News Items at - 22^nd July 2008

Introduction

By a curious coincidence, the Treasury and Resources Department in Guernsey and HMRC both published documents on the subject of payrolling of benefits-in-kind in the past week.  Guernsey is looking to introduce mandatory payrolling of benefits in just six months time; HMRC is responding to overall negative feedback on the proposals to introduce mandatory payrolling of benefits in nearly three years time.

Perhaps the difference in time periods is accounted for by Guernsey’s relatively simpler valuation rules for benefits, or because voluntary payrolling of benefits is already permitted for those that are easily valued, or because there are only 300 or so employers in Guernsey that provide benefits-in-kind.

As you read our summary of the HMRC document, or pore over the full document, you may be struck by almost unanimous call for simpler P11D valuation rules and for employer choice as to which benefits to put through the payroll.  Perhaps the government should, first of all, address those preferences and then, at a later stage, go for a compulsory scheme.

Quiz question – If an employee is paid £11 an hour and earns £23,000 in a year, could the employer be paying below the National Minimum Wage?  Have a look at this week’s Employer FAQ and then work through the complex statutory maths explained in DBERR’s guidance on the NMW.

Double Taxation Conventions

New agreements with Moldova, Slovenia, New Zealand and Saudi Arabia

First-time comprehensive Double Taxation Conventions between the United Kingdom and the Republics of Moldova and Slovenia were signed in November 2007 respectively. The Convention with Slovenia will replace the 1981 Convention between the United Kingdom and the Socialist Federal Republic of Yugoslavia.

New Conventions have also been finalised with New Zealand and Saudi Arabia.

All four Conventions have been approved by Parliament and the  Statutory Instruments were made on 9 July 2008.  They will enter into force when the respective countries complete their legislative procedures and will take effect from the start of the next following tax year in each country.

Further information:
The Double Taxation Relief and International Tax Enforcement (Taxes on Income and Capital) (Moldova) Order 2008  http://www.opsi.gov.uk/si/si2008/pdf/uksi_20081795_en.pdf
Explanatory Memorandum to The Double Taxation Relief and International Tax Enforcement (Taxes on Income and Capital) (Moldova) Order 2008  http://www.hmrc.gov.uk/si/2008-1795-em.pdf
The Double Taxation Relief and International Tax Enforcement (Taxes on Income and Capital) (Slovenia) Order 2008  http://www.opsi.gov.uk/si/si2008/pdf/uksi_20081796_en.pdf
Explanatory Memorandum to The Double Taxation Relief and International Tax Enforcement (Taxes on Income and Capital) (Slovenia) Order 2008  http://www.hmrc.gov.uk/si/2008-1796-em.pdf
The Double Taxation Relief and International Tax Enforcement (Taxes on Income and Capital) (New Zealand) Order 2008  http://www.opsi.gov.uk/si/si2008/pdf/uksi_20081793_en.pdf
Explanatory Memorandum to The Double Taxation Relief and International Tax Enforcement (Taxes on Income and Capital) (New Zealand) Order 2008  http://www.hmrc.gov.uk/si/2008-1793-em.pdf
The Double Taxation Relief and International Tax Enforcement (Taxes on Income and Capital) (Saudi Arabia) Order 2008  http://www.opsi.gov.uk/si/si2008/pdf/uksi_20081770_en.pdf
Explanatory Memorandum to The Double Taxation Relief and International Tax Enforcement (Taxes on Income and Capital) (Saudi Arabia) Order 2008  http://www.hmrc.gov.uk/si/2008-1770-em.pdf

Employee Database Records

HMRC delays migration of PAYE data

In June 2008, HRMC announced that “the biggest change to PAYE for over 20 years” would take place in October 2008.  This was not a reference to the introduction of online filing of in-year forms, nor to revolutionary new PAYE procedures.  Rather, it described the start of the process of merging all employee records onto a single database, providing HMRC staff with access to all employees’ pay, tax, NICs and pension information in one place.  The migration was to have created service restrictions during October 2008.

However, HMRC announced on 16 July its decision to defer the implementation of the new PAYE Service and Work Management System.  In explaining the delay, HMRC states:
“We recognise the huge importance of the changes we are making to PAYE processing and the customer service improvements they will bring.

