News Items – at 20th February 2007

National Minimum Wage

Living accommodation and deductions from wages for heating and lighting

The Court of Appeal, in a decision given on 16 February 2007 in the case Leisure Employment Services Ltd v The Commissioners for Her Majesty’s Revenue and Customs, has confirmed that, in the circumstances of the case, a deduction from workers’ pay for the provision of gas and electricity has the effect of reducing the pay for national minimum wage (NMW) purposes. 

Leisure Employment Services (LES) operates Butlins resorts and Haven holiday parks.  Workers, who include bar staff, shop assistants, receptionists and security staff, have the option of living in on-site accommodation and, if they do, their pay is reduced by the full amount of the statutory accommodation offset and, in addition, they sign an agreement that they will pay £6 each fortnight towards the cost of gas and electricity.  HMRC brought the case on behalf of the LES’ workers in its role as the enforcement agency for the NMW.

To quote the lead judge in the Court of Appeal decision, “the structure of the Regulations is fairly complex”.  In order to determine whether a worker’s pay is less than the statutory minimum hourly rate of pay, the National Minimum Wage Regulations 1999 define a number of different types of deductions and payments that may be made from the wages of workers and the effect they have on NMW compliance.

Only one type of deduction is specifically defined in the Regulations – the accommodation offset.  This allows employers to deduct an amount for the provision of living accommodation (currently a maximum of £29.05 per week) as long as the wages before the deduction is made are not less than the NMW.  LES  took advantage of this statutory arrangement with the result that the workers’ wages were not treated as falling below the NMW.

Example: A 25-year old employee is paid £214 for a week (i.e. 40 hours @ £5.35 per hour), and the maximum offset of £29.05 is deducted for the provision of accommodation for 7 days, i.e. 7 days × £4.15 per day.  The employee receives £184.95 (i.e. £214 - £29.05) and the payment complies with NMW rules.

The issue before the court was whether the additional deduction of £6 each fortnight for the provision of gas and electricity must be taken into account when calculating the permitted accommodation deduction or, alternatively, it is one of the permitted deductions that may be made without counting against the minimum wage.  LES was appealing the decision of the Employment Appeal Tribunal (EAT), that the deduction was not one of the permitted deductions and, as a result, an amount greater than the accommodation offset was being deducted, taking the worker’s wages below the NMW.

Example: The employer in the example above deducts a further £3 per week for the provision of heating and lighting.  The amount offset for the provision of accommodation is now £32.05 and the resulting £181.95 wage falls below the NMW.

The argument put forward by LES was that the requirement of the Regulations, that “any deduction made by the employer for his own use and benefit” must be subtracted from a worker’s remuneration before making the comparison with the NMW, did not apply to the deductions.  The agreement that the workers signed had been worded carefully (“clumsily” in the view of the judges) to try to transfer the liability for paying the gas and electricity bills from LES to the workers.  If LES was simply collecting the money on behalf of the workers and paying the suppliers, the deductions could not be said to be for the employer’s “own use and benefit”.

The Court of Appeal accepted the detailed reasoning behind the EAT’s decision, in particular that

• the £6 deduction was a payment “in respect of” the provision of living accommodation and, as a result, the total deduction exceeded the maximum statutory offset, and
• the attempt to transfer the liabilities for paying the gas and electricity was not successful as the suppliers had no contractual relationship with the workers.

The decision leaves LES with the job of tracing all of the former workers affected by the ruling.  HMRC’s own press release about the decision states that thousands of Butlins’ and Haven Holidays’ staff will share up to £1 million in pay arrears.   

Further information:
Leisure Employment Services Ltd v The Commissioners for Her Majesty’s Revenue and Customs  http://www.bailii.org/ew/cases/EWCA/Civ/2007/92.html
Million pound boost to low paid workers  https://www.gnn.gov.uk/Content/Detail.asp?ReleaseID=264979&NewsAreaID=2

Termination Due to Retirement or Death

Taxation of lump sum payments

Clarification has been issued in an HMRC statement about the taxation of ex-gratia payments made to employees in the event of retirement or death.  The tax rules have changed significantly since the start of the new registered pensions regime in April 2006.

Prior to April 2006, ex-gratia awards made on termination of an office or employment due to retirement or death were payable tax-free, if the procedure set out in Statement of Practice 13/91 was followed.  Application had to be made to HMRC Audit and Pension Scheme Services (APSS) and approval would only be given if no other lump sum benefit from an approved or statutory retirement benefits scheme was payable and the total payment, including gifts in kind, did not exceed 1/12th of the annual pensions cap, i.e. £8,800 for the 2005/06 tax year.

