News Items – at 25th October 2007

Author’s Note

The news item Contracting-out and the State Second Pension may not, initially, appear to be highly relevant in the context of payroll.  However, it is probably the most significant of all the items provided this week and should be studied carefully.

Pre-Budget Report

Headline announcements

The Chancellor presented his 2007 Pre-Budget Report (PBR) to Parliament on 9 October 2007.  Most of the matters relevant to Payroll and HR were set out in supporting documents and press releases issued at the time.  However, as the date of the PBR preceded the publication of the September 2007 Retail Price Index (RPI), the announcement about the annual statutory increases to NICs thresholds, tax allowances and statutory payments was not made until 18 October, following publication of the September 2007 RPI.

Several of the PBR announcements are payroll-related and are discussed in detail in this newsletter under the following headings:

• Contracting-out and the State Second Pension
• Removal of NICs exemption for holiday pay schemes
• Alignment of PAYE and NICs
• Car Fuel Benefit Charge.

The Pre-Budget Statement and the associated documents are available on the HM Treasury and HMRC websites.

Further information:
2007 Pre-Budget Report and Comprehensive Spending Review  http://www.hm-treasury.gov.uk/pbr_csr/pbr_csr07_index.cfm
2007 Pre-Budget Report and Comprehensive Spending Review  http://www.hmrc.gov.uk/pbr2007/index.htm

Annual Uprating of PAYE, NICs and related thresholds

Thresholds to increase by around 4% from April 2008

UK legislation requires the PAYE, NICs and related thresholds to rise each year in line with the Retail Price Index.  They are increasing, from 6 April 2008, by 3.948% (i.e. the year-on-year increase at September 2007), rounded up according to the statutory rules in section 257C of the Income and Corporations Taxes Act 1988.

NICs thresholds
The NICs thresholds for 2007/08 and for 2008/09 are set out in the following Table.  The increases are effective from 6 April 2008.

Notes:
*  These values are specifically defined in statute.  All other values are calculated according to statutory uplift and rounding rules.

1 The weekly LEL is set at the rate of the basic state pension for 2008/09 (i.e. £90.70) and rounded down to the next whole pound.

2 The RPI increase would suggest an increase in the weekly ET from £100 to £104.  However, the statutory calculation requires the annual ET (set at the same rate as the personal tax allowance) to be divided by 52 and rounded up in order to obtain the weekly ET.  This calculation gives £105.

3 The substantial increase in the UEL is the first stage of the process announced in the 2007 Budget to align, from April 2009, the UEL, the income tax basic rate limit (BRL) and the self-employed annual Class 4 NICs upper profits limit (UPL).  The new UEL is set at the same level as the UPL from 6 April 2008.  (See Tax Rates and Bands, below)

There are no changes to Class 1 NICs rates for 2008/09.  However, see Contracted-out Rebates, below, for newly-announced changes that will apply for 2009/10.

Tax allowances
The tax allowances from 6 April 2008 are shown in the following Table.  The increases are in line with inflation.

Note:
1 It was announced in the 2007 Budget that, from April 2008, the two age-related personal allowances would increase by £1,180 above the normal annual indexation increase – hence the over 19% increase.  Indexed rises will be maintained in the following two years but, by 2011, the Government’s intention is for the age 75 allowance to be £10,000.

The personal allowance for employees under age 65 is set at £5,435, the same level as the NICs earnings threshold.  The new emergency tax code from April 2008 will be 543L and the weekly tax threshold will be £105.  The change to L suffix tax codes will be made in bulk from the start of the 2008/09 tax year.  Instructions will be provided on form P9X, to be issued in February 2008 on the Employer CD-ROM.  The update will involve an increase in 21 points to all L tax codes.

Tax rates and bands
It was announced in the 2007 Budget that, from 6 April 2008, the 10% starting rate for earned income and pensions will be removed and the 22% basic rate of tax will be reduced to 20%.   The band limit from which the higher rate of tax applies is expected to increase from April by the September 2007 RPI increase.  The following rates and bands for 2008/09 are subject to confirmation in the 2008 Budget.

Instructions on how to implement the changes will be provided in the Employer’s Budget Pack, sent out subsequent to the Budget, and will be applied on the first payday on or after a date in May or June 2008.  Based on practice in recent years, the date may be 18 May, i.e. week 7, or 15 June, i.e. week 11.

The existing Taxable Pay Tables SR + B to D (dated May 2007) will continue to be used until the week in 2007/08 when the Budget changes are applied.  The new tables for 2008/09 will be known as Taxable Pay Tables B to D.

From April 2008, the first stage of the alignment of the UEL, income tax basic rate limit (BRL) and self-employed upper profits limit (UPL) will have been implemented, giving the following figures:

• annual BRL - £41,435, i.e. £36,000, plus £5,435 personal allowance
• annual UEL - £40,040
• annual UPL - £40,040.

The level of earnings at which Class 1 NICs, Class 4 NICs and income tax start to be paid are already aligned at the Class 1 NICs earnings threshold, the Class 4 NICs lower profits limit and the income tax threshold - £5,435 for 2008/09.  The objective, from April 2009, is to create the situation where the level at which (1) the basic rate of tax, (2) self-employed Class 4 NICs, and (3) the full rate of employee Class 1 NICs stop being paid are also aligned at the same value.  At April 2009, the BRL will be increased again by inflation and the UEL and UPL will be increased to the same figure.  After that, all three thresholds will be increased by a further £800. 

