News Items – at 26th March 2008

Amendments to PAYE Regulations

New powers to recover tax liabilities from employee instead of employer

The Income Tax (Pay As You Earn) (Amendment) Regulations 2008 were made on 20 March 2008 and come into force on 6 April 2008.  They include three specific provisions, two of which make the necessary changes to PAYE Regulations resulting from measures that have already been announced, namely:

• the abolition of the 10% starting rate of tax from the start of the 2008/09 tax year, and
• new powers from HMRC to assess an employer for non-payment or underpayment to the Accounts Office of PAYE tax, Class 1 NICs, student loan deductions and Construction Industry tax on account by specifying a combined amount rather than having to separately identify each particular liability.

The second of these subjects has been discussed in the last two newsletters and reference to it here is simply to confirm that the relevant changes have now been made to the PAYE legislation. 

The third provision included in the Amendment Regulations relates to the decision of the Special Commissioner in the case Demibourne v HMRC.  This decision highlighted a number of tax issues for employers and their employees that can arise as a consequence of an employer’s failure to operate PAYE, in particular where an employer fails to deduct tax from PAYE income but it is paid instead by the employee under self-assessment. 

The case confirmed that, where an employment relationship exists, the employer is responsible for deducting PAYE tax from payments made to the employee.  Under the law as it stands, HMRC does not have the discretion to choose whether to collect tax from the employer or the employee. For example, in a situation where an employer gets the employment status of a worker wrong and makes payments on invoice, without deductions, instead of deducting tax and NICs through the payroll, HMRC is obliged to seek recovery of tax from the employer, even though tax on the earnings is paid by the employee under self-assessment.

The Regulations are intended to prevent that situation from arising by creating a new series of situations in which HMRC may make a direction to transfer an employer’s PAYE liability to the employee who received the payments from which PAYE tax should have been deducted.

The Regulations allow HMRC to consider making a direction in circumstances where the following conditions are satisfied:

• an employment relationship exists and the employee has received relevant payments (including notional payments) in respect of which the employer has failed to deduct or account for PAYE tax,
• the amount of tax that the employer should have deducted exceeds the amount of tax actually deducted or accounted for,
• HMRC considers that the employee concerned has been assessed on the income under self-assessment, or the tax due has been paid as a self-assessment payment on account or as a Construction Industry sub-contractor deduction, and
• one of the following trigger events has occurred on or after 6 April 2008 (and none of them has occurred before that date):
• HMRC assesses an employer for tax that includes tax on the payment in question,
• HMRC receives a self-assessment return from the employee which includes an adjustment for a PAYE credit in relation to the payment in question,
• the employee submits an amended self-assessment return, or an error or mistake claim, which includes an adjustment for a PAYE credit in relation to the payment in question, or
• HMRC receives a letter offering to make a settlement of the employer’s liability  to pay an amount of tax, including tax on the payment in question.

The ability of HMRC to make such directions will apply to tax years before 6 April 2008 but only if none of the four trigger events has occurred before that date.  HMRC will issue directions both to the employer and to the employee (or employees) concerned.

In practice, where a person, who should have been treated as an employee and had tax deducted under PAYE, has paid tax on earnings from the employment under self-assessment, an HMRC direction will have the effect of leaving the self-assessment as it is.  The employee will, however, be able to claim a PAYE credit in respect of any tax that exceeds the amount specified in the direction.  Similarly, the employer will be relieved of any PAYE liability for the amount of tax specified but not on any PAYE tax in excess of the amount specified.  A direction will not cover any penalties for which the employer may be liable in respect of the breach of PAYE Regulations, but no interest will be charged on the amount specified in the direction.

No corresponding amendments to NICs legislation is required as HMRC already has statutory authority to offset wrongly paid Class 2 and 4 contributions against Class 1 NICs.

