The OpRA rules have been in place since 6 April 2017 and were the subject of our newsletter article in November 2017.
These rules were introduced to address the tax and/or NIC advantages enjoyed where benefits are provided through arrangements where the employee gives up the right to an amount of earnings in return for a benefit, typically when under a salary sacrifice arrangement.
For those employers and employees that entered into such arrangements before 6 April 2017 for school fees, certain company cars, and living accommodation benefits, the tax and NIC position could change significantly from 6 April 2021.
When do the OpRA rules apply?
To recap, the OpRA rules apply to:
- any arrangement where an employee or director gives up the right (including a future right) to an amount of earnings in return for a benefit. These are known as ‘Type A’ arrangements, and this catches salary sacrifice; or
- any other arrangement where an employee has an option or choice between taking a benefit in kind or cash earnings and chooses the benefit. These are known as ‘Type B’ arrangements.
The inclusion of Type B OpRAs means that these rules extend well beyond salary sacrifice arrangements including to a situation where:
- an employer offers a prospective employee a choice between a ‘live-in’ rate of pay with living accommodation being provided, or a higher ‘live-out’ rate of pay without living accommodation being provided; or
- an employee is offered the choice between a car allowance or a company car.
What do the OpRA rules do?
Where the OpRA rules apply, the value of the benefit for tax and NIC purposes is the higher of the amount of cash pay given up and the taxable value of the benefit in kind.
An employee is promoted in August 2020, and their employer offers them a choice between a car, and a cash car allowance of £500 per month. The employee chooses the car which is made available to him on 6 September 2020. The car has a list price of £22,000 and an appropriate percentage of 22 per cent.
The OpRA rules apply as the employee gives up earnings of £500 per month in return for a company car. The value of the company car benefit in 2020/21 is the higher of the earnings foregone of £3,500 (ie monthly cash allowance £500 x 7 months) and the normal benefit value of £2,823 (i.e. £22,000 x 22 per cent x 7/12 months).
The benefit in kind reportable on the employee’s form P11D and liable to tax and employer’s Class 1A NIC during 2020/21 is £3,500, not the amount of £2,823 determined under the company car benefit rules.
Are the comparison calculations always this straightforward?
No, often the comparison calculation can be more complicated.
This is because the amount of earnings given up is compared to a modified benefit where any amounts made good by the employee are ignored. However, amounts which are made good do then reduce the taxable benefit which arises. This typically affects benefits where part of the benefit is provided under OpRA, and the employee also contributes towards the cost of the benefit in another way.
What about exempt benefits?
In circumstances where the benefit is otherwise exempt, but is not an excluded or special case benefit, the value to be compared with the amount foregone is deemed to be nil, and the amount earnings given up (and therefore the value of the benefit liable to tax and employer’s NIC) will invariably be higher than the nil value.
Furthermore, many schools may have agreed with HMRC that the value of the school fees benefit can be measured on a marginal cost basis (typically 15 per cent of the school fee or lower). From 6 April 2021, the value to be compared with the amount forgone will be the marginal cost, and the amount forgone (and therefore the value of the benefit liable to tax and employer’s NIC) will invariably be higher than the marginal cost.
From when do these rules apply and why is 6 April 2021 important?
For most OpRAs commencing before 6 April 2017 and which were still in place on 6 April 2018 (without being modified, varied or renewed between 6 April 2017 and 5 April 2018) the OpRA rules automatically applied from 6 April 2018.
However, for an OpRA entered into before 6 April 2017, where the benefit subject to the arrangement is a company car with C02 emissions of more than 75gkm, or school fees, or living accommodation, the OpRA rules will not automatically apply until 6 April 2021 if the arrangement is not modified, varied or renewed before then (subject to certain allowable amendments for school fees).
April 2021 is therefore an important date for employers and employees who entered into pre-6 April 2017 OpRAs for these types of company car, school fees, and living accommodation. From that date, the value of the benefit in kind arising and the tax and employer’s NIC due could increase significantly.
An employee of an independent school enters into an OpRA with their employer on 6 April 2016 for a discounted school place at the school for their child. The annual fees are £15,000 per pupil but the employee is given a 25 per cent discount and enters into an annual salary sacrifice arrangement for the remainder of £11,250.
The school has agreed with HMRC that the benefit in kind value of a school place, under the marginal cost principle, is 15 per cent of the annual fees.
For each of the tax years from 2016/17 to 2020/21 the annual benefit in kind arising and liable to tax and Class 1A NIC is £2,250, being 15 per cent of the full annual fee of £15,000. The employee is a 40 per cent taxpayer and pays tax of £900 on the benefit annually in each of these tax years. The employer pays employer’s Class 1A NIC (at the rate of 13.8 per cent) of £310.50 on the benefit annually in each of these tax years.
The arrangement continues until 5 April 2022. From 6 April 2021 the OpRA rules apply and the annual benefit in kind value increases to £11,250, being the higher of the annual salary given up for the benefit (£11,250) and the normal benefit in kind value (£2,250).
For the 2021/22 tax year the employee, who is still a higher rate taxpayer, pays tax on this benefit of £4,500 and the employer pays Class 1A NIC of £1,552.50. This is a significant increase in the annual value of the benefit and the tax and NIC payable.
Are all benefits provided under an OpRA caught?
No, certain ‘excluded’ and ‘special case’ benefits are outside the scope of the OpRA rules.
Excluded benefits are ringfenced benefits unaffected by the OpRA rules where the previous tax and NIC advantages can continue. These include (but are not limited to) payments by employers into registered pension schemes, childcare vouchers, certain bicycles, and cars with C02 emissions of less than 75gkm.
Special case benefits are those benefits where separate legislation already counters the use of OpRAs in conjunction with the use of that benefit (for example in relation to subsidised workplace meals).
What should employers with such arrangements be doing now?
The OpRA rules are complex and we recommend that all employers with such arrangements review these to ensure they are being compliant with the rules. Where the value of benefits is underdeclared because the OpRA rules are not complied with, HMRC will ask the employer to settle the underpaid tax on the benefits on a grossed-up basis, together with the Class 1A NIC due, a potential penalty and interest charges. Given that HMRC can collect the liabilities for previous tax years in this way, such a settlement with HMRC can be expensive and so it is important to identify non-compliance at the earliest opportunity.
We also urge employers with pre-6 April 2017 arrangements for school fees, company cars with C02 emissions of more than 75gkm, and living accommodation, to review the offering of such arrangements now, decide if any changes are needed, and where appropriate clearly communicate with employees the change in the tax treatment from 6 April 2021.