To illustrate, if there were a 4% inflation increase at September 2008, the thresholds would increase as follows:

• annual BRL - £43,955, i.e. £37,500 (£36,000 + 4% rounded), plus £5,655 personal allowance (£5,435 + 4% rounded), plus £800
• annual UEL and UPL - £43,955, i.e. £42,120 (£770 + 4% rounded × 52), plus 1,035 top-up, plus £800.

Effect on employees and employers
Following the Pre-Budget Report and later publication of the NICs and tax changes, there was considerable comment in the press about “stealth taxes”, particularly in connection with the large increase in the NICs upper earnings limit.  The separate and combined effect of the NICs and income changes on employees and employers is demonstrated in the following Table.

The figures are for employees with NICs table letter A, tax code 522L in 2007/08, and tax code 543L in 2008/09.  They use the same salary in both tax years so do not take into consideration the effects of an annual pay rise.

The Table shows clearly that there is no stealth tax effect from the increase in the NICs upper earnings limit.  The NICs increase offsets the reduction in tax for higher-paid employees as a result of the fall in the basic rate of tax to 20%.  The main losers from the changes are employees who are losing the benefit of the 10% tax band; in fact anyone earning up to £15,000 will pay more in tax and NICs overall.  There is a small consistent saving for employers of about £27 for the year throughout the range of salaries.

Statutory payments
The weekly rates of SSP, SMP, SAP and SPP are also increased annually in line with the RPI each September but, at the time of publication, the new figures had not been issued.   As the uprating rules are much less precisely defined in statute than they are for tax and NICs, we have not given any estimates.  It is hoped, however, that, following a positive response from the Department for Work and Pensions in December 2006, the standard rate of SMP, SAP and SPP will be increased to a figure that is exactly divisible by 7.  This will remove the rounding problems incurred by employers who make use of the facility to calculate these statutory payments using a daily rate.

Further information:
http://www.hm-treasury.gov.uk/newsroom_and_speeches/press/2007/press_109_07.cfm

Contracting-out and the State Second Pension

New NICs recording requirement from April 2009

The State Second Pension (S2P) is paid, in addition to the basic state pension, to employees who are not in contracted-out employment in respect of each tax year in which their earnings exceed the annual NICs lower earnings limit.  Entitlement is accrued annually on the amount of each employee’s “surplus earnings”, i.e. the earnings between the lower earnings limit (LEL) and the upper earnings limit (UEL).  Within that range of earnings there are three accrual rates that are weighted heavily in favour of those with low earnings.
The accrual thresholds for 2007/08 are:

The accrual rates for the current and coming tax years are:

Not only is the highest accrual rate targeted at employees with earnings up to £13,000, but an employee with earnings above the QEF but less than the LET is treated as having earnings of £13,000.  For example, an employee with only £5,000 earnings in the year (surplus earnings of £476) is treated as having surplus earnings of £8,476 (i.e. £13,000 - £4,524).  

S2P is currently a variable pension, i.e. the higher the employee’s “surplus earnings”, the higher the second pension.  However, the Government’s long-term objective is to change S2P to a fixed additional pension for everyone, by about 2030.  To achieve this objective, a number of changes are necessary and already have a statutory basis in the Pensions Act 2007. 

One of the first changes is to reduce the three accrual rates to two by merging the second two bands.  This will take place from the 2010/11 tax year, when the accrual rates will be 40% on earnings between the QEF and the LET, and 10% on earnings between the LET and the AUEL.

From the 2012/13 tax year*, the 40% accrual rate will be replaced by a weekly flat-rate accrual amount of £1.50, equivalent to an annual amount of £78.00.  (Note that the £1.50 is not a payroll deduction but an automatic pension accrual based on the employee having earnings between the LEL and the LET in the particular week on which primary NICs were paid.)  The additional 10% accrual rate on earnings above the LET will continue in place and will ultimately be withdrawn by around 2030, by which time S2P will be a flat-rate pension benefit.
(*Note: 2012/13 is the planned commencement date for these reforms but is subject to confirmation.  References to “2012/13” in the following paragraphs should be read with that understanding.) 
Another significant change will be the abolition of contracting-out for both occupational and personal defined contribution (money purchase) schemes, also from 2012/13.  The effect will be that members of schemes that had been contracted-out on a money purchase basis will be contracted back into S2P and will start to build up entitlement to the additional state pension.

The Government also has long-term plans to abolish contracting-out for defined benefit (salary-related) pension schemes.  From 2012/13, the flat-rate accrual and the additional 10% accrual rate will also apply to contracted-out employment, thereby drawing employees into the state second pension scheme.  This change will affect the level of the rebate paid in respect of contracted-out employment, resulting in higher contracted-out NICs rates from 2012/13.

The Pensions Act 2007, among the rules governing the new flat-rate accrual, introduces a new upper limit, the “Upper Accrual Point” (UAP).  Its value has not yet been set but will be less than the annual UEL from April 2009 after alignment with the income tax basic rate limit (BRL) but more than the UEL would have been under normal indexation.  (See the news item Annual Uprating of PAYE, NICs and related thresholds)    The UAP will replace the AUEL as the ceiling for determining an employee’s

• surplus earnings for S2P purposes, and
• contracted-out earnings for applying lower contracted-out NICs rates.

As enacted, the UEL would continue to be used for these purposes until the 2011/12 tax year and the UAP would replace the UEL in 2012/13.  The UEL would continue to be the starting point from which primary NICs are paid at the 1% rate.