Further information:
The Income Tax (Pay As You Earn) Amendment) Regulations 2008  http://www.hmrc.gov.uk/si/2008-782.pdf
Explanatory Memorandum to The Income Tax (Pay As You Earn) Amendment) Regulations 2008  http://www.hmrc.gov.uk/si/2008-782em.pdf
Amended regulations to deal with issues highlighted in the Demibourne case  http://www.hmrc.gov.uk/employers/demibourne.htm
FAQ: New legislation to transfer a PAYE liability from an employer to an employee  http://www.hmrc.gov.uk/employers/faq-transfer-paye.htm

Payroll Test Data

Data for 2008/09 calculations published

HMRC provides packs of test data to enable payroll system developers to check that their software works accurately.  Developers whose systems are accredited under either the Payroll Standard or the Pensioner Payroll Standard also use the tests to ensure that they continue to comply with the relevant Standard.
However, as employers – not developers – are responsible in law for the accuracy of their tax, NICs and statutory payment calculations, HMRC’s test data is also a useful tool for employers to use to check, especially at the start of each new tax year, that their payroll system update for the new tax year continues to give accurate results across a range of different payment situations.

The first set of HMRC’s test data for the 2008/09 has been published.  It gives expected results for payments made using all of the different tax codes.  The tests are simple to perform if your payroll system has a “calculator” facility.  For example, try the following test using your payroll system:

• calculate the tax due at month 1 of 2008/09 for a payment of £3,100 using tax code 45L – the result should be £647.73
• carry forward those results to month 2, change the same employee’s tax code to 100L and pay £623.23 – the tax for month 2 should be £63.27.

Further information:
08/09 Tax calculation and Week 53, 54, 56 tests version 1  http://www.hmrc.gov.uk/ebu/advance08-09.pdf

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 if certain conditions are met. The regulations came into effect from 14 August 2007 and replaced the non-statutory treatment previously set out in HMRC guidance.  For the exemption to apply, the health screening and/or medical check-ups had to be available to all of the employer's employees generally on similar terms and were limited to one such event in each tax year.

However, following a number of representations, HMRC became aware that some existing health screening schemes could be affected in a way that was not envisaged at the time the Regulations were made.  As a result, HMRC announced that discussions would be held with employers and their representatives to resolve the issues.  In the meantime, HMRC confirmed that it would not seek to collect tax and NICs for the whole of 2007/08 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 still considering the many responses received and has now announced that the concession not to collect tax on the basis of the Regulations is being extended to cover the 2008/09 tax year.

The previous guidance, which continues to apply for 2008/09, is as follows:

“Do not treat expenses incurred by the employer in providing periodic medical check-ups for employees as conferring a chargeable benefit on those employees. If an employer incurs expenses in providing check-ups for members of an employee’s family or household this represents a benefit chargeable on the employee unless the family or household member is also an employee of the employer who provides the check-up.”

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

Scotland Bankruptcy and Diligence Reforms

Changes to arrestments introduced from 1 April 2008

The Bankruptcy and Diligence etc. (Scotland) Act 2006  legislates on personal bankruptcy and diligence.  In Scottish law, the term “diligence” means “the process by which persons, lands, or effects are seized for debt”.

Part 9 of the Act, set out in sections 199-205, introduces a number of changes to the provisions of the Debtors (Scotland) Act 1987 that affect the operation by employers of the court orders that are distinctive to Scotland, namely

• earnings arrestments (EAs), which are used to recover civil debts, fines and unpaid Council Tax,
• current maintenance arrestments (CMAs), which are used to deduct payments for maintenance, and
• conjoined arrestment orders (CAOs), which combine EAs and CMAs when there are more than one of either of them in force against the debtor.

The penalties for non-compliance with the new rules are as already set out in the Debtors (Scotland) Act 1987.

The Regulations have now been made to bring the new measures into force from 1 April 2008.  They include some transitional arrangements.