This procedure ceased to apply from 6 April 2006.  From that date,

• if a lump sum payment is the only benefit provided by a registered pension scheme, i.e. no associated pension is payable, the payment is taxable as an unauthorised payment (paid over by the scheme administrator and reported under self-assessment by the recipient)
• an arrangement established on or after 6 April 2006 to make ex-gratia payments on retirement or death is an Employer-Financed Retirement Benefits Scheme (EFRBS) and, as such, the benefits provided are taxable in full under PAYE.

Benefits from an EFRBS are only excluded from a tax charge if they are:

• benefits in respect of ill-health or disablement of an employee during service
• benefits in respect of the death by accident of an employee during service
• benefits in respect of an employee’s non-accidental death in service and
• payment of which is already provided for under the rules of the scheme on 6 April 2006
• benefits under a group life policy or certain prescribed individual life policies.

Further information:
Withdrawal of Statement of Practice SP13/91  http://www.hmrc.gov.uk/briefs/brief1707.htm
Registered Pension Scheme Manual RPSM04104510 - Technical Pages: Taxation: Unauthorised payments: Unauthorised payments charge  http://www.hmrc.gov.uk/manuals/rpsmmanual/rpsm04104510.htm
Employment Income Manual page EIM15210 - Non-approved and employer-financed retirement benefits schemes: payer's responsibilities: operation of PAYE  http://www.hmrc.gov.uk/manuals/eimanual/EIM15210.htm

PAYE Coding Notices for Tax Year 2007/08

HMRC issuing from 19 February

HMRC is issuing 2007/08 P9 Coding Notices to employers and payroll agents during the week commencing 19 February.

Employers will receive their document online if they have registered for online services.  HMRC will only send code numbers to agents online if the employer has given authority, e.g. by completing an online agent authorisation or a form FB12 Authorising your agent to use PAYE Online services (Internet).  However, code numbers will not be sent to agents who are registered for “filing only”.  Agents can see code numbers for all their clients for seven days from the time that HMRC makes them available.

Further information:
2007-08 P9 code numbers  http://www.hmrc.gov.uk/dps/07-08-p9-code-numbers.htm

VAT Fuel Scale Charge

Charges linked to CO2 emission ratings from May 2007

The VAT fuel scale charge is currently based on engine size and type of fuel.  Starting with the first accounting period beginning on or after 1 May 2007, the VAT fuel scale charge for each car will be based on its CO2 emission rating, using a table with 5g/km increments between 140 g/km and 240 g/km, similar to that used to determine the car benefit charge for employees with company cars.

Details of the scale charge and the output VAT on that charge for each will be published at the time of the 2007 Budget.  There will be no diesel supplement or reductions for alternative fuel cars.  Separate charges based on engine capacity only will be provided with older cars that do not have a CO2 emission rating.

The change will be revenue neutral but will obviously benefit businesses with fuel efficient cars.

Further information:
VAT: Fuel Scale Charge; new CO2 basis  http://www.hmrc.gov.uk/briefs/brief1307.htm

Data Protection

Advice for small businesses on handling disclosure requests from individuals

The Information Commissioner’s Office (ICO) has published a Good Practice Note about subject access requests, aimed at small and medium-sized firms (SMEs).  The document includes a simple checklist to help SMEs deal with requests from individuals for access to information held about them by the SME.

The advice distinguishes between requests that SMEs can treat as part of normal business practice and those that should be dealt with formally under the Data Protection Act.  It  includes information on checking a person’s identity and what SMEs should do if the information requested includes details about other people.  Practical examples are provided explaining information that should not be released.
A fee of up to £10 can be charged unless the information is a medical or educational record. Where a charge is levied the information must be supplied within 40 calendar days of receiving payment.

Further information:
Small business advice: handling requests from individuals for information about themselves  http://www.ico.gov.uk/upload/documents/pressreleases/2007/subject_access_
requests_smes.pdf
Checklist for handling requests for personal information (subject access requests)
http://www.ico.gov.uk/upload/documents/library/data_protection/practical_application/
checklist_for_handling_requests_for_personal_information.pdf

Electronic End-of-Year Filing

Avoiding duplicated returns

In a Bulletin sent to payroll system developers, HMRC has provided guidance on how employers can avoid one of the main reasons for failure of their year-end electronic filing.

In 2006, some employers experienced problems submitting via the Internet because they sent only part of their end-of-year data in the format of a complete return by mistake.  They tried to address this by sending more than one complete original return or one complete original return and many additional P14 part returns.  The problem is that all returns sent after the complete original return has been accepted are always rejected as duplicates.