However, the use of the UAP, as defined in the Pensions Act 2007, was defined before the Chancellor’s announcement in the 2007 Budget that the UEL would be increased considerably to align it with the income tax basic rate limit.  From April 2009, the UEL is likely to be around £44,000, much higher than was anticipated when the reforms to S2P were decided.  If the UEL had been indexed normally, it would probably only have been about £37,700 from April 2009.  To maintain the structure of the S2P reforms and prevent excessive accrual between 2009 and 2012, the Government has announced in the Pre-Budget Report that the UAP will be introduced three years earlier, from April 2009.

The implications of this announcement are enormous and far outweigh, from a payroll perspective, the effects of the upper limit alignments.

The implications for S2P are not directly payroll-related.  From April 2009, the UAP will replace the AUEL as the upper limit for earnings-related accrual under S2P.

However, the implications for the payroll calculation and recording of NICs are considerable:

• as at present, no NICs will be due on earnings between the LEL and the ET, and rebates will continue to apply in contracted-out employment
• NICs will be due at current rates on earnings between the ET and the UAP, with lower rates, reflecting the appropriate rebate, continuing to apply in contracted-out employment
• NICS will be due at the full rates (11% primary and 12.8% secondary) on earnings between the UAP and UEL, even in contracted-out employment
• NICs will be due (1% primary and 12.8% secondary) on earnings above the UEL
• the UAP will be the upper threshold for the employer’s liability for “minimum payments” in defined contribution pension scheme
• earnings for NICs purposes will be split on the P11 Deductions Working Sheet (or equivalent) into (1) earnings up to LEL, (2) earnings between LEL and ET, (3) earnings between ET and UAP, and (4) earnings between UAP and UEL
• year-end P14s will also reflect the same four splits of each employee’s earnings.

Legislation to bring forward the introduction of the Upper Accrual Point is to be included in a new National Insurance Contributions Bill and in relevant Regulations.  The Bill is likely to be introduced in the next session of Parliament.  Draft Regulations providing the level of the UAP and employers’ reporting requirements will be published in January 2008.  These significant changes will have to be fully tested and operational in payroll software from 6 April 2009, the same date from which electronic filing of in-year PAYE forms becomes mandatory for employers with 50 or more employees.

Further information:
Changes to State Second Pension (S2P) And Contracting Out  http://www.hmrc.gov.uk/pbr2007/pbrn1.pdf
Pensions Act 2007  http://www.opsi.gov.uk/acts/acts2007/ukpga_20070022_en.pdf
Explanatory Note on the Pensions Act 2007  http://www.opsi.gov.uk/acts/en2007/ukpgaen_20070022_en.pdf

Removal of NICs exemption for holiday pay schemes

NICs savings for employers and employees removed from 30 October 2007

In one of our newsletters in August 2006, we suggested that, following the declaration by the European Court of Justice that the use of “rolled-up holiday pay” schemes was in breach of the Working Time Directive, employers who had been using such arrangements might consider using instead the “holiday pay fund” schemes operated in the construction and related industries.  These schemes take advantage of a statutory exemption that allows holiday pay from such schemes to be paid without any liability for Class 1 NICs – but only if the statutory conditions are met.

HMRC’s CWG2 Employer Further Guide to PAYE and NICs describes holiday pay schemes in the construction industry where groups of employers contribute to a central, independently managed holiday pay fund.  From that fund, the employees receive holiday pay when they go on holiday or when they leave the employment.  The payment is usually made through the employer’s payroll and is subject to PAYE tax but not to Class 1 NICs.  Afterwards, the employer recovers the amount of the payment from the fund.  The fund may, in some situations, make payments direct to employees, in which case there is also no NICs liability but special PAYE procedures apply.

The NICs exemption was originally introduced in the construction industry in 1979.  The nature of the industry is that workers move regularly from one project to another and are not always with one employer long enough to take the holidays they have accrued.  An arrangement whereby employers would buy holiday stamps and stick them on individual employee cards was introduced to resolve that problem.  Employees could take their holiday cards with them from one employer to another and the next employer could redeem the stamps for which previous employers had paid.  However, that created a problem for the employer redeeming the stamps because, on paying the holiday pay to the employee, the employer had to pay NICs on the value of all of the stamps redeemed, including those that had been purchased by previous employers.  An extreme case would have been an employee starting a new construction job a week before the Christmas closure.  The new employer could redeem the stamps that the previous employer had purchased for, say, two weeks’ holiday pay, but became liable for Class 1 NICs on the whole payment.  The NICs exemption was introduced to prevent this situation arising.

In recent years, holiday pay stamps have been replaced by holiday credits and the process is computerised.  The practice of carrying forward stamps or credits from one employer to the next was discontinued from October 1998 when the requirement for employers to pay outstanding holiday entitlement on termination of employment was introduced by the Working Time Regulations 1998.

That does not mean, however, that construction employers benefit in full from the NICs savings.  The construction industry Working Rule Agreement requires the employer to pay pension contributions for each employee (currently £3 per week) and to provide life and accident cover.  For this reason, construction employers cannot simply buy holiday credits; they have to buy the whole package, including the pension and insurance benefits.  The employees too are encouraged to contribute to the stakeholder pension and employers are required to match any amount that employees contribute between £3 and £10 per week.