Priorities
Where a debtor is subject to both an EA and a CMA, the former priority of an EA over a CMA no longer applies.  Instead, they rank equally in the deductions from the debtor’s earnings if the debtor’s net earnings are insufficient to allow deduction of the full amounts due under each.  This principle of equal sharing contrasts with the “first come, first served” approach used for attachment of earnings orders in England and Wales.

The calculation involves

• reducing the debtor’s net earnings by the amount of protected earnings in respect of the CMA, to give an amount N,
• adding together the EA deduction (amount E) and the CMA deduction (amount C), to give an amount S, and
• dividing N in the proportions that the E and C have to S.

Example
An employee has net earnings for a 31-day month of £3162.  The deductions to be taken are £823 for an EA (amount E) and £2170 (i.e. £70 per day) for a CMA (amount C).  The protected earnings for the CMA are £372 (i.e. £12 per day), so there are insufficient earnings left to take both deductions in full.

The previous rules required the EA to be taken first, in full.  The earnings that remain for the CMA are £2339, i.e. £3162 - £823.  After removing the protected earnings, the amount taken for the CMA is only £1967.  As a result, the person entitled to the maintenance payment does not receive the full £2170 due.

Under the new rules, the amount available for the two arrestments, after deducting the protected earnings, is £2790 (amount N), i.e. £3162 - £372.  This is split in the proportion that £823 (amount E) and £2170 (amount C) are to £2993, their total (amount S):

               EA:      (N × E ÷ S)               £2790  ×  823    ÷  2993  =  £767.18
               CMA:  (N × C ÷ S)               £2790  ×  2170  ÷  2993  =  £2022.82

Where deductions are made from a debtor’s earnings under a CAO and the amount sent to the sheriff clerk is insufficient to split fully between the creditors, the amount is similarly split proportionately between all of the creditors instead of priority being given to debts and fines.

An employer is entitled, but not required, to apply this procedure in respect of a payday that falls within 7 days of 1 April 2008.

Holiday pay
The previous rules required holiday pay to be added to the employee’s normal earnings and the deduction was calculated on the basis of that aggregated payment.  Weekly-paid employees particularly could lose much of their holiday pay as a result.  In contrast, the procedures for attachment of earnings orders in England and Wales have the effect of spreading the deduction over the period covered by the normal pay and the holiday pay.

The new rules have the effect of treating holiday pay as if it were normal earnings relating to the period during which the debtor is on holiday.  On a payday when an employee receives normal earnings and holiday pay,

• a deduction is made from normal earnings as if the holiday pay had not been paid,
• a deduction is made from each week’s holiday pay as if it were being paid as normal earnings,
• and the results of the two calculations are added together.

Although the calculation differs from those used for attachment of earnings orders in England and Wales, the effect is the same – the deduction is spread over the period covered by the normal earnings and holiday pay.

An employer is entitled, but not required, to apply this procedure in respect of a payday that falls within 7 days of 1 April 2008.

Provision of information

Creditor’s duty to provide debt advice and information
The Act imposes a new duty on creditors to provide debtors with debt advice and information packages no earlier than 12 weeks before executing a diligence against the debtor’s earnings.

Court’s duty to provide information
The judicial officer, when serving an EA schedule or a CMA schedule on an employer, must take all reasonable steps to provide the debtor with a copy of the schedule.

Employer’s duty to provide information
The employer must provide the debtor with a copy of the EA or CMA schedule and must notify the debtor of the date on which the first deduction under the EA, CMA or CAO is to be made, together with the amount to be deducted.  This requirement does not apply to any EA schedule, CMA schedule or CAO served on the employer before 1 April 2008.

On receiving a new EA or CMA schedule, or a copy of a CAO, on or after 1 April 2008, the employer is required to send, as soon as is reasonably practicable, the following information to the creditor or the sheriff clerk, as appropriate, with a copy to the debtor:

1. how the debtor is paid, i.e. weekly, monthly or otherwise
2. the date of the debtor’s payday next following receipt of the schedule or order
3. the sum deducted on that payday and the net earnings from which it is so deducted, and
4. any other information which the Scottish Ministers may, by regulations, prescribe.

