put part-timers at a disadvantage.  For example, because most bank and public holidays fall on a Monday, those who do not work Mondays will be entitled to proportionately fewer days off.  In many workplaces, these workers will predominantly be part-timers.

In such cases, it may be necessary to remove the disadvantage suffered by those staff who do not receive particular days off as a result of their particular working pattern, for example by giving all workers a pro rata entitlement of days off in lieu according to the number of hours they work.

Whether either of these approaches meets the requirements of the regulations will depend on the particular circumstances.  Whatever approach they choose to adopt, employers should bear in mind the principal that it is unlawful to treat part-timers less favourably than comparable full-timers unless there is objective justification for doing so.

Employers or part-timers who are unsure how the law should be implemented in a particular situation should seek legal advice.”

The Court of Session did not comment on the apparent contradiction between its ruling and the DTI guidance.  Capita’s legal counsel argued that “the DTI Guidance, which was expressed in qualified terms by use of the words ‘could’ and ‘may’, was not a useful guide.”

Employers seeking to rely on the Court of Session decision – which does not automatically apply outside of Scotland – should consider carefully whether

• the specific circumstances of this case are to be found in their employment contracts, namely that entitlement to time off for public holidays only applies to employees for whom the day on which the public holiday falls is a normal working day, and
• it can be shown that, in practice, any full-time employee not working on the public holiday would also not be entitled to time off in lieu.

Further information:
McMenemy v Capita Business Services  http://www.bailii.org/scot/cases/ScotCS/2007/CSIH_25.html
DTI Employment Guidance -  Part-time workers. The law and best practice - a detailed guide for employers and part-timers  http://www.dti.gov.uk/employment/employment-legislation/employment-
guidance/page19479.html#Public_holidays

Retrospective Application of Tax Anti-Avoidance Legislation

New PAYE procedures from April 2007

On 2 December 2004, the Government announced its intention to introduce measures to counteract tax and NICs avoidance schemes involving options on securities and to backdate their application to that date where appropriate. 

Since then, new tax avoidance disclosure rules have been introduced and are being enforced.  In addition, changes and additions have been made to the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) and to the Social Security Contributions and Benefits Act 1992 that allow Regulations to be made defining the procedures that would be required for recording, reporting and paying retrospective tax and NICs liabilities.

All of the necessary adjustments to the Income Tax (Pay As You Earn) Regulations 2003 and the Social Security (Contributions) Regulations 2001 have been made and came into force from 6 April 2007.  Some of the new procedures have been described in previous newsletters but, with the very recent approval of the new PAYE  and Social Security Regulations, they are described altogether in this current news item. 

Certain anti-avoidance measures involving the provision of securities options were included in the Finance Act 2006.  They came into force on 6 April 2007 but are backdated in their application to 2 December 2004.  It must be stressed that these new and somewhat complex rules affect the very small number of employers who have remunerated their employees in ways that seek to avoid tax and National Insurance.  The penalty is not simply a requirement to pay tax and NICs retrospectively but a requirement on both employers and employees to comply with a number of burdensome, time-consuming and time-limited procedures.  In addition, employers may not be able to recover all of the tax and NICs that the employer has paid in respect of former employees.

Definitions
The following terms are used throughout this article and have the following meaning where they appear.

• open tax year – the current tax year, up to the point at which the P14 returns for affected employees are finalised
• closed tax year – an earlier tax year, for which the employer’s annual returns and payments have been completed
• retrospective provision – a measure introduced by the tax and NICs legislation to treat payments and benefits under tax avoidance schemes as “retrospective earnings” and liable for income tax and NICs from a date earlier than the date on which the enactment containing the measure was passed
• retrospective earnings – payments that are retrospectively treated as payments of employment income (for income tax purposes) or earnings (for NICs purposes) by virtue of a “retrospective provision”
• qualifying payment – a payment, including a “notional payment”, that becomes “retrospective earnings”
• notional payments – payments that are not cash but are treated as cash under PAYE Regulations – including payments made by an intermediary of the employer; cash vouchers; readily-convertible assets; non-cash vouchers and credit tokens used to obtain readily-convertible assets; charges on employment-related securities; gains from securities options – it is the provision of employment-related securities and securities options that are most commonly the subject of anti-avoidance legislation
• relevant time – in the context of notional payments, the earliest of
  • the time on which PAYE  and NICs liabilities arise on a “notional payment” – generally the date on which the benefit is provided
  • where, under a “retrospective provision”, a notional payment becomes a “qualifying payment”, the date on which the Finance Act containing the provision is passed, and
  • where the “retrospective provision” is contained in the Finance Act 2006, 6 April 2007.
• The employer must pay all of the tax and the primary and secondary NICs due on the notional payment by the normal payment date following the tax month in which the “relevant time” falls.  The employee must pay any tax owed to the employer on the notional payment within 90 days of the “relevant time”.

