Familiarity Breeds Complacency?
Salary sacrifice schemes have become all too familiar in recent years prompting the Government to issue its annual budget day warning that it may decide to turn off the supply ‘at the mains’. This seems an unlikely scenario but the warnings inevitably have the desired impact of making employers think twice. Apart from these warnings, there is another way for the Government to reduce the Treasury loss caused by salary sacrifice and it’s almost staring HMRC straight between the eyes, namely salary sacrifice compliance.
Historically we have observed an interesting juxtaposition with regard to Government pronouncements on salary sacrifice – where there seems to have been concern about the growth of such arrangements – and the way that HMRC Employer Compliance teams have historically reviewed their application, which has generally been on a ‘light touch’ basis.
However, in recent months we have seen some evidence of HMRC beginning to take a more robust approach to monitoring these schemes in applying the letter of the law and any employers should be wary of the types of challenges that may now arise.
From a VAT perspective, as you will no doubt recall, HMRC has already been forced to remove any advantages following the ECJ decision in the Astra Zeneca case C-40/09. Since 1 January 2012, most salary sacrifice payments received from employees have been subject to VAT and this, in itself, presents a tax compliance issue.
Fundamentally, a salary sacrifice must involve a change to an employee’s terms and conditions that is permanent for the duration of the scheme. Whilst certain lifestyle events may be incorporated into the scheme which may allow the employee to cease participation, for example pregnancy or bereavement, we are beginning to see challenges from HMRC in cases where an employee may (or may be required to)suspend their participation in a scheme. For example, the employee is absent from work on health grounds and may have insufficient earnings to stay in the salary sacrifice scheme whilst they are away from work, but they are permitted to defer their salary sacrifice reductions to a later date even after the benefit has stopped being provided. In instances such as this, we have seen HMRC take the position that the salary sacrifice is not genuine, because the employee has the choice of opting out and back in again at a later date.
Another area which is susceptible to HMRC challenge relates to the ‘end of scheme’ arrangements. For example, in an electronics goods scheme, employees are often able to acquire the equipment outright at the end of the period during which it has been made available to them. There are additional complications with these types of benefits, because they are taxable benefits in kind for the duration of the scheme. Therefore, under the terms of the legislation regarding the transfer of the ownership of a benefit to an employee that has been subject to a tax charge, the employee must, to avoid an additional tax charge, pay the higher of the market value on transfer or the value of the benefit when it was first provided less the amount on which tax has been paid. Therefore, because the employee may have had the benefit for a relatively short period of time during the scheme, typically 12 or 24 months, the valuation under the tax rules will generally be much higher than the actual market value at that time. There is also the need to ensure that the correct VAT liability is applied to any income received from the employees when the title of the goods transfers.
Another compliance issue relating to the electronic goods scheme arises in respect of a ‘collection note’ provided to the employee for use when collecting the goods in question from the retailers. These collection notes are likely to be viewed by HMRC as ‘vouchers’ which would then give rise to tax/ NIC implications not envisaged by the scheme.
We have also seen HMRC contest the position of other schemes involving laptops and tablets being provided purportedly for training purposes and therefore deemed to be exempt from any benefit in kind charge. Whilst it is possible that some of these schemes do meet the necessary requirements to qualify as training, it is likely that many will not and HMRC has made significant recoveries of tax and NICs in such cases.
In view of the apparent additional scrutiny from HMRC regarding compliance with the various requirements of the tax/NICs and VAT rules recently, employers should be taking additional care with setting up arrangements involving salary sacrifice. They should also be checking existing arrangements to make absolutely certain that they comply fully with tax legislation.
At PSTAX we have put together a scope and fixed price for a salary sacrifice scheme review covering one or more schemes. We would be pleased to send this to clients on request. Please email one of the contacts below setting out the schemes that you run and we will send our compliance review scope and pricing.
In addition to providing this support, we can also help with any new scheme implementation. PSTAX is now working alongside Connected Benefits, a major benefits provider in the public sector, and would be happy to put them in touch with you to discuss your fully compliant salary sacrifice scheme requirements going forward.