For further information about holiday pay and other benefits in the construction industry see www.bandce.co.uk/corporate/about.asp and www.ucatt.info/content/blogcategory/23/34/.
The statutory exemption itself is to be found in the Social Security Contributions Regulations 2001, Schedule 3, Part X, Paragraph 12.  This provides that payments in respect of a period of holiday entitlement can be disregarded for Class 1 NICs purposes where

1. the sum paid is derived directly or indirectly from a fund –
   1. to which more than one secondary contributor contributes, and
   2. the management and control of which are not vested in those secondary contributors; or
2. the person making the payment is entitled to be reimbursed from such a fund.

There is nothing in the wording of the exemption that limits its application to the construction industry.  As a result, a number of enterprising providers of benefits schemes have, over the past couple of years, set up independent holiday pay funds and offered the statutory scheme to businesses outside of the construction industry.  Many large companies have taken advantage of the scheme and they and their employees are enjoying significant NICs savings on payments of holiday pay – amounting in some cases to millions of pounds.

In August 2006, HMRC issued the following press statement about the use of the exemption by employers outside of the construction industry:
“We would not normally expect employees outside of ‘construction work’ to be included in such schemes, because the legislation was introduced to cater for payments made to workers within that industry.
However, there is nothing in the legislation to prevent employers in other industries using these provisions.  The first point of contact for such an enquiry would be the employer’s HMRC office. 
We naturally monitor the operation of the exemption to ensure that the legislation is meeting its objectives.  We are reviewing the operation of the legislation by reference to its original policy intention, and changes since it was first introduced.”

In our August 2006 newsletter, we made the following comments on the issues facing HMRC and those employers outside of the construction industry that had taken up the scheme:
While HMRC concedes in the reply that there is nothing in the legislation to prevent other employers taking advantage of the NICs savings by setting up their own schemes, there is clearly some concern about the future of the exemption.  If the exemption was introduced originally to meet specific problems in the construction industry and was effectively conditional on the employers providing other benefits for employees, it is understandable that HMRC would be concerned about its use by other employers who are introducing their schemes solely to make NICs savings.  There is nothing in the legislation that requires any employer to use the savings for other purposes. 

Another factor that HMRC is likely to consider is that the key reason for introducing the NICs exemption, the need for an employee’s holiday entitlement to be passed on from one employer to the next, ceased to be significant when the requirement to pay holiday pay on termination of employment was introduced by the Working Time Regulations 1998.

An HMRC decision to withdraw the NICs exemption would have significant cost implications for construction industry employers.  An alternative approach would be for the legislation to be changed so that, in order to use the exemption, employers are required to provide a package of benefits similar to those provided to construction employees.  The problem with that approach is that the Government, as proposed in the White Paper Security in retirement: towards a new pensions system, already intends to make employer contributions to pension schemes compulsory from 2012.

An HMRC decision to withdraw the exemption would also create significant problems for those employers outside of the construction industry that have introduced holiday pay fund schemes.  As revealed by a number of postings on the PayPerShop Forum (www.paypershop.com/phpBB2/viewtopic.php?t=235), some employees are suspicious of their employer’s motives in introducing the scheme, believing that the savings are greater for employers than they are for employees.  Having promised their employees that they will make annual savings on their holiday pay, how will the employers back-track from that?

HMRC’s written statement encourages employers to discuss the issues with their tax office before replacing their existing holiday pay arrangements and advertising the NICs savings to their employees.  At the present time, employers should be very cautious and, if they decide to introduce a scheme with NICs savings, make sure that employees know that the savings will stop if the exemption is withdrawn.

The Government’s decision on the continued use of the exemption was announced in the Chancellor’s Pre-Budget Report documents.   The exemption is withdrawn from 30 October 2007.  However, it will continue to apply for five years, until 30 October 2012, in the construction industry if

• the secondary contributor (i.e. the employer) is carrying on a business which includes construction operations; and
• the employed earner (i.e. the employee) was personally engaged in such operations at the time that entitlement to that pay accrued.

In explanation of the exemption’s retention in the construction industry, the Pre-Budget Report document states:
The exemption was aimed at addressing problems of high mobility and turnover of the labour force in the construction industry, but working time regulations now ensure holiday entitlement is preserved in all sectors and therefore an on-going exemption for construction is no longer appropriate.  However, given the longstanding nature and wide range of benefits typically provided by schemes, the exemption will be maintained for the construction industry for 5 years to give it sufficient time to adjust.

The withdrawal of the exemption has had a mixed reception.  The principal provider of the scheme to the construction industry, B&CE Benefit Schemes, has accepted the change without comment and welcomed the continuation of the exemption for a five year period.  (www.bandce.co.uk/).  In contrast, the Union of Construction, Allied Trades and Technicians (UCATT) has “reacted angrily” to this “major tax change” and believes that “the closing of the scheme is potentially disastrous, as many companies will use the changes to end direct employment of workers and instead opt for bogus self-employment” in order to avoid employer NICs. (www.ucatt.info/content/view/277/30/2007/10/)

Outside of the construction industry, one scheme, The Holiday Pay Fund, has immediately changed its website so as to offer its scheme solely to employers in the construction industry.  Other employers are advised to contact their fund provider or a named contact in that business.  (www.theholidaypayfund.co.uk/Q&A.htm).   

Further information:
The Social Security (Contributions) (Amendment No. 9) Regulations 2007  http://www.opsi.gov.uk/si/si2007/uksi_20072905_en.pdf
PBRN02 - Exploitation of National Insurance Contributions Exemption  http://www.hmrc.gov.uk/pbr2007/pbrn2.pdf
Protecting tax revenues  http://www.hm-treasury.gov.uk/pbr_csr/press/pbr_csr07_press02.cfm

Alignment of PAYE and NICs

No cumulative collection of NICs but consultation on benefits and expenses

The Government announced at the time of the 2006 Budget that it would review the case for closer alignment of the income tax and NICs systems.  The findings of this review were published with the 2007 Pre-Budget Report.