This mistake, the inappropriate use of a complete original return, may have occurred for a number of reasons:

• the payroll software used by the employer does not support part
• submissions of end-of-year returns at all, but their business circumstances require them to send P14s in parts
• the employer uses more than one software product and different offices are unaware that they should be sending parts not complete returns
• the employer uses an agent for some of the employees, (e.g. directors) but different offices are unaware that they should be sending parts not complete returns
• employers are unaware of consolidation features available on some products to combine part returns into a complete return.

If the employer submits a complete return in error in 2007, it will be fully processed immediately and there will be no opportunity for any intervention to address the issue.  If an employer has not submitted all the P14s that they need to in the complete original return, then they must send the additional P14s to HMRC as an amendment to the return that has been accepted, with an amended P35 and a letter of explanation.  The amendment can be sent electronically using payroll software, if it offers an amendments feature, or using the HMRC Online filing service, or on paper.  Whichever means is used to send the amendment to HMRC, the employer must also send a short letter of explanation to their local HMRC office.

Further information:
PAYE Bulletin 21 - EOY Duplicate Returns  http://www.hmrc.gov.uk/ebu/email_bul_paye.htm

Construction Industry Scheme

Reporting payments due on Good Friday 2007

HMRC has introduced a concession that will allow employers who are due to pay wages on Good Friday this year, i.e. Friday, 6 April 2007, and who make the payments a day early, to treat the payment as being made on 6 April.  This prevents the earlier payment having to be handled as a week 53 payment in the 2006/07 tax year.

Can this same arrangement be used by contractors in the Construction Industry Scheme.  HMRC has issued the following statement:

“We have been asked to give some guidance on the operation of the Construction Industry Scheme (CIS) where a payment falls due on Good Friday, 6 April 2007 and a contractor is proposing to make the payment before that date.  In particular, we have been asked if the recently published HMRC guidance on the operation of PAYE & Class 1 NICs may be followed in these circumstances.

Our view is that there is a difference with CIS.  Unlike payments to employees under PAYE, CIS has no set paydays.  A voucher, at present, or an entry on a return, in future, is required reflecting the date of the payment.  For the coming April, there is even greater significance, because if the payment is made on 5 April then a voucher is required, but if it is made on 6 April then the payment must be reported on the first new CIS monthly return.

The end of the tax year is not such an issue for sub-contractors because it is not necessarily their end of year in the way it is for employees (hence the PAYE guidance).  Although we can see that some contractors might face difficulties with some computerised accounting systems, we do not believe that a similar approach to that for PAYE & Class 1 NICs is needed.

If a contractor was to treat a payment on 5 April as being made on 6 April and included it on the first new CIS return, they would face one of two problems.
If the contractor deducts 20% from the payment, they would have no statutory right to do this and we cannot give them cover by concession.  Furthermore, the sub-contractor would be legally entitled to ask for the other 2%.

If the contractor deducts 18% from the payment, then the monthly return will show that they have under-deducted for that month.

On balance, the statutory position is that the payment is effective on the date it is made.”

Northern Ireland

Consultation on increasing entitlement to paid holiday

The Department for Employment and Learning has published a consultation document that seeks views on the proposals to increase the annual entitlement to paid holidays in Northern Ireland to 6 weeks.

The proposals mirror those already published by the Department of Trade and Industry for Great Britain.  However, as Northern Ireland enjoys ten bank holidays each year, the entitlement is to be increased from the current four statutory weeks to six weeks.  This equates to an increase from 20 days to 30 days for a five-day worker.  Entitlement will be capped at 30 days for six-day workers.

The additional entitlement will be introduced in two stages; to 4.8 weeks from October 2007 and to 6 weeks from October 2008.

Further information:
Public consultation on draft Regulations to increase paid holiday entitlement  http://www.delni.gov.uk/index/consultation-zone/archived-consultations/archived-
consultations-2007/public-consultation-on-draft-regulations-to-increase-paid-
holiday-entitlement.htm
Increasing the Holiday Entitlement: A Further Consultation  http://www.delni.gov.uk/annual_holiday_2nd_consultation.pdf

Council Tax Attachment of Earnings Orders

Correction of typographical error in Regulations

New deduction tables come into force for Council Tax Attachment of Earnings Orders (CTAEOs) issued by billing authorities in England and Wales from 1 April 2007.  The new tables have been added to the source legislation for CTAEOs by means on the Council Tax and Non-Domestic Rating (Amendment) (England) Regulations 2006.
Unfortunately, the Amendment Regulations contained a typographical error, quoting “£335” instead of “£355” as the upper threshold for the 12% band on the weekly table.  The error has caused some concern over which threshold should be used by employers from April.

