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News Items – at 30th January 2007
HMRC has published clarification of the status of payments or incentives that are being offered by some employers to members of defined benefit occupational pension schemes to induce them to agree to a reduction in their benefits or to a transfer out of the defined benefit scheme to a defined contribution scheme.
The inducement can occur in a number of ways, for example:
- an enhancement to a transfer value of the pension fund
- a direct cash payment to the member
- a combination of those.
Previously, HMRC’s advice has been that the tax treatment of payments in this complex area depends on the facts of the case and that, in certain circumstances, inducement payments could be paid without income tax or NICs liability.
Having obtained further legal advice, the position is now that such inducement payments, paid to encourage pension scheme members to give up future pension rights or to move from one pension scheme to another, must be subject to income tax and NICs. Specifically they will be:
- taxable as employment income under the provisions in the Income Tax (Earnings and Pensions) Act 2003 for benefits provided from employer-finance retirement benefits schemes, and
- “earnings” liable for Class 1 NICs under the provisions of the Social Security Contributions & Benefits Act 1992 for remuneration or profit derived from an employment.
This treatment does not apply to inducement payments that enhance the transfer value of the pension fund and which are included in the funds transferred between schemes. Such inducement payments are treated for tax and NI purposes in the same way as any employer’s contribution to a registered pension scheme.
As some transactions have already been entered into which relied on previous advice that they were not taxable or liable for NICs, HMRC will not seek to alter this treatment where
- inducement payments have already been paid before 24 January 2007, the date of the announcement. If in any particular transaction it was assumed by the payer or confirmed by HMRC that the payments were taxable or liable for NICs then that treatment will continue to apply.
- HMRC has confirmed that the inducement payments in question are not taxable or liable for NICs and the employer has made an offer to scheme members before 24 January 2007 but no inducement payments have yet been made. Subject to there being no material changes to the original offer, HMRC will not seek to tax or apply NICs to the inducement payments paid in relation to that transaction after the date of this announcement.
- an employer has made an offer to scheme members before 24 January 2007 and can show that the offer relied on HMRC’s former view of the law.
These assurances apply only to the extent that the payments were not taxable or liable to NICs under the former view of the law.
However, where an employer
- has made an offer to scheme members before 24 January 2007 but is unable to demonstrate that the offer relied on HMRC’s former view of the law, or
- has not made an offer to scheme members before the date of this announcement,
HMRC will apply its revised understanding of the correct tax and NI treatment of the inducement payments and expects them to be subject to PAYE tax and NICs.
This guidance will be published in due course in HMRC’s Employment Income Manual (EIM) and the National Insurance Manual (NIM).
Further information:
The Tax and National Insurance Treatment of Employer Cash Inducement Payments to Pension Scheme Members http://www.hmrc.gov.uk/pensionschemes/draft-announcement.htm
Our news item two weeks ago provided information about the deduction tables for Council Tax Attachment of Earnings Orders (CTAEOs) that must be used for CTAEOs issued on or after 1 April 2007.
We omitted to mention, however, that the statutory Regulations introducing the new limits only applies to CTAEOs issued by billing authorities in England. (We have since amended that article so that this situation is made clear.)
We have now had sight of new Regulations that are to be made by the Welsh Assembly and that apply the new deduction tables to CTAEOs issued by Wales billing authorities from 1 April onwards.
The prospect of, for the first time, having a difference in the way attachment of earnings orders are handled in England and Wales has been averted.
It is important to understand, however, that the new CTAEO tables do not apply to the Attachment of Earnings Orders issued by magistrates’ courts. The existing pre-April 2007 will continue to be used for those orders.
Payroll deadlines during the next month
February 2 – This is the date by which any changes to the provision of company cars in the three months to January 5 must be reported using form P46(Car).
February 5 – This is the final day of tax month 10. Tax and NICs etc. for payments made in the tax month to February 5 are due for payment to the Accounts Office by February 19, or by February 22 if paid electronically.