Collecting NICs cumulatively on an annual basis
The review considered the implications for employers, individuals and Government of the common suggestion that NICS should be collected in a similar manner to PAYE tax, by moving it onto an annual basis and collecting it cumulatively.  It did not, however, look at merging the two taxes into one, on the basis that current policy dictates that each system serves a different purpose, with NICs providing entitlement to contributory benefits.
The review found that:

• Net savings for employers depend on the extent to which they continue to move away from manual processing but are smaller than might have been expected.
• Maximum estimated savings are around 4.5% of the costs of operating the payroll taxes by 2012, which is the earliest year by which changes could be introduced. One-off transitional costs of alignment would be around £200 million.
• While approximately 5 million people would save an average of £120 per year in NICs, 1 million individuals, including some low earners, would pay up to £550 more NICs per year and the Exchequer costs would be around £340 million per year.

On that basis, the Government has concluded that, on balance, the benefits of administrative alignment do not outweigh the costs.

However, even though the review does not recommend administrative alignment, a number of areas have been identified where improvements to the current systems could be made.  As a result, the Government will consult further on:

• collecting tax on benefits in kind and expenses through the payroll, and
• improving and aligning information and guidance on tax and NICs.

Benefits in Kind and expenses
Forms P11D and P9D returns, used by employers use to report benefits in kind and expenses that have been provided to employees, are filed electronically or in paper form by 6 July each year, following the end of each tax year.  Some employer representatives have suggested that completing and filing these returns is an administrative burden that could be avoided if benefits in kind and expenses could be accounted for through the payroll for both tax and NICs purposes when they arise.  In addition, HMRC’s Administrative Burdens Advisory Board has identified this separate process as one of the major irritants for employers in meeting their HMRC obligations.

Initial analysis suggests that including benefits in kind and expense details on forms P14 and P35 and withdrawing the separate requirement for forms P11D and P9D could reduce the costs to employers of meeting administrative obligations by between £14 million and £21 million.  Further administrative savings in the region of £850,000 per year could be realised by removing the £8,500 earnings threshold that distinguished which benefits are reported on form P9D and which on form P11D.

Some employers already have informal agreements with their local offices to tax benefits through the payroll but, as there is no statutory basis to do so, such agreements do not remove the requirement for employers to file end of year P11D/P9D returns for these items.

The Government thinks that a more formalised statutory scheme for taxing expenses and benefits in kind through the payroll could help to align the process of accounting for tax and NICs and to reduce the number of separate end of year processes by abolishing the P11D/P9D forms and rationalising the number of filing dates.  Where payments are liable to Class 1 NICs the process for dealing with tax and NICs would be more fully aligned although the Government has no plans to fully introduce a Class 1 charge on benefits in kind that currently attract a Class 1A charge.  Introducing a new statutory scheme would involve estimated one-off costs for employers of between £15 million and £35 million.

HMRC is preparing to issue a consultation document in November 2007 on how best to introduce a system to tax benefits in kind and expenses through the payroll.  The consultation will also include a proposal to remove the £8,500 threshold.

Guidance on tax and NICs
Existing HMRC guidance on PAYE tax and Class 1 NICs tends to treat the two systems separately and generally takes the legislation as its starting point rather than the tasks and responsibilities of employers and individuals.  The guidance still reflects its origin in the work of two previously separate departments (the Inland Revenue and the Contributions Agency).

It has been proposed that there is scope for improving the structures, presentation and clarity of the guidance which would result in significant savings for employers by

• reducing the risk of employers making errors in calculating employees’ tax and NICs liability, and
• making it easier for them to deal with queries from employees.

Measures already taken by HMRC to improve and simplify guidance includes improvements to the Employers CD-ROM, in particular the P11 calculator, and online combined tax and NICs guidance on benefits in kind.

However, HMRC accepts that there are areas where there is scope for further improvement including:

• shared and consistent use of language to describe the two systems, to make it clear whether the
• advice applies to tax only, to NICs only, or to both
• shifting the focus of the guidance from the legislative framework to the tasks and responsibilities of employers and individuals
• improving the lay-out and presentation, and
• greater cohesiveness and clarity, including more practical examples.

Making significant changes to the structure and format of HMRC’s guidance is sensible only where the changes will genuinely aid employers.  The Government does not wish to disrupt guidance that employers find useful and recognises that different employers will have different preferences.  Consequently, HMRC intends to consult during 2007 with employers and businesses about priority areas for improving its guidance.

Further information:
Income tax and national insurance alignment: an evidence-based assessment  http://www.hm-treasury.gov.uk/media/B/B/pbr_csr07_incometax713.pdf

Car Fuel Benefit Charge

17% increase from April 2008

When an employee is provided with free fuel for a company car for private use, the fuel benefit charge is calculated by multiplying the car’s CO2 emission rating by a fixed multiplier, currently £14,400.  From 6 April 2008, this multiplier will increase to £16,900, effectively increasing the employee’s tax charge and the employer’s Class 1A NICs charge by over 17%.

