Environmental, social, and governance (ESG): employment taxes are a vital consideration

27 October 2023

Employment tax policies can be a crucial part of any ESG strategy. People are an integral part of any organisation, making them a crucial consideration when companies are looking at their overall ESG agenda.

What is ESG?

ESG encompass a range of issues, including climate change, diversity and inclusion, human rights, labour practices, and corporate governance.

Companies are increasingly incorporating ESG principles into their operations and strategies. This change is a result of a broader understanding that sustainable practices drive long-term value, mitigate risks, enhance a company's reputation, and give something back to society.

How are employment tax policies and ESG connected?

Employment tax policies and ESG can be connected in several ways as explained below.

1. Environmental considerations

Many employers have integrated environmental considerations into their culture through recycling programs and energy efficiency initiatives for the workplace.

But employers can also address environmental considerations by making employee benefits available which advantage the environment. Examples include:

  • electric company car schemes;
  • bicycles under ‘cycle to work’ arrangements;
  • providing discounts on ethical brands; and
  • offering alternative rewards on recognition platforms (such as tree planting or charitable donations rather than vouchers).

While these benefits can help support an employer’s environmental strategy, it’s important that employers should properly consider the employment tax treatment when planning and implementing such benefits to ensure that they are properly reported to HMRC and the right amount of tax and NIC can be paid.

The employment tax treatment of benefits can often be complex and if employers are not compliant it can affect social considerations under their ESG strategy. This can leave the employer liable for underpaid tax and NIC liabilities plus HMRC penalties and interest.

Taking the discounts on ethical brands as an example, providing employees with access to discounts through a discount platform can create a benefit in kind which, unless it is a trivial benefit in kind might be liable to tax and NIC and might need to be reported to HMRC by the employer on employees’ forms P11D or via a PAYE Settlement Agreement. Find out more about HMRC’s position in relation to discount platforms in their HMRC Employer Bulletin: December 2019.

2. Social considerations

The social pillar looks at an organisation’s contribution to fairness in society. Paying fair wages and ensuring employees receive appropriate benefits is fundamental to the social component of ESG. Topical themes here include equal pay and gender pay gap reporting. Total tax contributions are also relevant.

Looking at fair wages includes National Minimum Wage (NMW) or National living Wage (NLW) compliance, making sure these are paid as they are being actively enforced by HMRC. Ensuring compliance with NMW and NLW regulations should be a priority for employers. Some of the most common reasons for employers not paying NMW and NLW are the result of mistakes. It is crucial to ensure risks are considered, especially when implementing new working practices.

Investing in employee wellbeing can be part of an employer’s social strategy. This might take many forms from gym memberships or fitness classes to the offering of welfare counselling services to employees, which provide employees with a helpline service through which they can speak confidentially with and seek advice from, third party counsellors. While there is a tax exemption for employer provided welfare counselling (SI2000/2080 provides an exemption under section 210 ITEPA 2003), this is very narrow in scope, and it is possible for employers to provide services which fall outside of the narrow constraints of the exemption.

3. Governance

As the business environment becomes more complex, organisations are under intense scrutiny from government, regulatory and other significant stakeholders. But tax governance is not new. Over the years we've seen the introduction of several regimes that will impact the ESG agenda. Some tax governance compliance requirements are mandatory for certain size organisations such as Senior Accounting Officer, publication of a Tax Strategy and Country by Country Reporting. But others, such as Corporate Criminal Offence, apply irrespective of size and industry.

Proactive governance underpins any successful tax compliance response and is key to building trust with the authorities and evidencing behaviours. For these reasons tax governance should be a board agenda item for organisations but getting it right isn't easy. It's essential to understand what frameworks in place and risks covering all tax areas. Employment taxes can be many organisations’ hardest tax burden to manage, and so this is a key area. The role of technology is becoming increasingly important in extracting and monitoring relevant tax data.

Key considerations can include:

  • the organisation’s tax strategy and risk appetite;
  • documented processes and controls;
  • reporting lines for communicating tax risks and changes as they emerge;
  • escalation procedures;
  • maintaining of a tax risk register; and
  • how all the above will be tested and when, to make sure it works.

There is no ‘one-size-fits-all’ solution. However, a robust tax governance framework covering all taxes including employment taxation will increase the ability to proactively respond to the challenges of today’s dynamic and evolving compliance and reporting environment.

The ultimate goal of good governance on employment taxes, is ensuring the correct amount of income tax and NIC are paid on wages and benefits. For more details, read our P11D and benefit in kind reporting and PAYE settlement agreements articles. 

One key area in recent years has been the complexities created by the off-payroll working including the agency legislation, and the need to undertake due diligence on labour supply chains. With further possible changes ahead, such due diligence can enable the end-user to spot unethical working practices in the labour supply chain and identify whether they could be exposed to tax, NIC, legal and reputational risks.

What are the challenges?

While connecting employment taxes policies with ESG is important, it’s not without its challenges. Key challenges include the below.

  • Complexity.
  • Employment tax regulations can be complex and require expertise and training to navigate effectively. Employers should invest the appropriate time to identify risk areas and ensure that their policies and procedures in relation to employment taxes facilitate compliance.
  • Short-term and long-term goals and challenges.
  • Employers may face pressure to address an issue in the short-term, which can conflict with longer-term ESG goals and strategies. For example, to address an urgent skills gap or labour shortage, a company might engage off-payroll workers through a labour supply chain which they have not taken suitable due diligence on and do not fully understand. Striking the right balance is essential.
  • Regulatory risks.
  • Changes in tax regulations, case law developments, and HMRC guidance and practice can all impact employment tax policies. Staying informed and up to date is a huge challenge for employers.

How can RSM help?

Employment taxes and ESG may not obviously seems connected, but employment taxes policies can play a pivotal role in an employer’s ESG strategy by facilitating sustainable and ethical business practices and good governance is key to ensuring compliance.

At RSM our team of employment taxes specialists can help you to shape your employment tax strategies and polices, manage your employment tax risks, and ensure compliance with legislation and HMRC guidance.

If you would like to discuss this, please contact Lee Knight, Susan Ball, or your usual RSM contact.