New PAYE and NICs procedures
Section 700 of ITEPA requires the gains from employment-related securities options to be treated as employment income and taxed under the notional payments procedures.  They are also subject to Class 1 NICs under the provisions of Regulation 22 of the Social Security (Contributions) Regulations 2001.  The procedures themselves are set out in section 710 of ITEPA.  From 6 April 2007, employers must apply the notional payment procedures to chargeable events in connection with securities options that have occurred since 2 December 2004 and that are now “qualifying payments” under retrospective provisions in the Finance Act 2006.  For NICs purposes, the retrospective rules also apply to certain securities that were brought into tax under avoidance measures in the Finance (No. 2) Act 2005.

Employers affected in this way have been informed by the accountancy firm that marketed the avoidance scheme that it was disclosed to HMRC and have been given the tax scheme reference number.  In turn, the employer should have notified HMRC that the scheme was being used, quoting the reference number.  These procedures are part of the disclosure of tax avoidance scheme rules and are explained at http://www.hmrc.gov.uk/aiu/index.htm.

Although the affected employers must apply the notional payments procedures from 6 April 2007, the liabilities for both tax and NICs must be allocated to the “closed tax years” in which the payments where originally made, i.e. the 2004/05, 2005/06 or 2006/07 tax years, although the new procedures also include rules for payments that are made in an “open tax year”.  To complicate things further, many of the employees who benefited from the avoidance arrangements will have left the employment and there is no guaranteed way for the employer to recover the tax and NICs paid by the employer from former employees.

The new PAYE and related NICs procedures as they apply to the Finance Act 2006 measures and, in the case of NICs, to the Finance (No. 2) Act 2005, are as follows:

• For each employee for whom a chargeable event has occurred since 2 December 2004, the employer must estimate the value, as accurately as possible, of the gains from the securities options as at the time of the chargeable event.  Guidance on the procedures for calculating the value of gains on securities options is available in HMRC’s Employment-Related Securities Manual, at http://www.hmrc.gov.uk/manuals/ersmmanual/ERSM110000.htm.
• The “relevant time” for the anti-avoidance measures in the Finance Act 2006 is 6 April 2007.  Therefore, the employer must follow the notional payments procedures in tax month 1 of 2007/08.  For monthly-paid employees, the estimated value of the notional payments must be added to each employee’s salary for April 2007.
• The total gross pay is subject to both PAYE tax and to primary and secondary NICs.  (See below for the rates at which tax and NICs are calculated.)
  • The tax due on the notional payment must be deducted from any earnings being paid to the employee in the same tax period.  If the tax due exceeds the earnings, all of the net pay must be taken towards the tax liability, leaving the employee owing the difference to the employer.  The employee must pay any outstanding tax to the employer within 90 days of the relevant time. 
  • The primary NICs due may be deducted from any earnings in that period and in following periods.  There is no limit on how much may be recovered in an earnings period and recovery may be spread over the current and the following tax year.
  • Irrespective of how much of the tax and NICs due on the notional payments the employer can recover in tax month 1 from the employees, the employer must pay over all of the total tax, primary NICs and secondary NICs to the Accounts Office by 19/22 May 2007.  There is no requirement for large employers to make the payment to the Accounts Office electronically.  In the case of an employer who pays quarterly, the higher amounts of tax and NICs do not affect the employer’s quarterly payment status but the tax and NICs due on the notional payment must nevertheless be paid in May, the following month.
  • If the employee fails to pay any outstanding tax to the employer by 4 July 2007, i.e. within 90 days of 6 April 2007 (the “relevant time”), the employee is treated as having received a benefit of the value of the outstanding tax.  The benefit is subject to Class 1 NICs in tax month 3 and must be reported for tax purposes on the employee’s P11D at the year end.
  • If the employee has left the employment, the employer must still pay the full amount of tax and NICs to the Accounts Office.  There is no statutory provision for recovering any of the payment from the former employee – the employer must come to whatever arrangements are possible.  If the outstanding tax is not paid to the employer by 4 July 2007, the employer must notify the tax office that a benefit to the value of the outstanding tax has been provided.
• The employer is not permitted to enter into an agreement or election for the employee to bear any of the secondary NICs liability.
• If the employee left the employment before tax month 1 of 2007/08, tax is calculated on the notional payment and on any other payments made in month 1 of 2007/08, using
  