Further information:
PBRN23 - Fuel Benefit Charge  http://www.hmrc.gov.uk/pbr2007/pbrn23.pdf

Filing of PAYE In-year Returns

Clarification from new Regulations

As part of the process of introducing mandatory filing of forms P45 and P46 from April 2009 for employers with 50 or more employees, HMRC is making a number of changes to the content and filing arrangements for forms P45, P46 and is introducing a new form P46(Pen).  The statutory basis for these changes is now in place, with the necessary amendments to the Income Tax (Pay As You Earn) Regulations 2003 coming into force from 6 April 2008 and 6 April 2009, as appropriate.

The adjustments to PAYE procedures have already been explained in recent newsletters but are summarised below, with some clarifications as revealed by the amendment Regulations.  Note that the changes and dates below are statutory changes and HMRC may introduce some of them earlier.  For example, P45s from April 2008 will include date of birth and gender but providing that information is not mandatory until April 2009.

6 April 2008
P46

• must be sent to HMRC if Statement A or B applies and when the first payment to the new employee equals or exceeds the NICS lower earnings limit (instead of when it exceeds the PAYE threshold)
• if the employee has not completed the form, or has not fully completed it, the employer must enter the missing information before sending it to HMRC

6 April 2009
P45(Part 1)

• inclusion of employee’s date of birth and gender (but not on the other Parts)
• the employer must enter new employee’s date of birth and gender (date of birth no longer optional)

P45(Part 3)

• the pension payer (who is not the pensioner’s employer immediately before retirement) must enter the pensioner’s date of birth and gender

P46(Pen)

• the new form for providing details of a new pensioner, where no P45 is completed because the pension payer was the pensioner’s employer immediately before retirement (replaces form P160)
• the pension provider must give a copy of the information provided on the completed form to the pensioner (not necessarily a copy of the completed form)
• the employer must enter the pensioner’s date of birth and gender
• the employer must enter the annual amount of the pension payable (and payment frequency no longer required)
• must be completed by a pension payer for a pensioner who is a non-UK resident and who has not provided a P45 (instead of form P46)
• must be completed by a pension payer for a pensioner who is a UK resident and who has not provided a P45 (instead of form P46)
• if filed electronically, the pension provider must enter the pensioner’s address and date of birth (optional for PENNOT electronic filing)

The Regulations also provide HMRC with the statutory authority, from 6 April 2008, to send the annual e-filing notice and e-payment notice to employers electronically, instead of just by post.

Further information:
The Income Tax (Pay As You Earn) (Amendment No. 4) Regulations 2007  http://www.opsi.gov.uk/si/si2007/uksi_20072969_en.pdf
Explanatory Memorandum to the Income Tax (Pay As You Earn) (Amendment No. 4) Regulations 2007  http://www.opsi.gov.uk/si/em2007/uksiem_20072969_en.pdf

Agency Workers and Statutory Sick Pay

Government intends to provide entitlement to SSP

In June 2007, the Court of Appeal agreed with the interpretation of the General Commissioners and the High Court that the statutory sick pay (SSP) legislation excludes agency workers from entitlement to SSP if they have less than three months’ continuous employment.

HMRC has announced that, when the Fixed Term Employees (Prevention of Less Favourable Treatment) Regulations 2002 were made for the purpose of giving fixed term employees equal employment rights with permanent employees, it had not been the policy intention to deprive short-term employees of the right to statutory sick pay.  Accordingly, the Department for Work and Pensions is preparing Regulations to correct the situation in the coming months.

Further information:
Entitlement to Statutory Sick Pay  http://www.hmrc.gov.uk/employers/fte-ssp.htm

Health Screening and Medical Check-ups

Review of exemption from tax liabilities

In July 2007, Regulations were laid to exempt employer-provided health screening and medical check-ups from tax.  The regulations came into effect from 14 August 2007 and replaced the non-statutory treatment previously set out in HMRC guidance.

For the Regulations to apply, the health screening and/or medical check-ups have to be available to all of the employer’s employees generally on similar terms.  However, following a number of representations, HMRC is concerned that some existing health screening schemes could be affected in a way that was not envisaged at the time the Regulations were made.

HMRC wishes to discuss the issues arising from the Regulations with employers and their representatives in order to find a way forward that meets the needs of both HMRC and employers.

In the meantime, for 2007/08, HMRC will not seek to collect tax and NICs in respect of health screening and/or medical check-ups where they would not have been payable on the basis of the previous non-statutory treatment.  HMRC is contacting interested parties and representative bodies and comments can be sent by email to www.hmrc.gov.uk/asplib/mailer/mailer_form.asp?dpt=PA_HARRIS by 4 January 2008.

Further information:
Income Tax (Exemption of Minor Benefits) (Amendment) Regulations 2007  http://www.hmrc.gov.uk/si/2007-2090.pdf
The Social Security (Contributions) (Amendment No. 6) Regulations 2007  http://www.hmrc.gov.uk/si/2007-2091.pdf
Employer provided medical check ups  http://www.hmrc.gov.uk/employers/employers-checkups.htm

Additional Paternity Leave and Pay

Confirmation of when the new paternity rights will not be introduced

The Government’s intention is to increase the period for which Statutory Maternity Pay, Statutory Adoption Pay and Maternity Allowance from 39 weeks to 52 weeks and to introduce Additional Paternity Leave and Pay by the end of the current Parliament.  Although no specific date has been given, HMRC has been preparing its systems so that the new provisions could be implemented from April 2009.  It has previously been announced that implementation would not take place from April 2008.

HMRC has now confirmed that the changes will not be introduced from April 2009 and HMRC will also not be planning for an October 200 9 implementation.  It should therefore be assumed that the earliest introduction date is April 2010.