February 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.
February 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 February 20 at the latest.
Payroll Tip
Medical insurance and treatment
How are premiums paid by an employer for private medical insurance reported on form P11D?
Section I of form P11D is used to report the provision of private medical treatment or insurance to obtain private medical treatment to an employee or to a member of the employee’s family or household. Medical treatment covers “all procedures for diagnosing or treating any physical or mental illness, infirmity or defect”. These definitions cover every stage of medical examinations and treatment, starting from the initial visit to a GP, dentist, optician or other medical practitioner.
Under the provisions of the Benefits Code, the cash equivalent of the provision of private medical treatment or insurance is the “cost of the benefit” less any part of that cost made good by the employee.
In the case of private medical treatment, records must be carefully kept of the costs incurred by the employer in paying
- fees charged by GPs, specialists, surgeons etc
- charges for medical and surgical procedures, in-patient or out-patient
- charges for hospital accommodation
- charges for nursing and convalescence
- charges for prescriptions and medical equipment and materials, and
- expenses claims and bills presented by employees to cover the above costs.
The total amount paid by the employer for any such treatment provided for an employee is the amount that must be reported on form P11D.
An alternative method of funding private medical treatment is for the employer to take out an insurance policy under which the employer is the insured person. When the policy pays out, the amount that is actually used to pay for the medical treatment is the amount that is to be reported – not the premiums paid by the employer under the policy.
Probably the most common method of providing medical treatment is through membership of a private medical insurance scheme such as BUPA and PPP. These schemes provide insurance under which the employer pays the premiums and the cost of the treatment is paid for by the insurance company on behalf of the employees. In this case, the expense to be reported is the amount paid by the employer in premiums or in any other way to provide the benefit that has been enjoyed by the employee during the tax year. If the employer meets the costs of any treatment that is not covered by the insurance policy, that must also be reported.
Where the employer pays monthly premiums for each employee, the total expense incurred for each employee should not be difficult to determine. However, difficulties arise where
- the monthly premiums under the policy do not relate to specific employees, e.g. a monthly premium of £20,000 is paid to provide cover for an average of 500 employees, but the employees are not identified unless they make a claim
- the premiums are paid annually based on the number of eligible employees at the time, with the result that a full premium may be paid for an employee who leaves part way through the benefit year, and no premium may be paid for an employee who joins part way through the benefit year.
The cash equivalent of the benefit for any particular employee is the cost incurred to provide the benefit enjoyed in the tax year in question. When the cost was incurred is not important. If the employee has enjoyed the benefit for the full tax year, the amount reported is the expense incurred in providing the benefit for the full year. If an employee enjoys the benefit for only part of a year, the premiums should be apportioned appropriately. It does not matter that part of the premium to provide the benefit in the current year is paid in the previous or the next tax year.
It may be necessary, therefore, to apportion the premiums for two reasons:
- to split the premiums between the number of beneficiaries, and
- to reduce the premium where the benefit was provided for part of a year.
There are no statutory rules for apportioning the premiums. If the insurance policy clearly identifies the premium for each employee and the additional premiums for family members, those should be used. Otherwise, HMRC accepts any reasonable method of apportionment that is used by the employer and generally accepted by the employees. The same method of apportionment should be used each year.
BAILIWICK OF JERSEY
National Minimum Wage
Minister approves minimum wage for 2007
During October 2006, the Employment Forum carried out a review of the minimum wage and, early in January, recommended new rates to apply from 1st April 2007. The Social Security Minister, Senator Paul Routier, has accepted the Forum’s recommendations and has also undertaken to consider a number of related issues raised in the Forum’s report.
The new minimum wage hourly rates from 1 April 2007 are:
- minimum wage – £5.40
- trainee rate – £4.05
- new youth rate – £4.05
The accommodation offset increases to £59.10, and the combined accommodation and food offset increases to £78.80.
