The Optional Remuneration Arrangement (OpRA) rules have been in place since 6 April 2017 but we are finding that many employers are unaware that the rules extend beyond standard salary sacrifice arrangements. Have you identified all arrangements caught by these rules?
Broadly, since 6 April 2017, the OpRA rules apply when an employee gives up the right to an amount of earnings in return for a benefit. Subject to transitional rules and certain exemptions, when the rules apply, the value of the benefit for tax and Class 1A NIC purposes is the greater of the cash earnings given up and the value of the benefit in kind calculated under normal benefit rules.
The rules apply to two types of scenario, known as 'Type A' and 'Type B' arrangements.
'Type A' is any arrangement where an employee gives up the right, or the future right, to receive an amount of earnings (for example salary or a bonus) in return for a benefit. This catches benefits provided under salary sacrifice arrangements. 'Type B' is any arrangement other than a 'Type A' arrangement, where an employee agrees to be provided with a benefit rather than an amount of earnings, which allows the rules to be applied to much more than just salary sacrifice.
Eight months into these new rules we are finding that many employers do not realise that their 'Type B' arrangements are caught, are not considering the impact of the OpRA rules to such arrangements, and are not communicating the effect internally and to employees.
A common example is where an employee is offered a company car or a car allowance and chooses the company car. In this 'Type B' scenario, the OpRA rules would apply (subject to transitional rules and certain exemptions) and, if the cash allowance given up in a tax year is higher than the benefit value under normal company car benefit rules, it is the cash allowance which determines the benefit in kind value for tax and Class 1A NIC purposes in that tax year.
We are already seeing HMRC start to consider the OpRA rules during reviews of employer records and we are expecting to see HMRC activity on this increase following the 2017/18 P11D season. Failure to apply and communicate the effect of the OpRA rules correctly could result in unexpected liabilities for both employers and employees in the future.
What should you do?
Where not done so already, we recommend that all employers urgently carry out the following steps. This is particularly urgent for employers who are payrolling benefits under OpRA for 2017/18.
- Identify all benefits (including 'Type B' arrangements) which could fall within the OpRA rules.
- For affected benefits identify exactly when the OpRA rules will apply from (for arrangements entered into before 6 April 2017 the transitional rules must be considered).
- Develop and implement processes and procedures to ensure that affected benefits are valued, reported, taxed and subjected to Class 1A NIC correctly for the 2017/18 tax year and beyond for different populations of the workforce.
- Communicate the effect of the OpRA rules to impacted employees (such as the effect on their PAYE tax codes) and include suitable communications for new employees from 6 April 2017 who may be immediately impacted.
- Consider whether arrangements can and should be changed going forward, and whether documentation such as contracts of employment and staff handbooks need to be amended accordingly.
If you have any questions about the OpRA rules, or any concerns about whether your arrangements are caught or that the correct treatment is being applied, please contact Lee Knight or your normal RSM contact who can help you review the position.