Further information:
Important information relating to Additional Paternity Leave and Pay  http://www.hmrc.gov.uk/statutory-notices/paternity-leave-pay.htm

Employment Benefits During Additional Maternity Leave

Changes planned to align entitlements during Ordinary and Additional leave

The Sex Discrimination Act 1975 is the UK’s implementation of the European Directive on “equal treatment for men and women as regards access to employment, vocational training and promotion, and working conditions”.  The Equal Treatment Directive was amended in 2002 and the Government subsequently amended the 1975 Act by means of the Employm ent Equality (Sex Discrimination) Regulations 2005, which came into force on 1 October 2005.

In February 2007, the Equal Opportunities Commission (EOC) sought a judicial review in the High Court of the Government’s implementation of the 2002 changes to the Directive.  Six issues were raised by the EOC and, in its judgement, the High Court ruled that the 2005 changes did not clearly reflect the amended Directive in the areas at issue and should be amended by the Government. 

Among the issues raised by the EOC were two points related to the entitlement of women to contractual pay and benefits during ordinary maternity leave (the first 26 weeks of absence) and additional maternity leave (the second 26 weeks of absence).  These entitlements are set out in sections 71 and 73 of the Employment Rights Act 1996 and in Regulations 9 and 17 of the Maternity and Parental Leave etc Regulations 1999.  The entitlements that are relevant to this discussion are:

• During ordinary maternity leave, a woman is entitled to the benefit of all of the terms and conditions of employment that would have applied if she had not been absent, other than her remuneration which is defined specifically as “sums payable to an employee by way of wages or salary”.
• During additional maternity leave, a woman is entitled to the benefit of any terms and conditions of her employment relating to
  • notice of the termination of the employment contract by her employer,
  • compensation in the event of redundancy, or
  • disciplinary or grievance procedures.

The EOC raised two points about these entitlements because the European Directive does not allow a woman to suffer discrimination in employment because she is on maternity leave, other than in certain permitted situations.  Are these provisions discriminatory?

According to the UK’s implementation of the European Directive, they are not discriminatory.  Section 6A of the Sex Discrimination Act 1975, as amended in 2005, states (as relevant) that it is not unlawful if a woman,

• during ordinary maternity leave, does not benefit from terms and conditions of employment relating to remuneration, other than maternity-related remuneration (e.g. SMP), and
• during additional maternity leave, does not benefit from terms and conditions of employment, other than
  maternity-related remuneration
  • notice of the termination by her employer of her contract of employment,
  • compensation in the event of redundancy,
  • disciplinary or grievance procedures.

The exceptions match the entitlements in the employment legislation and, as a result, a woman could not make a claim for discrimination where the exceptions apply. 

However, according to the EOC,

• if a woman were denied a discretionary bonus during maternity leave, she could not complain of discrimination because such a payment falls within the exceptions, but the European Court of Justice, in the case Lewin v Denda, has ruled that it would be discriminatory for an employer not to pay a discretionary bonus.
• a distinction is drawn between complaints for discrimination that could be made in respect of benefits not provided during ordinary leave and benefits not provided during additional leave, but such a distinction is not permitted by the decision of the European Court of Justice in the case Land Brandenburg v Sass.

The High Court agreed with all of the issues raised by the EOC, including the two described above, and, as a result, the Government is obliged to change the relevant legislation, including the Maternity and Parental Leave etc Regulations 1999.  The changes will include

• clarification of the meaning of “remuneration”, and
• the removal of the distinction between entitlement to non-pay benefits during ordinary maternity leave and during additional maternity leave.

No timetable has yet been announced for the changes and, as European legislation is involved, the Government is not obliged to introduce the changes from the normal April or October commencement dates.  However, if the change is made, say, from 6 April 2008, it would affect women who are already on, or about to start, maternity leave, and the prospect of retaining their full benefits package (with the exception of remuneration) for a full year could affect the decisions they make.

Further information:
Equal Opportunities Commission v Secretary of State for Trade and Industry  http://www.bailii.org/ew/cases/EWHC/Admin/2007/483.html

Payroll deadlines during the next month

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

November 5 – This is the final day of tax month 7.  Tax and NICs etc. for payments made in the tax month to November 5 are due for payment to the Accounts Office by November 19, or by November 22 if paid electronically.

November 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.

November 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 November 20 at the latest.

Payroll FAQ's

Deductions from Pay

How can we ensure that our rules for making deductions from pay are lawful?

The key issues to consider are those defined under the ‘Protection of Wages’ provisions of the Employment Rights Act 1996 (ERA), as found in section 13 to 16.  These provisions apply, not just to employees, but to “workers”, including agency staff, apprentices and fixed-term workers.

Deductions from wages made by an employer, or payments from wages made by a worker, are only lawful if

• they are required by statute (e.g. tax, NICs, court orders, student loan deductions), or
• the worker has given prior written authority (e.g. loan repayments, trade union check-off deductions), or
• the deduction is authorised under a provision of the worker’s contract.

It is sensible, therefore, to include as many deduction situations as possible in each worker’s contract, e.g. the recovery of overtaken holiday pay, fines for stock losses (taking into consideration the special rules for this in sections 17 to 22 of ERA), fines for non-return of company property (e.g. tools, protective clothing), repayment of training costs or relocation costs for early termination, recovery of an overpayment of wages, deductions for not working notice.

