Finance Bill 2017 – employment taxes

The Finance Bill 2017 was published on 20 March 2017. It contains a number of employment tax measures, the most important of which are summarised in this news item:

 

  • Workers’ services provided to public sector through intermediaries – Clause 7 and Schedule 1)
  • Optional remuneration arrangements (salary sacrifice) – Clause 8 and Schedule 2
  • Taxable benefits: time limit for making good – Clause 9
  • Taxable benefits: ultra-low emission vehicles and company car tax for 2020/21 – Clause 10
  • Taxable benefits: assets made available without transfer of ownership – Clause 11
  • Pensions advice – Clause 12
  • Legal expenses etc – Clause 13
  • Termination payments: amounts chargeable to tax on employment income – Clause 14
  • PAYE settlement agreements – Clause 15
  • Employment income provided through third parties (disguised remuneration) – Clauses 48–51 and Schedules 16–18

 

Clause 7 and Schedule 1

Workers’ services provided to public sector through intermediaries

The intermediaries legislation (often known as IR35) is to be reformed for workers’ services provided to the public sector through intermediaries. The new Chapter 10 in Part 2 of Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) will apply where:

 

  • an individual personally performs, or is under an obligation personally to perform, services for a public sector client,
  • the services are provided not under a contract directly between the client and the worker but under arrangements involving an intermediary, and
  • the circumstances are such that:
  • if the services were provided under a contract directly between the client and the worker, the worker would be regarded for income tax purposes as an employee of the client or the holder of an office under the client, or
  • the worker is an office-holder who holds that office under the client and the services relate to the office.

 

Responsibility for operating the ‘off-payroll’ working rules, and deducting any employment taxes and national insurance contributions (NIC) due (including paying employer NICs), will move to the public sector body, agency or other third party paying the individual worker’s personal service company (PSC or ‘fee-payer’).

 

The change will come into effect from 6 April 2017 and apply across the UK in relation to payments made on or after that date (even if services were delivered before that date).

 

The 5% tax-free allowance for general business expenses, available to workers currently applying the IR35 rules, will be withdrawn for PSCs working in the public sector that are in scope. This is intended to simplify administration and reflect the fact that such PSCs no longer have responsibility for applying the rules.

 

The public sector client will be responsible for determining whether or not the rules apply and will be required to share this information with the person with whom it contracts, on or before entering into the contract, and new s61T ITEPA 2003 would require the client to explain, in writing, within 31 days of a written request by the other party to the contract why it considers that the rules apply. Unfortunately, the right to this information does not extend further. The individual worker is, at the same time, required to inform the liable fee-payer whether or not one of the tests for off-payroll work is met – if the worker fails to comply, the Chapter 10 rules will apply automatically. The two rules cover simple intermediary cases, but the gap between them seems likely to cause difficulties where there is a chain of intermediaries or the public sector client decides to err on the side of caution and put all workers operating through a PSC onto its payroll.

 

To address concerns about acting in good faith on incorrect or false information, transfer of liability provisions are introduced to provide protection.

 

Public sector bodies in scope are those subject to the provisions of the Freedom of Information Act 2000 and the Freedom of Information (Scotland) Act 2002.

 

The rules remain unchanged for the private sector, although certain private sector bodies may be treated as public sector bodies by the relevant Act.

 

Clause 8 and Schedule 2

Optional remuneration arrangements (salary sacrifice)

The tax and NIC rules where employer-provided benefits-in-kind are provided by way of salary sacrifice are to be changed to plug a perceived loophole. The result in many cases will be that benefits-in-kind provided by way of salary sacrifice where the employee can choose between cash and the benefit will be liable to more tax and NIC than when the employee has no choice.

 

The taxable value of benefits-in-kind where cash has been foregone will be fixed at the higher of:

 

  • the current taxable value of the benefits-in-kind; and
  • the value of the cash forgone.

 

This includes benefits that are currently tax exempt.

 

The new rules will not affect pensions saving, employer-provided pensions advice, childcare, cycle-to-work benefits or ultra-low emission cars (ULEVs) with emissions under 75 grams of CO2/km (so as not to remove the incentive for the take-up of these vehicles).

 

This change will take effect from 6 April 2017. Those already in salary sacrifice contracts at that date will become subject to the new rules in respect of those contracts at the earlier of:

 

  • an end, change, modification or renewal of the contract; and
  • 6 April 2018, except for cars, accommodation and school fees, for which the last date is 6 April 2021.

 

Clause 9

Taxable benefits: time limit for making good

Where an employee makes a payment to their employer in return for the benefit-in-kind they receive, the taxable value of the benefit is reduced by the same amount, which can reduce the amount of the taxable benefit to nil.

 

The deadlines by which employees must make good are to be aligned to 6 July following the end of the tax year for benefits-in-kind which are not accounted for via the payroll.

 

The change will affect making good for benefits-in-kind provided in 2017/18 onwards.

 

Clause 10

Taxable benefits: ultra-low emission vehicles and company car tax for 2020/21

There will be new, lower bands for taxable benefits-in-kind for the lowest emitting cars.