When we designed the system, we based the design on the information available at that time. The implementation of the new PAYE Service … will change our internal procedures on handling internal data. It will introduce higher levels of automation, improve accuracy and efficiency of processing, and enhance our management information and workflow management. This has generated higher internal transaction volumes than we originally forecast. We have decided it would be sensible to defer implementation while we make some design changes to accommodate the higher volumes.
We will not implement the new PAYE system until we can be sure it will meet the demands that will be placed upon it.

A later implementation date will delay the introduction of the benefits that the new PAYE service will bring, but given the scale and importance of PAYE, we will only go ‘live’ when we are satisfied that the changes will deliver the expected benefits and not cause unnecessary disruption.

At this stage a new implementation date has not been set. The new date will be determined by a variety of factors including, of course, the best time in the annual PAYE cycle.”

Of the various service restrictions announced earlier, the only ones that will still occur are:

• HMRC’s PAYE Online Returns and Forms service will not be available in the five days ending on 27 October while improvements are made.  During these five days, the following records will be deleted:
  • all Employer Annual Returns submitted for tax years 2003/04 and 2004/05
  • any other forms and returns submitted before 6 April 2005
  • anything else that has been entered on to the current system but has never actually been filed, irrespective of the date it was created.
• Even though the migration of PAYE records will not yet take place, HMRC will still  withdraw the facility to issue notification of bulk P6/P9 tax code changes list after August 2008.  This is a little-used process and many employers have already made alternative arrangements to receive this data electronically.

There is no change, however, to the introduction of

• mandatory online filing of in-year forms by employers with 50 or more employees from April 2009, and for all other employers from April 2011
• the new A4-size P45s in October 2008 and the facility for employers to print Parts 1A to 3 on plain paper
• the new P46(Expat) and P46(Pen) forms from April 2009.

Further information:
Deferral of the new PAYE Service from October 2008  http://www.hmrc.gov.uk/paye/deferral-new-service.htm

Taxation of Benefits-in-Kind

HMRC reviews responses to payrolling consultation

In December 2007, in a consultation document entitled Benefits in kind and expense payments in the payroll - a fresh approach, HMRC published proposals to

• abolish the £8,500 earnings rate threshold, below which form P9D reporting rules apply, from April 2009, and
• introduce taxation of all benefits and expenses through the payroll by all employers from April 2011.

The consultation period ran until 14 March 2008.

In April 2008, HMRC published a brief statement, thanking those who responded to the consultation on the proposal to collect tax and NICs on benefits and expenses through the payroll and promising to give an update at the time of the Pre-Budget Report at the end of 2008.

With regard to the proposal to scrap the £8,500 annual earnings rate threshold, HMRC revealed that responses to the consultation indicated that the removal of the threshold would have an adverse impact on low-paid employees and possibly the voluntary sector.  As a result, the Government had decided that the threshold will be retained and the proposal will be withdrawn.
HMRC has now published a summary of the responses to the consultation and given some rather non-committal views on the way forward.  HMRC received 67 written responses, held eight meetings and employed two research companies to discuss the proposals with employers and employees.

The overall response was negative, with most respondents against the proposals.  Other saw the benefits of employer choice but were opposed to compulsory payrolling.  Many thought that the changes would increase administrative burdens, especially for small employers.  A large number of respondents did not view the P11D reporting regime as burdensome; their greater concern was with the method used to calculate the value of particular benefits.  And a recurring theme among the responses was that clarification of a number of issues was necessary before support could be given to the concept of payrolling.

Among the many issues raised by respondents were:

• there was more support for the existing year-end reporting procedures, because they are well established and provide time after the year end to get the figures right, and because it is seen as a separate process to PAYE
• the problem is not the completion of the forms but the method by which employers have to calculate the amounts to put on the forms
• simplification of the current complex legislation would likely overcome the perceived problems with P11D reporting
• employers saw the need for statutory backing but not compulsory payrolling of all benefits; the preference was for choice rather than compulsion, with the option to payroll those benefits that suited them best
• employers do not want to complicate P45 procedures by including details of benefits and do not want any responsibility for collecting tax due on benefits provided by the previous employer
  
• the concept of estimating the value of benefits and making later adjustments was generally unacceptable; unless HMRC is prepared to accept best estimates as the final figure, those benefits should be reported as at present.

HMRC acknowledges that, if payrolling is to be introduced in some form, a number of issues raised will need further detailed consideration and analysis.  The next update is expected to be at the time of the 2008 Pre-Budget Report.