All of such deductions may be lawful if they are clearly defined in the worker’s contract.  Any deductions that are made routinely but that are not in the contract, or not agreed individually with the worker before the situation arises, are unlawful.  A common example of a deduction that is commonly made by many employers but that is unlawful is the recovery of ‘overtaken’ holiday pay on termination.  The Working Time Regulations 1998 allow employers to pay ‘undertaken’ holiday pay on termination, but only allows the recovery of ‘overtaken’ holiday pay if it is provided for contractually.

However, contractual deductions may still be unlawful if any rules or conditions defined in the contract are not properly followed by the employer.  For example, if the contract states that overtaken holiday may be deducted from the worker’s “final wages”, it would be unlawful to make a deduction from any other payments due to the worker on termination.  It would be better to state that the deduction will be made from “final payments due on termination”, allowing all such payments to be aggregated for recovery purposes.  Or, if the contract allows the costs of repairs to be deducted from a worker’s wages if damage is due to the worker’s negligence, the deduction would be unlawful if the employer has not properly established the worker’s negligence.

Problems can also arise if a contractual deduction provision is unreasonable.  For example, if a deduction may be made from termination pay where a worker has not worked full notice, the deduction may be unlawful if it is of the nature of a penalty, e.g. “an amount equal to the period of notice not worked”, rather than an amount that properly reflects the value of the damage caused to the employer because the employer has not worked notice.

JERSEY

Minimum Wage

Increases agreed for April 2008

On 1 October 2007, the Employment Forum published further proposals for an increase in the minimum wage from April 2008.  It is a follow-up to the second review, which was carried out in 2006 and recommended not just a 3% increase in all minimum wage rates from April 2007 but also a formula by which the 2008 rates may be set without a full public consultation.  The intention was to give businesses a greater period of notice of any new rates.

The 2007 and 2008 rates were recommended to be set by reference to 40% of the average weekly earnings, as provided by the June Average Earnings Index of the previous year.

Proposed formula for future increases
In order to provide a “two year deal”, the Forum recognised that a formula would be necessary by which rates may be proposed with a greater period of notice.  In considering what formula to recommend, the Forum took into account other jurisdictions (namely the United Kingdom, the Isle of Man, Eire, France and New Zealand) that on average provide a minimum wage that is at least 40% of the median wage income of those jurisdictions, based on a forty-hour week.

The Index of Average Earnings measures changes in average earnings (gross wages and salaries) that have occurred, and been paid, to workers in Jersey.  It includes overtime payments, but excludes bonuses, employers’ insurance contributions, holiday pay and benefits in kind (e.g. free accommodation or meals).
The 2006 Index measures changes in average earnings received between the last weeks of June 2005 and June 2006 and is designed to measure changes in average earnings by matching records in consecutive years from sampled firms.  The Forum recommended that

• the minimum wage from 1st April 2008 should be set by reference to 40% of the overall average weekly earnings, as released in the June 2007 average earnings statistics, subject to Ministerial approval of the resulting rate, and
• this formula should be used each year to recommend rates for the following April, subject to consideration (only where necessary) of factors which have had a major impact on the economy.

Having regard to the Average Earning Index report, the Forum considers that there are no major factors necessitating a review of that recommendation or the formula prior to recommending rates for April 2008.
The Forum will assess the appropriateness of this method and the percentage of average earnings used in the formula via an internal review in approximately six months time, before the method is utilised to recommend a rate for 1st April 2009.  Ideally, the Forum would aim to gradually increase the percentage of the average wage used in the formula towards 45% over the coming years, if the States of Jersey wishes to raise the bottom end of earnings.

Minimum wage
The average weekly earnings for full-time equivalent employees in Jersey in June 2007 was £580 per week.  Forty per cent of this weekly wage equates to a minimum wage of £5.80 per hour, based on a forty hour week.  As the Forum’s previous recommendation was for an increase equivalent to 40% of average weekly earnings, this results in a higher minimum wage than would have been recommended if the 4.7% average earnings increase figure were applied (£5.65).

The Forum noted that neither figure is incorrect.  The difference in the resulting minimum wage increase results from “rounding” and due to the method of preparing the average weekly earnings figure, whereby individual employers’ returns are compared year on year.  So, depending on which employers return data, a different mixture of employers might then be used to create the final weekly earning figure.

The Forum recommends a minimum wage of £5.80 to apply from 1st April 2008.

Trainee rate
Responses to the Forum’s 2006 review suggested that the trainee rate should not be increased significantly above or below any increase in the minimum wage.  The Forum considered that, as a specific method for uprating the minimum wage for two years was proposed, it would be appropriate to return to the initial method of setting the trainee rate, which is 75% of the full minimum wage rate for 2008, as set by the formula specified above.

The Forum recommends a trainee rate of £4.35.

Accommodation and food offsets
The Forum recommended that the accommodation and food offsets should be increased proportionately to the minimum wage rate (i.e. a 7.4% increase) bearing in mind that, if increased by a different proportion, the effect of any increase in the minimum wage could be unpredictable and would be likely to have a greater impact on employers, particularly in the Agriculture and Hospitality industries.

The Forum recommends an accommodation offset of £63.47, and a food and accommodation offset of £84.63.
Summary of recommendations

The Employment Forum’s recommendations were subsequently approved by the Social Security Minister.

Further information:
Recommendation - Minimum Wage Rates for April 2008  http://www.gov.je/ChiefMinister/PublicConsultations/Past+consultations/Recommendation+-
+Minimum+Wage+Rates+for+April+2008.htm

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