 

For cars with emissions of less than 50g CO2/km, bands will be based on the electric range of the car. The relevant percentage for cars emitting more than 90g CO2/km will rise by 1%.

 

Electric range (miles) is the number of kilometres declared on the certificate of conformity or type approval certificate and multiplied by 0.62.

 

Changes for 2020/11 onwards are also made to the percentages for cars without a CO2 rating and cars first registered before 1 January 1998.

 

Clause 11

Taxable benefits: assets made available without transfer of ownership

The government is prescribing a detailed method for calculating the taxable value (cash equivalent) of an asset provided to an employee which is made available for private use so that employees pay tax just for those days on which the asset is available for private use.

 

The changes will take effect from 6 April 2017.

 

Clause 12

Pensions advice

Following the introduction of pension freedoms in 2015, there was a requirement that employees should be provided with pensions advice.

 

The tax exemption for pensions advice provided to employees is increased from £150 to £500, and its scope will extend from simply pensions advice to include general financial and tax advice relating to pensions. To qualify, the advice must be available generally to all employees, or all employees within five years of their retirement age, or those who due to ill-health are unable to continue to carry on their occupation.

 

Clause 13

Legal expenses etc

All employees or former employees called to give evidence, for example at an inquiry, will be able to receive tax-free legal support funded by their employer.

 

At the same time, the termination payments rules are being amended to specifically allow such costs but disallow other employee liabilities.

 

The changes will take effect from 6 April 2017.

 

Clause 14

Termination payments: amounts chargeable to tax on employment income

The tax treatment of termination payments will be tightened, in the following way:

 

  • all contractual and non-contractual payments in lieu of notice (PILONs) will be taxable as earnings; and
  • employers will have to apply tax to the equivalent of an employee’s basic pay if notice is not worked.

 

It appears that foreign service relief for employees who have spent time working outside the UK, which was removed in the draft legislation save for seafarers, is being retained.

 

The first £30,000 of a termination payment will remain exempt from income tax and NIC.

 

Following the government ameliorating some of its proposals for the draft Finance Bill legislation to make the new rules easier for employers to operate, including requiring the employer to calculate post-employment notice income on basic pay only, the formula to calculate post-employment notice pay has been tweaked again for the Finance Bill.

 

The measure will take effect from 6 April 2018.

 

The NIC treatment of termination payments is also being reformed. Primary legislation will be introduced (in a National Insurance Contributions Bill 2017) to align the tax and employer NIC treatment of termination payments so that employer NIC will be payable on the elements of the termination payment exceeding £30,000 on which income tax is due.

 

Clause 15

PAYE settlement agreements (PSAs)

The Bill provides for PSA agreements to be made with HMRC instead of an Officer of Revenue and Customs. This is to pave the way for HMRC to accept PSAs online using an automated system with effect from 6 April 2018 and replace the current paper-based process under which employers agree PSAs with an HMRC officer.

 

Clause 48–51 and Schedules 16–18

Employment income provided through third parties (disguised remuneration)

As previously announced, the government is legislating to tackle existing disguised remuneration avoidance schemes and prevent future use of such schemes by strengthening the current rules in Part 7A of ITEPA 2003 (ss 554A–554Z21) to put beyond doubt that it applies to all forms of disguised remuneration schemes, as was always intended. Disguised remuneration loans that were made after 5 April 1999 and remain outstanding on 5 April 2019 will be subject to a new charge. Legislation will ensure there is no double taxation.

 

Clause 49 and Schedule 18 combat the use of disguised remuneration type schemes that avoid tax on earnings from self-employment with effect from 6 April 2017. The measure will also deal with the historic use of such planning by introducing a charge to tax on loans and amounts previously made available and which have never been repaid. This loan charge will operate in a similar way to the employment loan charge. It will have effect from Royal Assent to FB 2017.

 

Clauses 50–51 will prevent employers claiming a deduction when computing their taxable profits for contributions to a disguised remuneration scheme unless income tax and NIC are paid within a specified period. This will have effect for contributions made on or after 1 April 2017 (corporation tax) or 6 April 2017 (income tax).

 

These measures are covered in HMRC’s technical note & summary of responses to the consultation of summer 2016 published on 5 December 2016 and a technical update policy paper published on 20 March 2017. The latter explains changes to the measures since the 5 December 2016 version. HMRC notes that for an explanation of all the legislation being introduced to tackle disguised remuneration avoidance schemes the technical update policy paper should be read alongside the technical note.

 

HMRC also published on 20 March 2017 draft guidance for changes to Part 7A comprising draft updates to the Employment Income Manual for the changes to Part 7A of ITEPA 2003 as a result of Finance Act 2016 and for the expected changes from Finance Bill 2017. It does not contain draft guidance on the new charge on outstanding loans, self-employed schemes or employer deductions which will be set out later in 2017. The guidance will be finalised and published in the Employment Income Manual following Royal Assent of Finance Bill 2017.

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