  • if the qualifying payment was made in a closed tax year (i.e. 2004/05, 2005/06 or 2006/07), the employee’s final tax code for that tax year or, if the employer does not have a tax code, the higher rate of tax for that tax year
  • if the qualifying payment was made in an open tax year (not possible in the current context), the employee’s final tax code before leaving or, if the employer does not have a tax code, tax code D0
• Irrespective of the year in which the qualifying payment was made, the Class 1 NICs are calculated using the rates and thresholds applicable to 2007/08, i.e. the year in which the notional payment is processed.  If the employee left the employment more than six weeks before the payment is processed, the NICs are calculated using a weekly earnings period and the relevant not-contracted out rate.
• The payment and the tax and NICs due must be entered on the employee’s payroll record for the tax year in which the qualifying payment was made (i.e 2004/05, 2005/06 or 2006/07).  If there is no payroll record for that year, one must be created and must record
  • the date on which the qualifying payment was actually made
  • the amount of that payment
  • the amount of tax
    • deducted (if there are other earnings available from which it may be deducted), or
    • accounted for (if there are no earnings from which it can be deducted).
  • The same information must be given to the employee as soon as possible after the relevant time.
• Before 1 January 2008, the employer must give the employee
  • a revised P60 for the tax year in question, if one has already been issued to the employee for that year, or
  • a revised P14 for the tax year in question, if a P60 was not issued to the employee for that year.
    The revised P60 or P14 must be endorsed by the employer to show that it supersedes an earlier certificate.  The employee is not permitted to use the earlier certificate.
• Before 20 May 2008, the employer must complete and submit to HMRC
  • a revised form P14 for each employee, and
  • a form P35(RL) showing
    1. the total original tax and NICs deducted or repaid in the case of each employee
    2. the revised total tax and NICs deducted or repaid in the case of each employee
    3. the total original tax and NICs deducted or repaid in respect of all the employees
    4. the revised total tax and NICs deducted or repaid in respect of all the employees
    5. the difference between the figures at points 3 and 4 above
    6. if relevant, the employer’s contracting-out number.
• These revised P14 and P35(RL) forms do not have to be submitted electronically.
• If the qualifying payment for an employee was made during the 8-week relevant period used to calculate entitlement to a statutory payment (SMP, SPP, SAP or SSP) for that employee, the average earnings in that relevant period must be recalculated to include the retrospective earnings.  If  as a result, the rate at which the statutory payment was paid should have been higher or the employee is brought into entitlement, an arrears payment should be calculated and paid to the employee.  

Further information:
Disclosure of Tax Avoidance Schemes  http://www.hmrc.gov.uk/aiu/index.htm
Budget 2006 Budget Notes (page 87)  http://www.hm-treasury.gov.uk/media/602/CF/bud06_budgetnotes030406.pdf 
Finance Act 2006 (sections 92 and 94)  http://www.opsi.gov.uk/acts/acts2006/ukpga_20060025_en.pdf
The Finance Act 2006 (Section 94(5)) (PAYE: Retrospective Notional Payments - Appointment of Substituted Date) Order 2007  http://www.hmrc.gov.uk/si/2007-1081.pdf
The Income Tax (Pay as You Earn) (Amendment) Regulations 2007  http://www.opsi.gov.uk/si/si2007/uksi_20071077_en.pdf
The Social Security (Contributions) (Amendment No. 2) Regulations 2007  http://www.opsi.gov.uk/si/si2007/uksi_20071057_en.pdf
The Social Security Contributions (Consequential Provisions) Regulations 2007  http://www.opsi.gov.uk/si/si2007/uksi_20071056_en.pdf

Payroll deadlines during the next month

April 19 – This is the deadline for payment of tax and NICs to the Accounts Office, for tax month 12 by employers who pay monthly, for tax months 10 to 12 by employers who pay quarterly, unless they make their payments electronically.  This is also the latest date for paying any outstanding tax and NICs to the Accounts Office in respect of the 2006/07 tax year.

April 20 – (April 22 is a Sunday) – For employers who pay their tax and NICs to the Accounts Office electronically, this is the deadline for electronic payments to be cleared into the HMRC bank account.  Payments through BACS must be initiated by April 18 at the latest.

May 3 – This is the date by which any changes to the provision of company cars in the three months to April 5 must be reported using form P46(Car).

Payroll FAQ's

Discount Vouchers

Are discount vouchers that are available to both employees and the general public taxable as an employment benefit?

Vouchers given to employees are not taxable as long as they are not provided on more preferential terms than those that apply to the public generally.  For example, if discount vouchers are issued to anyone spending over a certain amount in a retail store and, because they are shopping as customers, they are also given to employees, there is no employment benefit.

This situation is specifically covered in the tax legislation.  Sections 78, 85 and 93 of the Income Tax (Earnings and Pensions) Act 2003 state, with reference to cash vouchers, non-cash vouchers and credit-tokens, that they are excluded from a tax charge if

• they are of a kind made available to the public generally, and
• they are provided to the employee or a member of the employee’s family on no more favourable terms than to the public generally.

The term “credit-token” means not just a credit card but any card or document that allows someone to obtain money, goods or services on credit.

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