The Chancellor Confirms Plans for Salary Sacrifice and Intermediary Rule Changes

The Chancellor Confirms Plans for Salary Sacrifice and Intermediary Rule Changes

Release Date: 23 November 2016

Local authority and public sector clients have been anxiously awaiting the outcome of the Chancellor’s Autumn Statement in relation to two Government proposals introduced by way of Consultation earlier in the year. This E-Alert brings clients and contacts up to date with the post-Statement position in each area.

Taxation of benefits provided by way of salary sacrifice

The basic proposals contained within the August Consultation are to be retained, namely:

·With effect from April 2017, benefits provided under salary sacrifice will be subject to tax on the higher of the statutory ‘cash equivalent’ and the salary sacrificed in the tax year in question.

·An exemption will apply in respect of pensions, pension advice, childcare and cycles to work

However, the Autumn Statement has announced some changes to the Consultation proposals that will be welcomed by clients.

1.Ultra-low emission cars will be added to the list of benefits for which the new legislation will not be applied. The Statement does not drill down to the specific CO2 emission details so we will need to await the draft legislation to identify where the Government intends to draw the distinction between ‘low’ and ‘ultra-low’ emissions. The draft legislation is expected to be made available on 5 December.

2.Transitional, or ‘grandfathering’, arrangements have been announced and these will ensure that clients have plenty of time to prepare employees for their potential increase in tax on certain benefits provided by way of salary sacrifice as well as giving employers the opportunity for one last push for employer NIC savings. Based on the wording of the relevant documents, it would appear that employees who are in salary sacrifice schemes as at April 2017 will be protected for a year or, in specific cases, for four years. As the ‘devil’ is often in the detail, it may be prudent for employers to wait until 5 December before they plan the next tranches of their schemes. However, it would appear that the tax and employer NIC savings available from salary sacrifice are safe until April 2018 in all cases, subject to employees having joined the schemes prior to April 2017. Additionally, there are some schemes – relating to cars, accommodation and school fees – where those in existing schemes as at April 2017 are protected from the changes until the end of the 2020/21 tax year.

After the shock of receiving the Consultation proposals in August, we are sure that the majority of affected clients will now feel some relief that they won’t have to rush to make further changes to their arrangements prior to April 2017. That said, clients are advised to give early consideration as to how today’s announcement impacts on their current and prospective salary sacrifice plans, especially as the ‘window’ for generating employer NICs savings appears to be open for the next 16 months, subject to action taken between now and the end of March 2017.

Intermediary rule changes in the public sector

Today’s Statement confirms Government plans to proceed with changes to the intermediary rules for public bodies. The new rules will be introduced from April 2017 as previously planned.

We will await the publication of draft legislation on 5 December to identify the Government’s detailed plans, but expect this to closely reflect the proposals outlined during consultation. Only one specific issue has been clarified today. Under existing ‘IR35’ rules, a personal service company (PSC) can deduct 5% before applying PAYE and NIC to the ‘deemed income’. When introduced back in 1999/2000, this 5% was supposed to partly recognise the cost to the PSC of administering the deductions. As regards the new obligation for public bodies to determine whether ‘IR35’ applies and to make a deduction and remittance of PAYE and NIC on the ‘deemed earnings’, the 5% will not be applied. The Government justifies this on the basis that the public body will be dealing with the deductions therefore eliminating this administration for the PSC.

Although the process for determining the ‘deemed earnings’ will be simpler as a result of this clarification, this will not be viewed as any form of consolation by clients hoping for a postponement or abandonment of these plans. Local authorities and public bodies generally will be disappointed that they will have a significant new form of ‘employment tax’ to come to terms with in such a short timescale, particularly given the potential impact on payroll software and processes, and the HR and legal ramifications when contracts will already be in place with PSCs and the terms of these may conflict with the employer’s new obligations. Clients and contacts are urged to be proactive following publication of the draft legislation in order to ensure that they are well placed to comply from 1 April next year.

We understand that HMRC’s new ‘Digital Tool’ will be available in BETA format before the end of this month. We will advise further once we have sight of it.

If you need any assistance in dealing with these issues please contact one of the team below.

Duncan Groves 07715 666754 duncan.groves@pstax.co.uk
John Harling 07768 446381 john.harling@pstax.co.uk
Peter Minchinton 07484 277870 peter.minchinton@pstax.co.uk