Unless the arrestment or order is no longer in force, the employer must send the same information to the creditor or sheriff clerk, with a copy to the debtor, as soon as is reasonably practicable, after

• the later of
  • 6 April next following receipt of the schedule or order, or
  • the day falling 6 months after receiving the schedule or order, and
• each 6 April thereafter.

The date (b) to be provided on this occasion is the date of the debtor’s payday next following the relevant date above.

In the case of EA schedules, CMA schedules and CAOs received by the employer before 1 April 2008, the employer must send the first set of information by not later than 6 October 2008 and subsequent sets of information by each 6 April thereafter.

Examples

If the debtor leaves the employment, the employer must, as soon as is reasonably practicable, inform the creditor or the sheriff clerk and, if known, provide the name and address of any new employer of the debtor.  If the employer fails to do this, the sheriff may, on the application of the creditor, make an order requiring the employer

• to provide the information, and
• pay to the creditor an amount equal to twice the deduction that would have been taken at the next payday had the debtor still been employed.

In that situation, the sum paid is offset against the debt and the employer may not recover it from the debtor.  There is a right of appeal, on a point of law only, to the sheriff principal.

Creditor’s duty to provide information
Unless the arrestment or order is no longer in force, a creditor who receives payments under an EA, CMA or CAO is required to send the following information to the employer or the sheriff clerk, as appropriate:

1. the sum owed by the debtor to the creditor
2. the amounts received by the creditor by virtue of the arrestment or order, and
3. the dates of payment of those amounts.

The information must be sent, as soon as is reasonably practicable, after

• the later of
  • 6 April next following service of the schedule of arrestment or order, or
  • the day falling 6 months after the service of the schedule or order, and
• each 6 April thereafter.

Debtor’s duty to provide information
A debtor, on leaving an employment, must inform the creditor or the sheriff clerk, as appropriate, and provide the name and address of any new employer.

Seamen’s wages
The existing exemption that prevents deductions under earnings arrestments being made from the earnings of merchant seamen (other than fishermen) is removed.  An employer is entitled, but not required, to apply this procedure in respect of a payday that falls within 7 days of 1 April 2008.

Further information:
Bankruptcy and Diligence etc. (Scotland) Act 2007  http://www.oqps.gov.uk/legislation/acts/acts2007/asp_20070003_en_1
The Bankruptcy and Diligence etc. (Scotland) Act 2007 (Commencement No. 3, Savings and Transitionals) Order 2008  http://www.opsi.gov.uk/legislation/scotland/ssi2008/pdf/ssi_20080115_en.pdf

Payrolling of Benefits and Expenses

Results of IPP survey

In March 2007, the Institute of Payroll Professionals (IPP) published the results of a survey of its members on the possibility of taxing benefits and expenses through the payroll, instead of reporting them annually on forms P9D and P11D.  In response, HMRC published a detailed consultation document containing proposals to

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

During the consultation period, which ended on 17 March 2008, the IPP conducted a further survey to obtain the views of the payroll profession to these proposals.  The results of this survey were published in early March and have been forwarded to HMRC so that it can be considered alongside other responses to the official consultation.

The following are some of the perceived advantages and disadvantages of the current procedures, as mentioned by respondents to the IPP’s survey.

Advantages of the current procedures

• only having to calculate benefits and expenses once a year
• calculations are more accurate as an annual process
• details can be compiled throughout the year before they have to be reported
• many ad-hoc payments and benefits are only identified as part of a business’s normal annual accounting procedures when experienced accountants check the employer’s records
• employees’ pay frequency is not relevant
• keeps benefits reporting separate from payroll
• does not use up payroll resources
• there is a delay before employees have to pay tax on their benefits
• third-party payments are more easily handled
• some tax exemptions are expressed in a manner that only allows a benefit to be identified at the year end (e.g. expenses connected with exempted living accommodation, benefits that depend on the official interest rate)
• flexible benefits schemes are ideally suited to an annual reporting process
• many payroll departments are not currently involved in P11D reporting and do not have the necessary knowledge to apply the tax and NICs rules.

