Following a consultation period from August through to October the Chancellor of the Exchequer confirmed in his 2016 Autumn Statement that he would legislate to remove the income tax and employer national insurance contributions (NICs) advantages of salary sacrifice schemes from 6 April 2017 on all except a few exempted benefits in kind. The government has been concerned about the tax leakage from salary sacrifice arrangements and, in particular, that the use of such schemes creates an unfair advantage for employers and employees who use salary sacrifice compared with those who do not .
So what are the changes?
All employers who provide benefits to employees in exchange for salary sacrifice or salary exchange will be affected. This will include any flexible benefits schemes where there is an element of salary sacrifice. In addition, where an employer provides a choice between a benefit or cash this will also be affected. A common example of this is where an employee can choose between a company car or a cash allowance.
However, the changes will not affect where a salary sacrifice is in place for the provision of pensions, cycle to work schemes, ultra-low emission vehicles (vehicles under 75gCO2/km) and the provision of childcare under certain circumstances.
The proposed legislation deems that the taxable value of a benefit under salary sacrifice arrangements will be the higher of the current value of the benefit or the cash forgone. This will be the value employers will need to use for calculating income tax and class 1A NICs.
The new rules are intended to come into effect from 6 April 2017 and any contracts entered into before this date will be protected until a ‘change in arrangements’ has taken place.
Change of arrangements
From 6 April 2017, a ‘change of arrangements’ arises when a salary sacrifice contract starts, renews, ends or is modified or changed in any way. After a change of arrangements the employer must value the benefit under the new rules. This will include most lifestyle changes made in flexible benefits schemes.
The government has put in place some grandfathering arrangements, such that if a contract is in place before 6 April 2017, the new rules will not come into place until there is a change of arrangements or 6 April 2018, whichever is the earliest. In the case of ultra-low emission cars, accommodation benefits and school fees, grandfathered arrangements will continue to 6 April 2021 unless there is a change of arrangements.
However, employers need to be aware that, under the draft legislation, if an employee starts a contract on or after 6 April 2017, they will need to use the new rules immediately for that employee.
It may be questionable as to whether there are grandfathered arrangements in place in many instances as most flexible benefits schemes have an annual renewal and these would mean that a change of arrangements is likely to be triggered before the applicable date - 6 April 2018 or 6 April 2021.
What actions should employers take now?
All employers using salary sacrifice or cash alternative arrangements will need to be conversant with the new rules, in particular how and when they will impact on their reporting obligations.
In many cases, employers will need to report different taxable values for some benefits on the new P11D, and there are likely to be additional complications for those currently voluntarily payrolling benefits. HMRC has already stated it will be providing guidance for employers who do not think that they will be able to update their software or systems in time.
For more information please get in touch with Graham Farquhar, or your usual RSM contact.