As we fast approach the end of the 2017/18 tax year, employers should start to consider the impact the Optional Remuneration Arrangement (OpRA) rules could have on their 2017/18 forms P11D and P11D(b). The OpRA rules are likely to make the preparation of these forms much more complicated than in previous years, and allowing sufficient time to properly consider the position will be key to submitting accurate and timely returns.
As reported in previous articles, from 6 April 2017, the OpRA rules apply when an employee gives up the right to an amount of earnings in return for a benefit in kind.
Subject to certain exceptions and transitional rules, when a benefit is provided under an OpRA, 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 using normal benefit rules.
The 2017/18 tax year will be the first tax year where the value and types of benefits employers report on their 2017/18 forms P11D and P11D(b) can be affected by these rules.
For benefits provided under an OpRA, employers could find that the method applied to value the benefits to be reported on forms P11D for 2017/18 becomes much more complicated, and that they are required to report benefits which have never been reported before. Furthermore, when the OpRA rules apply, this could increase the amount of tax employee’s pay, and the amount of Class 1A NIC employers pay, on affected benefits.
Take employer provided income protection insurance as an example. Many employers offer a fixed level of income protection insurance cover as a standard benefit but with the option for employees to enhance their cover and fund the additional cost through salary sacrifice (ie under an OpRA). Prior to 2017/18 employers providing income protection in this way would not normally have been required to report the premiums as a benefit in kind on employees’ forms P11D but from 2017/18 a benefit in kind will arise for employees who have enhanced their benefit under an OpRA which was either:
- first entered into after 6 April 2017; or which was
- varied, modified, or renewed between 6 April 2017 and 5 April 2018 (for example when employees renewed their enhanced cover when their annual flexible benefits window closed on 1 January 2018).
In summary employers may find that they are reporting a different value on Forms P11D for different employees on the same type of benefit, for example, where one employee entered into arrangements prior to 6th April 2017, and is covered by the transitional rules, compared to another employee that first entered into the arrangement or it was varied, renewed or modified on or after 6 April 2017.
What should companies do?
We recommend considering the effect of the OpRA rules on 2017/18 Forms P11D as soon as possible to allow sufficient time for the position to be reviewed and managed, and accurate forms to be prepared, before the P11D filing deadline. In particular employers should:
- Identify all benefit arrangements for 2017/18 which are affected by the OpRA rules, and from when.
This goes much further than just identifying benefits provided under salary sacrifice as the definition of a 'Type B' OpRA catches any arrangement where an employee agrees to be provided with a benefit rather than an amount of earnings (for example where an employee is offered a cash allowance or a benefit, and chooses the benefit).
- Establish the correct value of the affected benefits which will need to be reported on employees’ 2017/18 forms P11D.
In some circumstances benefits which have not previously been reported on forms P11D will need to be reported for the first time. The effect of this should be properly communicated to employees, including how this could increase their tax liability for the year and their 2018/19 PAYE tax codes.
- Consider whether changes should be made to benefit arrangements going forward.
For example, should employers switch to “net pay” arrangements for certain benefits or stop offering employees a choice between cash allowances and non-cash benefits.
We are expecting compliance with the OpRA rules to be an important part of HMRC’s employer record checks in the future. Employers must, therefore, exercise reasonable care to ensure compliance with the OpRA rules and steer clear of unexpected liabilities and HMRC penalties.