Disadvantages of the current procedures

• tax liabilities and tax code changes can be applied more than a year after the benefit has been provided
• year-end reporting involves two different processes with different deadlines
• P11D reporting is a heavy year-end burden, causing panic for some employers
• many employers responsibly collate benefits information throughout the year and then have to duplicate it on a P11D form
• company cars have to be reported twice, once on a P46(Car) form and again on form P11D
• when HMRC catches up with P11Ds, massive batches of P6 coding notices arrive
• many employees have to complete self-assessment returns only because a P11D is issued for them
• some benefits are taxed through the P11D but Class 1 NICs are deducted on the same benefits through the payroll
• the requirement for a separate payment procedure for Class 1A NICs
• employees do not understand P11D reporting but do understand payroll.

Other conclusions drawn from the responses are:

• there should be a consistent framework for payrolling benefits and expenses and, to achieve that, the procedures should be statutory, without flexibility for local arrangements
• the majority of respondents were in favour of payrolling benefits, although the main drawback with the proposals was seen to be the current lack of expertise among payroll staff and most small employers
• comprehensive guidance would be required, written in simple terms and prepared by both HMRC and representative bodies
• just over half of respondents were unhappy with the proposals for passing on information from one employer to the next, with some commenting that it would be impossible to calculate the outstanding tax due from leavers
• a majority were not in favour of estimating benefit values and would prefer to see a change in the benefit process to make estimation unnecessary
• if benefits are to be treated as taxable income, the requirement to report benefits separately on P14/P60 seems unnecessary – in contrast to payroll giving and AVCs where no separate reporting is required
• most respondents agree with the abolition of the £8,500 threshold, although most did not actually report benefits using form P9D – the main concern is in the voluntary sectors, where low-paid voluntary workers will be disadvantaged by the proposal
• over 60% of respondents thought that Class 1A NICs should be paid monthly rather than annually, using an employer-only Class 1 contribution

Some of the situations identified as problematic are:

• directors who cannot be covered by a dispensation
• employees whose residence status cannot be determined during the tax year
• employees on unpaid leave or receiving statutory payments who continue to receive benefits
• loans and accommodation, where the benefit charge depends on the official rate of interest which is not known until the year end
• directors’ loan accounts
• taxation of mid-period leavers
• employees with low earnings but high value benefits.

The Institute’s recommendations are as follows:

• “HMRC should re-visit the rules surrounding estimating
• HMRC should, with a working group, look at all the concerns identified in the survey.  It may be that resolutions can be found by amending policy, or permitting a year-end procedure for benefits that cannot be payrolled if this were to be the case.
• HMRC to look at a simplification exercise of the expenses and benefits rules
• HMRC to establish a working group that consists of:
  • Payroll representative
  • Agent/accountant representative
  • Business representative
  • Payroll bureau representative
  • Software developer representative
  • HMRC Better Regulation representative
  • HMRC Payrolling SRO (Senior Responsible Owner)
• HMRC to abolish the £8500 threshold, but to consider an exemption for voluntary/low paid charity workers
• HMRC to consider self-dispensation and self PSA options
• HMRC to consider and resolve the issues surrounding low income in a period, for example Statutory Sick Pay
• HMRC to consider allowing Class 1A to be remitted monthly, rather than a year-end process.  This could be Class 1 employers’ NI only.  This was used previously prior to the 1% band.”

