Payroll and employee incentives
Déjà vu for employment taxes, as off-payroll working and termination payments reform are delayed
As with last year, two of the main themes for employment taxes are off-payroll working in the private sector and the NIC treatment of termination payments.
The new off-payroll regime has been softened by excluding small organisations and postponed to April 2020.
Reform of the NIC treatment of terminations payments, which remains from the draft NIC Bill in 2016, is postponed to April 2020 as well.
Changes to the taxation of contractors and Personal Service Companies will increase risk of PAYE and NIC exposure for many companies
From April 2020, medium and large private sector organisations will be responsible for assessing the employment status of any contractors whose services are provided under a contract with a Personal Service Company (PSC) or intermediary, accounting for any Pay As You Earn (PAYE) and employees’ and employers’ National Insurance Contributions (NICs) due.
From 6 April 2020, private sector organisations will potentially become liable for PAYE and employer NICs in respect of payments to contractors engaged through an intermediary company or a PSC. This is an extension of the so-called IR35 rules, so that the obligations to correctly operate PAYE and account for NICs will now fall on the engaging company in most circumstances. The rules will apply to all engagements that are in place on or after 6 April 2020 in medium and large organisations. Small companies will be exempt.
The organisation that makes payments to the contractor or intermediary will be responsible for determining the status of the contractor and assessing whether or not PAYE and NICs will apply even where there is no direct contract between the individual and the company making payments.
No details have yet been provided on where exactly responsibility will lie in more complex cases where there are multiple intermediaries in a chain between the end user of services and a contractor. Nor has there been any confirmation of what the definition of a small company will be for these purposes. A further consultation on the detailed operation of the reform will be published in the coming months.
"It will be welcome news to the organisations affected that the changes have been delayed until 6 April 2020. Given the extent of the preparations required, however, many companies will already be considering their risk exposure and putting appropriate procedures in place. Significantly, the rules will apply to contractor arrangements already in place at 6 April 2020 as well as new arrangements; therefore, these rules will need to be considered when entering into or extending contracting arrangements over the coming year. For example, twelve-month contracts beginning on or after 6 April 2019 will be affected by the new rules.
This measure will have a significant impact for all companies that do not meet the small company exemption. There will be increased administration required when taking on contractors, increased costs for engagers and decreased net income for contractors where the new rules are applicable. Even a single contractor can easily lead to tens of thousands of pounds of possible exposure, so interest and penalties for non-compliance could also be significant.
In advance of the changes, organisations will need to undertake a review of the contractor relationships already in place, to ensure they will be compliant come April 2020. It will also be necessary to design and implement processes both for assessing new contractor engagements and for reviewing existing engagements on an ongoing basis; HMRC will consider these processes when testing for non-compliance."
When will it apply?
The changes will come into effect from 6 April 2020.
PAYE special arrangements for short-term business visitors to the UK: An extension of the PAYE payment deadline and an increase in the UK workdays threshold
The payment deadline for settling employers’ PAYE liabilities in respect of short term business visitors (STBVs) under a special arrangement will be moved back from 22 April to 31 May following the tax year-end. The number of UK workdays permitted for STBVs to be eligible for the special arrangement will be increased from 30 to 60.
The PAYE special arrangement is used by UK employers who host STBVs from overseas employers and whose earnings are not eligible for exemption from UK tax under a double taxation agreement. These STBVs commonly do not qualify for tax exemption because they are from an overseas branch of a UK company, or from a country with which the UK has not entered into a double taxation agreement.
The arrangement enables the employer to make one single PAYE payment for all STBVs, rather than through monthly payroll reporting for each STBV.
The extension of the payment deadline from 22 April to 31 May following the tax year-end will give more time for employers to collate the necessary information required to make the return. The increase in the UK workday limit from 30 to 60 will enable PAYE to be settled for more STBVs under the special arrangement.
"The PAYE payment deadline extension will be welcome news for employers operating PAYE special arrangements, who will have longer to collate the requisite information and to calculate the amounts subject to PAYE.
Also welcome is the relaxation of the eligibility criteria for STBVs by increasing the UK workdays limit to 60, as fewer STBVs will need to be reported through payroll on a monthly basis.
The above changes will increase the appeal of the PAYE special arrangement.
It is, however, disappointing for employers that the recommendations in the consultation to exempt STBVs from overseas branches of a UK company are not being taken forward."
When will it apply?
These changes will apply from 6 April 2020.
Restriction of eligibility for National Insurance Contributions Employment Allowance
Access to the National Insurance (NICs) Employment Allowance will be restricted to employers with an employer NICs liability of below £100,000 in the previous tax year.
Currently, employers of all sizes may reduce their Class 1 NICs liability by £3,000 a year. This claim is available for one employer per group of companies.
From 6 April 2020, this relief will only apply to employers who had a NIC liability below £100,000 in the previous tax year.
"While this will increase costs for larger employers, the amount of relief being withdrawn is unlikely to be significant for most affected employers."
When will it apply?
This change will apply from 6 April 2020.
Changes to the National Insurance treatment of termination payments delayed to 6 April 2020
The Chancellor announced the Government still intends bring in legislation broadly to align the National Insurance treatment of termination payments with the treatment that already applies for income tax. This change was initially proposed at Budget 2017, but its implementation was delayed and it will now come into effect from 6 April 2020.
From 6 April 2020, only the first £30,000 of any qualifying termination payment will be free from employer’s National Insurance. Any excess over £30,000 will be subject to employer’s National Insurance at the usual rate, but will remain free from employees’ National Insurance.
"This measure will increase the National Insurance costs for any employers paying termination payments of more than £30,000 to any one individual but will simplify the administration for all employers making termination payments.
The complexity that exists in assessing whether or not a payment made at the end of an employment qualifies as a termination payment or is considered as any one of a range of other types of payment taxed as earnings will remain. It will be this technical distinction that employers will need to be aware of when making payments to employees ending their contracts."
When will it apply?
The changes will now apply where the employment contract is terminated on and after 6 April 2020.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.