Minimum wage
The Minister has also accepted the Forum’s recommendation that the minimum wage from 1 April 2008 should be set by reference to 40% of overall average earnings, as released in the June 2007 average earnings statistics. The appropriateness of this method and the percentage of average earnings used in the formula will be re-assessed via an internal review, to be conducted by the Forum, before it is utilised to recommend a rate for 1 April 2009. The Minister supports the Forum in its aim to gradually increase the percentage of the average earnings used in the formula towards 45%.
Trainee rate
The trainee rate will be set at 75% of the full minimum wage from April 2008. The Minister has accepted the Forum’s recommendation that where students are undertaking a “work experience placement” as an educational requirement within an academic establishment, or as a requirement of a full time training course, they should not be “employees”, and therefore not entitled to the minimum wage, trainee rate or youth rate. Legal advice will be sought to clarify and address this situation.
Youth rate
The new youth rate will apply to employees aged between 16 and 18 who are in full time education or undertaking work during holidays, week-ends, or before or after school. Guidance will be provided on the meaning of “full time education”, including clarification that it must be undertaken in Jersey.
Accommodation and food
Clarification will be provided in guidance that the legislation does not allow an offset for food where accommodation is not provided, or a reduced offset where only two meals per day are provided. The Minister also noted concerns regarding charges levied by some employers for utility bills, in addition to the offset for accommodation, which is contrary to the intention that only two benefits may be off set against the minimum wage. A UK Employment Appeal Tribunal has decided that the accommodation offset includes charges made by the employer for electricity and gas; however the judgement has been appealed to the Court of Appeal and is due to be heard in January 2007. Advice and enforcement will be based on the outcome of this appeal when it becomes available.
Other issues
Tips – The Minister has understood the concern that it is unfair that tips and gratuities, when processed through payroll, can be used by the employer to form part of the Minimum Wage. However, it is noted that the situation is the same in the UK and the Isle of Man. The Forum has not made a recommendation to address this issue as its view is that to oblige employers to re-distribute tips received via the payroll would be very difficult to monitor or enforce.
Pay Slips – The Forum advised that an amendment should be made to the Employment Law to ensure that pay slips should be given to all employees, not just when requested by the employee, and that the pay slip must include a record of the number of hours worked (actual and contractual) in each pay reference period. This should prevent disputes arising where an employer has paid a flat weekly wage, despite the employee having worked additional hours. The Minister will take advice on what action might be taken to address these two issues.
Variable Hour Contracts – The Minister has accepted the Forum’s suggestion that drafting and legal advice should be obtained on the issue of “pay reference periods” where employees are paid a regular weekly wage but a “variable hour” system is operated over a monthly period. As suggested by the Forum, the Minister will consider how the law might be amended to provide the flexibility for pay reference periods for weekly paid employees to be averaged over “one calendar month”, if agreed by the employer and employee in a relevant agreement.
Trainee rate and offsets – As it is currently possible for employers to offset an amount for accommodation, or accommodation and food, against the trainee rate, the Minister has agreed to take action to prevent this, particularly in view of the proposal to introduce a youth rate, to ensure that the offsets may only be used when an employee is being paid at least the full minimum wage.
Further information:
Minister approves minimum wage for 2007 http://www.gov.je/SocialSecurity/NewsReleases/Minister+approves+
minimum+wage+for+2007.htm
Social Security Minister's response to the Employment Forum's minimum wage recommendation for April 2007 http://www.gov.je/NR/rdonlyres/23E78C1F-E929-4E07-A345-
114402E17D95/0/MinistersMWresponse22Jan07.pdf
REPUBLIC OF IRELAND
Maternity and Adoptive Benefit
Increases in earnings ceilings for maternity and adoptive benefit
The ceiling on reckonable earnings applied to Maternity and Adoptive Benefit have increased from €332 to €350 per week from 1 January 2007. This increase raises the maximum rate of payment, i.e. 80% of reckonable earnings in 2006, from €265.60 to €280 per week. In addition, the minimum rate of payment goes up from €182.60 to €207.80 per week.