Further information:

Payroll deadlines during the next month

April 5 – This is the final day of tax month 12 and of the tax year.  Tax and NICs etc. for payments made in the tax month to April 5, and any outstanding tax and NICs etc. for the tax year, are due for payment to the Accounts Office by April 19, or by April 22 if paid electronically.

April 6 – This is the first day of the new tax year.

April 18 – (April 19 is a Saturday) – This is the deadline for payment of tax and NICs to the Accounts Office, for tax month 12 by employers who pay monthly, for tax months 10 to 12 by employers who pay quarterly, unless they make their payments electronically.  This is also the latest date for paying any outstanding tax and NICs to the Accounts Office in respect of the 2007/08 tax year.

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

Payroll FAQ's

Directors’ National Insurance Contributions

How are NICs calculated for a director who receives the same salary each month?

Special statutory arrangements for the calculation of Class 1 NICs apply to company directors.  The primary and secondary contributions due on a director’s salary, fees, bonuses, and payments to or amounts overdrawn from a loan account, are calculated using,

• if a person is a director at the start of a tax year, an annual earnings period, or
• if a person becomes a director during a tax year, an earnings period that is equal to the number of tax weeks remaining in the tax year (often called a “pro-rata” annual earnings period).

The use of an annual earnings period for directors is a measure to counter NICs avoidance by making a single annual payment and calculating NICs using a monthly earnings period.  For example, the primary NICs (2008/09 rates, Table Letter A) on a single payment of £120,000 would be

• £1483.87, using a monthly earnings period, but
• £4606.15, using an annual earnings period.

However, by concession, HMRC allows employers to calculate directors’ NICs using a weekly or monthly earnings period if

• the director has consented to the employer using this method, and
• by the end of the year, the NICs collected are least as much as they would have been if the annual earnings period had been used. 

If the director receives only a monthly salary throughout the tax year that exceeds the NICs upper earnings limit (UEL) for each earnings period (e.g. £3,350 for a month during 2008/09), the total NICs using this “alternative administrative method” will generally be the same as if the annual earnings period had been used. Nevertheless, the employer must recalculate the NICs at the year-end to ensure that there is no shortfall in the NICs due, relative to the statutory annual earnings method.  In a computerised payroll system, this is achieved by resetting the “director” indicator for the employee for the last payment of the tax year.

The alternative method is not recommended where the director

• has irregular earnings, or
• earns less than the UEL in any month during the year.

The following Table compares the annual earnings period method and the alternative method, showing the NICs payable for a director with a salary of £120,000, paid in £10,000 instalments every month for a full year.  (Using NI category A and NI rates for 2008/09, and the exact method of calculating NICs)

*NICs for Month 12 calculated using Annual Earnings Period

REPUBLIC OF IRELAND

Publication of the Employment Law Compliance Bill 2008

Launch of major new Employment Rights framework

On 18 March, the Government published the Employment Rights Compliance Bill 2008.  It contains measures to completely overhaul the State’s employment rights framework.  The measures proposed in the Bill include:

• establishment of the National Employment Rights Authority (NERA) on a statutory basis
• strengthening powers in the area of labour inspection including ensuring labour inspectors have greater access to premises, personnel and data and empowering NERA to prosecute summary offences
• empowering labour inspectors in NERA to examine employment permits, prosecute offences and conduct investigations jointly with other agencies, including Revenue Commissioners, Social Welfare inspectors and An Garda Síochána (Ireland’s police force)
• provision for greater penalties for offences arising under employment law – in most cases up to €5,000 and/or 12 months’ imprisonment for summary offences and €250,000 and/or 3 years’ imprisonment for indictable offences
• protection of whistleblowers in the event of breaches of employment law being reported in good faith
• specification of a comprehensive list of documents which must be kept by employers in respect of the most recent three-year employment period and retained for a further two years after the employment relationship ends.

Further information:
Employment Law Compliance Bill 2008  http://www.oireachtas.ie/documents/bills28/bills/2008/1808/b1808d.pdf

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