Further information:

Payroll deadlines during the next month

July 22 – For employers who pay their tax and NICs to the Accounts Office electronically, this is the deadline for electronic payments, including payments of Class 1A NICs to be cleared into the HMRC bank account.  Payments through BACS must be initiated by July 20 at the latest.

August 2 – This is the date by which any changes to the provision of company cars in the three months to July 5 must be reported using form P46(Car).

August 5 – This is the final day of tax month 4.  Tax and NICs etc for payments made in the tax month to August 5 are due for payment to the Accounts Office by August 19, or by August 22 if paid electronically.

August 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

National Minimum Wage

Does an employer who always pays more than the national minimum wage hourly rate have to worry about compliance?

The minimum hourly rates in recent years and up to 1 October 2008 are shown in the following table:

The new rates apply to wages paid in the first pay reference period that commences on or after 1 October each year.  A “pay reference period” is the same as a worker’s pay period, except that it cannot be longer than one month.

For example, if employees are paid for work performed between Saturday and Friday on that Friday, the first pay reference period on or after 1 October 2008 starts on Saturday, 4 October.  The wages paid on 10 October are the first wages paid in October that must meet the new NMW rates.

With regard to general compliance, if an employer pays at least the minimum hourly rate for every hour worked, including all overtime hours, the employer will never be in breach of the rules.  In the terminology of the legislation, workers who are paid an hourly-rate for every hour they work are performing “time work”. This type of work also includes workers who are paid piece rates during working hours that are controlled by the employer.

It is possible, in certain circumstances, to pay workers who are performing “time work” at a rate that is lower than the statutory minimum but, in such a case, the employer must fully understand the rather complex issues concerning the hours and payments that count, or do not count, towards the compliance calculation, for example, the accommodation offset.   
There are, however, three other types of “work,

• “output work” – where workers are paid piece rates but the employer has no control over their hours of work
• “salaried hours work” – where workers are paid an annual salary, in equal instalments, but are not paid for hours in excess of their annual hours
• “unmeasured work” – where workers’ earnings are not linked in any way to the hours they work.

Where an employer does not always pay for overtime, or pays piece rates to workers who are working on the employer’s premises, or provides work that falls into these three additional types of work, compliance cannot be assumed.  In the following situations, it may not be possible to demonstrate compliance unless each worker’s actual working hours are recorded:

• workers who are paid an hourly-rate but who are not paid for every hour of overtime
• salaried workers whose salary is paid in equal instalments throughout the year, whose working hours are defined in their contracts, but who are not paid when they work extra hours, unless they never exceed their contractual annual hours
• output workers paid piece rates, or by commission, for work performed under the employer’s control
• output workers paid piece rates, or by commission, but whose work is not performed under the employer’s control, unless the employer pays “fair piece rates” and meets the necessary notification requirements
• workers whose working hours are unmeasured, e.g. because their contracts do not specify their hours of work, unless the employer and worker enter into a “daily average” agreement.

The statutory requirements for demonstrating national minimum wage compliance is probably least understood in the case of salaried workers.  As long as a salaried employee (as defined above) does not work more than the hours defined in the contract and is paid a regular salary in respect of those hours, compliance is demonstrated simply by dividing the worker’s annual salary by the worker’s annual hours.

However, if the worker is not paid for hours worked above the annual hours, e.g. a worker contracted to work 40 hours per week but who regularly works 48 hours per week without any extra payment, those extra hours each week must be taken into consideration in order to demonstrate compliance.  It is therefore necessary for the employer to keep records of all hours worked by salaried workers who are not paid for some of the hours they work.

Special statutory rules apply for salaried workers as soon as a worker has worked the contracted annual hours.  It is not difficult to show that a worker with an annual salary of £23,000, contracted to work 40 hours a week (i.e. an hourly rate of over £11), who gets no additional pay for working more than 40 hours a week, but who works 48 hours on average over the year, will be paid below the national minimum rate in one or more months towards the end of the calculation year.  In that situation, the employer would have to top up the salaried worker’s earnings in those months to at least the national minimum wage.

For worked examples of the compliance calculations for salaried workers, see the booklet A detailed guide to the National Minimum Wage, published by the DBERR (at www.berr.gov.uk/files/file11671.pdf), from page 73 onwards, although the rates shown are those that applied from October 2004.

