Budget 2021: Payroll and employee incentives

The Government has made some technical changes to the off-payroll working rules legislation. These include amendments to anti-avoidance rules, the rules on provision of information and the liability provisions where any party in the supply chain provides fraudulent information.

The off-payroll working or ‘IR35’ rules apply where, broadly, a worker contracts with an end user through a personal company or partnership (an ‘intermediary’). The general effect of the rules is that such workers can be taxed as employees. With effect from 6th April 2021, these rules can apply to end users in the private sector.

The following technical changes have been announced:

• anti-avoidance legislation was introduced in the 2020 Budget to structures where the intermediary was a company in which the worker held an interest of less than 5%. This legislation was considered to be too wide in its effect and will be moderated with a new targeted anti-avoidance rule;
• the existing requirement for workers to provide particular information to the end user will be expanded to the intermediary; and
• the existing legislation includes liability provisions where fraudulent information is provided. Broadly, these provisions will be amended to ensure that liability rests with the party in the supply chain that provided the fraudulent information.

Our comment

The extension of the IR35 rules to private sector end users was delayed by a year in 2020. There will be no further delay: the new rules will be enacted with effect from April 2021.

These amendments that have been announced are technical in nature but highlight that HMRC is continuing to focus on the rules.

When will it apply?

From 6 April 2021

The Coronavirus Job Retention Scheme (CJRS) is being extended until 30 September 2021. This is to protect jobs as the COVID-19 restrictions are eased gradually over a prolonged period.

During the COVID-19 pandemic, the Government has provided support to businesses and protected jobs by providing grants covering a proportion of employees’ salaries.

The operation of the CJRS will not change for the months of May and June. Broadly, this means employers will receive a grant equal to 80% of furloughed employees’ remuneration for the hours they do not work. This allows employees to be furloughed flexibly, as business activity returns to normal.

The amount that can be claimed by businesses will be gradually reduced from July onwards. For the month of July, employers will only receive 70% of furloughed employees’ remuneration. For August and September, the figure will be reduced to 60%.

This reduction will be made up by increased employer contributions. For the month of July, the Government will introduce an employer contribution of 10% towards the pay for unworked hours, up to a monthly cap. For August and September this will be 20%.

Our comment

The CJRS has provided many employees with much-needed certainty over their income and meant that, as the economy reopens, employees’ jobs are still in place.

Extending the CJRS to September allows businesses to plan for employees’ return. The extended support will provide relief for many employers who plan to re-open gradually and who are still affected by the continued restrictions.

When will it apply?

The extension takes immediate effect.

An existing relaxation to the Enterprise Management Incentive or ‘EMI’ scheme qualifying conditions has been extended. This will allow employees who have reduced hours or are furloughed due to COVID-19 to continue to meet the eligibility requirements of the scheme.

Employees can be granted tax-efficient share options under the EMI scheme, subject to meeting a number of requirements. One of these requirements is that participating employees must work 25 hours a week or 75% of their working time in the tax year.

Employees who are furloughed, working reduced hours or taking unpaid leave as a result of COVID-19 may be unable to meet this requirement.

The Government previously introduced an exception to this requirement for employees who have not met the working time requirements as a result of COVID-19. The exception meant that such employees could retain the tax benefits of their existing options, or be granted new options. The exception will be extended until 5 April 2022.

The Government has also released a call for evidence on the EMI scheme generally. The Government is considering the extension of the scheme, so that more companies can participate. The deadline for responses is 26 May 2021.

Our comment

These are welcome changes which should mean that the tax position of employees holding EMI options is not adversely affected by events outside their control.

The call for evidence on the EMI scheme is also a welcome development. The tax benefits of the scheme are extremely valuable to high-growth companies and their employees.

When will it apply?

The relaxation will apply from the date of Royal Assent to the 2021 Finance Act until 5 April 2022

The calculation of Post-Employment Notice Pay (PENP), which affects how Payments In Lieu Of Notice (PILONs) are taxed, will be changed. There will also be a change to the taxation of PILONs made to employees who are non-resident during their notice period.

Broadly, the purpose of the PENP calculation is to ensure that all PILONs are subject to income tax and National Insurance Contributions (NICs) in the same way. The Government previously announced two changes to the rules.

The first change provides an alternative formula for calculating PENP for employees whose pay period is defined in months but whose contractual notice pay is defined in weeks or days, or whose post-employment notice period is not a whole number of months.

The second change provides that PILONs taxed under the PENP rules are subject to income tax and NICs even if the employee is non-resident, if and to the extent that they would have served their notice period while in the UK.

Our comment

These measures are intended to ensure that the terms of the employee’s employment contract, severance agreement or where they spend their post-employment notice period do not affect the way that PILONs are taxed.

Although the measures should achieve greater consistency on the taxation of PILONs, they increase the complexity of what is already very detailed legislation.

When will it apply?

From 6 April 2021 for individuals who have their employment terminated and receive their termination payment after this date.

The temporary income tax and Class 1 National Insurance contributions (NICs) exemption, for the reimbursement by employers of expenses incurred by employees in acquiring relevant home office equipment, will be extended until 5 April 2022.

This temporary measure was originally due to end on 5 April 2021 and was introduced to provide certainty that employees could receive reimbursement for relevant expenses free of income tax and NICs. The exemption will now apply until 5 April 2022.

For the exemption to apply, the reimbursement must be available to all employees on similar terms and the expenditure must have been on equipment acquired for the sole purpose of making it possible to work from home as a result of the COVID-19 pandemic. It also needs to have been tax exempt if the cost were incurred directly by the employer.