The period of paid maternity leave increases from 22 to 26 weeks for women who commence their maternity leave on or after 1st March 2007.
Further information:
Increases In The Weekly Earnings Ceilings For Maternity And Adoptive Supports To Benefit Almost 14,000 Women http://www.welfare.ie/press/pr07/pr170107.html
http://www.welfare.ie/schemes/families/mb.html
Maternity Benefit http://www.welfare.ie/schemes/families/mb.html
Work Permits
New employment permit arrangements
On 24 January 2007, the Minister for Enterprise, Trade and Employment, Micheál Martin, announced the introduction of four new types of employment permit, including Green Cards. These new arrangements will come into operation on 1 February 2007. The Employment Permits Act 2006 passed by the Oireachtas last year, together with the Employment Permits Act 2003, provide the statutory basis for the new schemes.
The four new types of employment permit are:
- the Green Card Scheme
- the Work Permit
- the Intra-Company Transfer Permit, and
- Spousal and Dependant Permits.
Green Card Scheme
The Green Card scheme applies to occupations where there are strategically important high level skills shortages. The scheme will be available for an extensive list of occupations with annual salaries of €60,000 and above, and for a specified list of occupations with salaries between €30,000 and €60,000.
Green Cards will be issued for two years initially and will normally lead to the granting of permanent or long-term residence after that. Green Card holders will also be permitted to bring their spouses and families to join them immediately.
The new Green Card Scheme replaces the previous Work Visa/Work Authorisation scheme, which has been discontinued.
Work Permits
The revised Work Permit scheme is mainly for non-Green Card occupations in the €30,000 to €60,000 annual salary range. It will only be granted in exceptional circumstances for occupations with salaries below €30,000.
In order to establish that vacancies which are the subject of Work Permit applications cannot be filled by Irish or other European nationals, they will be the subject of a rigorous labour market needs test. There are also a number of categories of employment for which Work Permits will not be considered, because it is clear that they can be filled from within the EEA.
Work permits will be granted initially for a period of 2 years, and then for a further period of up to 3 years.
Intra-Company Transfer Permits
This transfer scheme for trans-national senior management, key personnel and trainees is designed to allow multi-national companies to transfer these types of staff between branches in different countries, or to transfer staff with particular skills, knowledge and expertise here on a temporary basis in a start-up situation.
These permits will only be available for those with annual salaries above €40,000 who can clearly show that they fit into one of these three categories and who have been with the sending company for one year. They will be issued for a period of two years initially, with the possibility of an extension for up to a further three years. No labour market needs test will be required.
Spousal/Dependant permits
The new Spousal/Dependant Work Permit will allow the spouses and dependants of Employment Permit holders who are entitled to reside here to apply for Work Permits. This will allow the spouses and dependants of work permit holders to help support their families. These applications will not require a labour market needs test and may be in respect of any occupation in the labour market.
Further information:
Minister Micheál Martin announces new Employment Permit Arrangements http://www.entemp.ie/press/2007/20070124.htm
Address by Minister for Enterprise, Trade and Employment Mr. Micheál Martin, T.D. at the launch of the New Employment Permits Arrangements including the Green Card Scheme http://www.entemp.ie/press/2007/20070124a.htm
Employment Permits Section http://www.entemp.ie/labour/workpermits/
Transitional Arrangements January – February 2007 http://www.entemp.ie/labour/workpermits/transit.htm
National Minimum Wage
Guidance for 2007
A new information leaflet explaining the payment rules applicable to the new €8.30 minimum wage rate that applies from 1 January 2007 has been published by the Department of Enterprise, Trade and Employment.
Further information:
National Minimum Wage from 1st January, 2007 http://www.entemp.ie/publications/employment/2007/minwageleafletjan2007.pdf
Readers Newsletter Forum
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