GUERNSEY

Taxation of Benefits-in-Kind

Proposals to tax benefits through ETI

In a newly published States Report, the Treasury and Resources Department proposes

1. to change income tax law to require the taxation of benefits-in-kind through the Employees’ Tax Instalment (ETI) Scheme from 1 January 2009, and
2. to change income tax and social security law to provide for the exchange of information between the respective departments in order to ensure more efficient assessment and collection of income tax and social security contributions.

Benefits-in-Kind
Under the ETI Scheme an employer is required to deduct tax from an employee’s emoluments but the present legislation only applies the provisions of the ETI Scheme where “any payment of, or on account of, emoluments is made by an employer”.  Although some benefits, such as private expenses paid by the employer, are covered by the ETI Scheme, the majority of benefits are detailed on the Benefit in Kind Return at the end of the tax year.

Employers are already able to tax benefits through ETI but, if they do so, they must still be reported at the year end and the Return must be clearly indicate that tax has already been deducted.

The principal reason given in the Report for extending this procedure to all benefits-in-kind and collecting the tax on a weekly or monthly basis, with the quarterly return and remittance continuing as at present, is that it would serve to reduce the Income Tax Office’s resources considerably.

Income Tax Office statistics show that during the calendar year 2006 (the year for which the most reliable information is currently available):

• 331 Guernsey employers provided benefits-in-kind to employees (equivalent to approximately 1 in 11 employers)
• 1146 employees received benefits-in-kind
• The tax yield from benefits-in-kind was approximately £640,000. 

The Social Security Department currently collects contributions on only limited benefits-in-kind but proposes that this should be extended to include similar benefits, and similar values, as used by the Income Tax Office.  The Social Security Department reports that there appears to be a trend for employers increasingly to provide benefits-in-kind instead of cash-based emoluments, and that one of the reasons for this may be the avoidance of social security contributions.

The Social Security Department currently has no mechanism by which it can economically identify benefits-in-kind which are received by employees and charge contributions unless the benefits-in-kind are treated as part of the employee’s total emoluments for the purposes of the ETI Scheme, in which case social security contributions are automatically charged accordingly.

Historically, the Social Security Department has made the assumption that the majority of benefits-in-kind would be provided to better remunerated employees and, as those employees were probably already paying maximum, or near maximum, social security contributions, the resource cost of trying to collect social security contributions on benefits-in-kind would likely outweigh the potential gain.   

The Social Security Department believes, however, that the recent increase in the annual upper earnings limit to £64,896 for employees and £108,108 for employers gives rise to two consequences:

• more employees who receive benefits-in-kind will fall within the new upper earnings limit and would, therefore, escape social security contributions on the benefits-in-kind they receive unless they are dealt with through the ETI Scheme, and
• the increasing upper earnings limit may actually encourage the use of schemes designed for the avoidance of social security contributions in the future.

No statistical information is available from Income Tax databases which would help evaluate the likely extent of the loss of social security contributions from benefits-in-kind.  The Departments believe that it is unfair that an employee remunerated solely should pay a higher social security contribution than another employee who receives the same aggregate total of emoluments but whose remuneration package consists partly of benefits-in-kind.

Departmental exchange of information
There are significant restrictions on the persons to whom the Administrator of Income Tax may give information provided to him by taxpayers, employers, etc.   The information that may currently be disclosed to the Social Security Department is restricted to the name and address of any employer and the address of any other person.

Similarly, Social Insurance Law also places restrictions on the extent to which the Administrator, Social Security Department, may disclose information to persons outside of the Department.  Without the consent of the person to whom the information relates, this is limited, mainly, to disclosures for the purposes of criminal proceedings or for the investigation of crime, and a limited power to disclose information (other than in relation to the income of a person) where the purpose of the disclosure is approved by the Department.

Although the purposes of the Income Tax Office and the Social Security Department include the collection of income tax and social security contributions respectively, both organisations use a person’s income as the basis for assessing the amount of the tax and contributions.  As a consequence there are many occasions when the work of the Income Tax Office and the Social Security Department overlap.
It is clear to both Treasury and Resources Department and the Social Security Department that a formal gateway providing for the exchange of information could lead to the avoidance of the duplication of effort and more efficient assessment and collection of both income tax and social security contributions.

The proposal, therefore, is that the law governing the operation of the Income Tax Office and the Social Security Department be changed to allow information, including details of taxpayers’ income, to be exchanged to assist the departments to exercise their respective functions.

The Report asks the States of Guernsey to agree to the proposals and direct the preparation of the necessary legislative changes in order for them to be effective from 1 January 2009.

Further information:

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