Home office equipment includes anything that is deemed necessary for the employee to work from home as a result of the COVID-19 pandemic. This includes the cost of a laptop, desk, office chair and other necessary computer accessories.

Our comment

The usual tax exemption only applies in circumstances where the employer provides equipment directly to their employees, with only insignificant private use.

This continued temporary relaxation of the rules is a welcome recognition that in many cases it has been more difficult for employers to provide equipment directly to their employees as a result of the COVID-19 pandemic.

When will it apply?

The existing provision will continue until 5 April 2022.

The Government will introduce and extend the income tax and National Insurance contributions (NICs) exemption for providing or reimbursing COVID-19 antigen tests.

The Government has announced a temporary income tax and NICs exemption for payments made to employees so that they can meet the cost of a COVID-19 antigen test. An exemption already exists for employer-provided tests.

The new exemption for payments made to employees will apply with retrospective effect to any payments made during the 2020-21 tax year and will continue to apply until the end of the 2021-22 tax year.

The existing exemption for employer-provided tests will be extended until the end of the 2021-22 tax year.

These exemptions will not apply to antibody tests.

Our comment

The provision of testing for employees will be vital in the months to come to ensure that employees can return to work safely. It will allow employers to protect the health of their employees and assist with the wider effort against COVID-19 without creating additional liabilities to tax. The Government has also aligned the tax treatment of employer reimbursement of testing costs with the treatment of employer-provided tests.

When will it apply?

The change will apply from the date of Royal Assent to the 2021 Finance Bill.

The van benefit charge and the van and car fuel benefit charge will increase in line with inflation. Private use by employees of employer-owned zero emissions vans will no longer result in any liability to income tax or National Insurance contributions.

The van benefit charge along with the van and car fuel benefit charges will be increased from 6 April 2021 by the September 2020 consumer prices index (CPI).

As a result, the van benefit charge will rise to £3,500, the flat rate van fuel benefit charge will rise to £669, and the car fuel multiplier will rise to £24,600.

As was announced at Budget 2020, the value of the benefit for an employee who has private use of an employer-owned zero emission van will reduce from £2,058 for 2020/21 to nil for 2021/22.

Our comment

The changes being enacted have been announced already. The amendment to the rules on zero emission vans put to private use is in line with the Government’s wider environmental aims and extends the tax advantages that are already available for the provision of zero emission cars to vans.

When will it apply?

From 6 April 2021

Employees participating in Cycle to Work schemes are normally required to use their bicycles for a minimum level of work journeys in order to qualify for tax benefits. In light of COVID-19 travel restrictions, these requirements have been relaxed.

Employees can acquire bicycles and cycling equipment in a tax-efficient way, using a Cycle to Work salary sacrifice arrangement. As a general rule, tax savings are only available if at least 50% of cycle journeys are either commuting journeys or other journeys to or from the workplace.

This requirement has been temporarily relaxed for employees whose participation in the arrangement commenced before 20 December 2020. The relaxation will last until 5 April 2022. After this date, participating employees will only qualify for tax savings if the use of their cycles and cycling equipment is mainly for qualifying journeys.

Our comment

This measure is intended as a practical solution for employees who are prevented from cycling to work locations by the COVID-19 travel restrictions. This is a temporary measure, as the Government expects that these restrictions will be lifted by 5 April 2022.

When will it apply?

This easement will apply retrospectively until 5 April 2022

Employees will not lose the income tax and National Insurance contributions (NICs) advantages of receiving long-term benefits under salary sacrifice arrangements when they receive Statutory Parental Bereavement Pay (SPBP).

In April 2017, the optional remuneration rules were introduced. Broadly, these rules prevented tax advantages from being obtained using salary sacrifice arrangements.

Transitional provisions permitted income tax and NICs advantages to be protected for the provision of long-term benefits under salary sacrifice arrangements. These advantages could be enjoyed until the earlier of 5 April 2021 or a variation in the employee’s employment contract.

From 6 April 2020, a new statutory payment, SPBP, was introduced. This is payable to employed parents or partners of a parent who lose a child. Legally, this could have constituted a variation to affected employees’ employment contracts, meaning that they would have lost the tax benefits of salary sacrifice arrangements a year earlier than intended.

The Government will enact retrospective legislation providing that the receipt of SPBP will not result in the withdrawal of salary sacrifice tax advantages for long-term benefits during 2020/21.

Our comment

This is a welcome measure for bereaved employees, as it should ensure that they were able to receive SBPB without affecting the treatment of salary sacrifice arrangements.

When will it apply?

This measure will apply retrospectively for the 2020/21 tax year

Several Construction Industry Scheme (CIS) rule changes, mainly to prevent abuse, will take effect from 6 April 2021.

There have been several technical changes to the CIS, mainly to prevent abuse. The Government has introduced rules that:

• empower HMRC to amend sub-contractors’ Real-Time-Information (RTI) Earlier Payment Summary (EPS) returns where incorrect CIS deductions have been claimed on their returns;
• change the rules for when entities outside the construction sector need to operate CIS – such businesses will only need to apply CIS when their annual construction expenditure exceeds £3 million (previously £1 million), although they will need to monitor expenditure more regularly than under the previous rules;
• clarify the rules around what is an allowable deduction for expenditure on materials; and
• expand the scope of the penalties for supplying false information when registering for gross payment status, or for payment under deduction.

Our comment

The above measures are mainly targeted at CIS subcontractors in order to reduce the scope for abuse. The second measure will result in fewer businesses outside the construction sector being required to register for CIS and submit monthly CIS returns, although such businesses will be required to monitor their construction expenditure more regularly than under the previous rules.

When will it apply?

From 6 April 2021