25 November 2022
With the ongoing cost-of-living crisis, employers are increasingly using welfare counselling to support their workforce. For employment tax purposes such arrangements always need to be considered on their own merits.
Why is welfare counselling so relevant to today’s workforce?
Welfare counselling is now a common type of support provided by employers to employees, often through the employer’s Employee Assistance Programme (EAP).
With the increase in remote and hybrid working patterns post Covid-19, it is getting tougher for employers to look after the mental health and wellbeing of their employees, particularly during challenging times.
Although by no means new, employer provided welfare counselling can be an effective tool for tackling these issues, providing employees with a helpline service through which they can speak confidentially with and seek advice from, third party counsellors.
This helps employers to look after the wellbeing of their employees, improving employee performance and productivity by creating a happier and more harmonious workforce.
Is this an exempt benefit in kind for employment tax purposes?
Potentially it can be, but it is certainly not the case that all types of welfare counselling are exempt from tax.
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 easy for employers to provide services which fall outside of the narrow constraints of the exemption.
The legislation itself does not define the types of welfare counselling that are exempt (although it does specifically exclude certain types of counselling services from the exemption - see below) and so employers have to rely on HMRC’s guidance in their Employment Income Manual (see EIM21845) which lists the types of issues HMRC expects the exemption to cover. This includes welfare counselling on:
- Problems at work;
- Debt problems;
- Alcohol and drug dependency;
- Career concerns;
- Equal opportunities;
- Ill health;
- Sexual abuse;
- Harassment and bullying;
- Conduct and discipline; and
- Personal relationship difficulties.
Additionally, the exemption can only apply if the welfare counselling is available to all employees of an employer on similar terms.
Are certain types of counselling excluded from the exemption?
Yes, the legislation specifically excludes the following from being exempt:
- Advice on finance, other than advice on debt problems;
- Advice on tax;
- Advice on leisure or recreation; and
- Legal advice.
What about medical treatment?
Prior to 6 April 2020, the exemption did not cover medical treatment of any kind, but this rule has since been relaxed slightly with certain types of counselling services which amount to medical treatment (the HMRC guidance gives cognitive behavioural therapy and interpersonal therapy as examples) can now be covered by the exemption.
Again, this is very narrow in scope and most medical treatment would not be expected to qualify.
What happens if a wide range of services are provided, some exempt and some not?
If an employer provides a range of welfare counselling facilities, some of which are exempt and some which are not, within a single programme, HMRC’s strict view is that the exemption would not apply to that programme. This is because the exemption does not include a basis for apportioning the benefit.
This means that all the component services provided under the programme need to be covered by the exemption for no benefit in kind to arise.
Employers in this position might consider dividing their programme into two separate schemes. One programme covering the counselling services which qualify for the exemption (which the exemption could apply to) and one which includes the services which do not qualify (on which a benefit in kind is liable to income tax and NIC would then arise).
However, the HMRC guidance says that if it is not possible to separate the services in this way, that “common sense should be applied” if the welfare counselling provided by an employer consists substantially of facilities that meet the exemption. HMRC states that this common-sense approach is more relevant where it is difficult to draw the line between exempt and non-exempt counselling.
Are there other practical issues?
A particular practical challenge can be legal advice which, while excluded from the exemption, can sometimes be closely connected to a fundamental problem which is covered by the exemption.
Take the example of an employee who has debt problems linked to alcohol dependency, who defaults on loan repayments on a loan with their bank and is threatened by the bank with further action to recover the outstanding repayments.
The employee’s problems are ultimately caused by the alcohol dependency, on which she has sought advice via her employer’s EAP. This service qualifies for the exemption based on the HMRC guidance at EIM21845. However, she also has a legal problem on which she has also sought advice from the EAP. This would not normally qualify for the exemption. It may be difficult to distinguish if the advice from the EAP on the alcohol dependency has changed into legal advice on the loan issue (for example, if both are discussed in one call between the employee and the counsellor). HMRC’s guidance states that common sense should be applied in these circumstances and where “the fundamental problem is covered by the terms of the exemption”.
This demonstrates why each programme needs to be considered on its own merits.
In this example the employer should already have sought to understand the tax treatment of the EAP given that it covers issues which qualify (advice on alcohol dependency) and do not qualify (legal advice) for the exemption.
What are the employment tax obligations if we provide taxable counselling services or a taxable EAP?
Subject to the points highlighted above, if an employer provides a type of welfare counselling programme or EAP which is not exempt, the benefit value should be reported on the employees’ forms P11D. The employees would then pay tax on the benefits and the employer would pay Class 1A NIC through the P11D(b) return. There may also be an opportunity to payroll the benefit for tax purposes.
Where the employer would prefer not to disturb the employees’ tax positions and wants to meet the tax and NIC liabilities itself, it may (by agreement with HMRC) be able to include the benefit in a PAYE Settlement Agreement (PSA) if the benefit is either minor, irregular, or impracticable. Please see more on PSAs in our article ‘PAYE settlement agreements: a useful tax compliance tool’.
As an employer, you may be putting welfare counselling measures in place to help employees navigate tough times. While the current tax exemption for welfare counselling may cover this you should ensure you have correctly considered the employment tax treatment based on the merits of your own arrangements given the narrow constraints of the exemption. Taking such care to consider your arrangements should help avoid unexpected tax surprises in the future.
For more information or if you have any concerns about the benefits you provide to employees, please contact Lee Knight or Susan Ball.