A Council Tax Information Letter, recently published by the Department for Communities and Local Government, states that, subject to Ministerial approval, amending regulations will be made to correct the error and will come into force from 1 April 2007.

(Information provided by the Institute of Payroll Professionals)

Further information:

Payroll deadlines during the next month

March 5 – This is the final day of tax month 11.  Tax and NICs etc. for payments made in the tax month to March 5 are due for payment to the Accounts Office by March 19, or by March 22 if paid electronically.

March 19 – 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.

Payroll FAQ's

Entertainment and Hospitality

What tax liabilities arise for employees attending hospitality events?

It is a common practice for employers to arrange hospitality events to which clients, customers and journalists are invited.  It may be as simple as a number of seats at a football match or as lavish as a hospitality tent at Wimbledon.  Whatever the arrangement, there are tax liabilities to consider, both for the clients and customers attending and for the employer’s staff who attend the event as hosts.

To avoid confusion in the following notes,

• the employer putting on the event is called the “event employer”, and
• the employer of the customers attending is called the “direct employer”.

In any situation where a tax liability arises for a person attending a hospitality event, the reportable value of the benefit is the total cost of the event, including all accommodation and travel, apportioned appropriately among the number of people attending, including all employees of the event employer.  For example, if the total cost of an event is £5,000 and 25 people attend it, there is a potential benefit charge of £200 for each of them, depending on the manner of apportionment.

Clients and customers attending

The position for the clients and customers who are employees or directors of a direct employer is relatively simple.  The third-party entertainment exemption, as set out in section 265 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA), removes any tax liability where an employee, or a member of the employee’s family or household, is provided with entertainment, including hospitality of any sort, if

• the event employer is not the direct employer, or a person connected with the direct employer,
• the direct employer, or person connected with the direct employer, has not directly or indirectly procured the entertainment, and
• the entertainment is not provided in recognition of particular services performed by the employee in course of the employment, or in anticipation of particular services that are to be performed.

Therefore, as long as the direct employer has not been involved in any way with the event and the entertainment for an employee is only an expression of appreciation for the business relationship and, perhaps, an opportunity to talk business, the event employer does not have to report the entertainment as a benefit for that employee.  However, if the entertainment is a reward for, say, the awarding of a specific contract,

• the benefit of the entertainment must be reported on a form P11D by the event employer (not the direct employer), and
• the direct employer, if aware that the employee has attended the event, must answer “Yes” to question 3 of Part 3 of the year-end P35 return.

Self-employed persons who attend the event, such as some journalists, are not within the scope of the employment income rules, so no tax liability arises in their case.

Employees of the event employer

The situation is not, however, straightforward for the employees of the event employer who attend the event.  There is no exemption for them as there is for the clients and customers.  As a result, the benefit of attending the event must be reported for them all, irrespective of their role at the event.  It does not matter whether they attended as the organiser, or as hosts for the event, or were there just for the entertainment – their individual portion of the cost of putting on the event must be reported on form P11D (unless they are a lower-paid employee with an earnings rate of less than £8,500, in which case there is no reportable benefit).

It is up to each of the employees concerned to claim subsequently a deduction from earnings against the amount that has been reported on form P11D.  The tax office may decide to allow a deduction if

• the employer is a non-trading business or, if not, if the amount reported has been disallowed against the employer profits.
• the amount reported, had it instead been incurred personally by the employee, would be deductible as business expenses (ITEPA s.365).  To be deductible, the general expenses rule requires that the amount be incurred wholly, exclusively and necessarily in the performance of the duties of the employment (ITEPA s.336).

To meet the latter requirement, the employee would have to show that attendance at the event was a requirement of the job and that any enjoyment of the event was only incidental to the reason for attending.  Any employee attending just for the entertainment would not be able to claim a deduction of earnings.

Example

An employer arranges a hospitality tent at a cricket match and invites a number of customers and journalists.  The total costs incurred in putting on the event are £6,000, including £1,000 spent on accommodation for the guests.  The employer disallows the costs against business profits.  The numbers attending are 25, i.e. 18 customers, 2 journalists, 3 members of staff who act as hosts throughout the day, and 2 directors who spend the day eating, drinking and watching cricket.

The tax liabilities are

• for the customers, nil, as they benefit from the s.265 exemption
• for the journalists, nil, as they are self-employed and are out of scope of the employment income legislation
• for the hosts, the employer could report a benefit of £240 (i.e. £6000 ÷ 25) for each of them, but decides to reduce it to £200 so as to exclude the effect of the accommodation that was relevant only to the customers
• for the two directors, the employer reports a benefit of £200 for each of them.

The employer would keep records that would explain, for audit purposes, the reasoning behind the apportionment.

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