In recent years there have been significant changes for employers in dealing with their employment related taxes. HMRC have also been very active with a number of consultations documents issued and the constant changes are leaving employers feeling exhausted. Keeping up with the changes feels like a full time job; and HMRC are passing more and more responsibility onto employers.

The consultations launched include:

• Salary sacrifice anti-avoidance
• Employed provided accommodation
• Travel & subsistence (now effectively abandoned)
• Taxation of termination payments
• IR35
• Pensions tax relief
• Trivial benefits
• Payrolling of benefits
• Abolition of the £8,500 P11D threshold

There are still other reforms under consideration and everyone involved in the change process will need to find a second wind to keep abreast of, and keep contributing constructively to, further developments to come.

A reminder of some recent changes

Real Time Information (RTI) brought the most significant change to payroll reporting in April 2013 which made employers ensure they had accurate details of all their employees. HMRC’s aim with RTI was to enable information to be available on a real-time basis through the tax year to ensure underpayments/overpayments and tax codes were accurate. It was a much needed change to a creaking PAYE system but it has been far from free of problems.

Auto-enrolment brought another change adding to the cost of employment. The government wanted to encourage greater saving for retirement, and auto-enrolment is fundamental to this aim. It imposes obligations on employers to include workers in pension schemes, with minimum levels of funding including employer contributions.

Only a few months ago employers had to look again at their payroll to account for the National Living Wage.

There are further changes on the horizon which employers need to think about – Gender Pay Gap Reporting (Great Britain only), Off Payroll Working in the Public Sector and the Apprenticeship Levy.

Over the next 12 months, employers will need to prepare for a number of these changes which are outlined in more detail below.

Gender pay gap reporting

In February 2016, the Government Equalities Office (GEO) issued their response to the ‘Closing the Gender Pay Gap’ consultation which was originally published in July 2015. The consultation received nearly 700 responses, including over 200 from employers and business organisations.

The outcome of the consultation was that the reporting regulations will apply to private, public and voluntary sectors across Great Britain for employers who have more than 250 staff. There is currently no requirement for employers in Northern Ireland to report the statistics. The information on pay (including bonuses and incentives) will be published on the employer’s website and must be accessible to employees and the public.

Employers will have 18 months after the commencement in October 2016 to publish the required information for the first time, and must publish the information annually thereafter.

It is therefore important, from a data and resource perspective, for employers to start to plan how to access, validate and analyse data, and report on the gender pay gap. As employers will be required to publish results annually, a visible reduction in the pay gap from one year to the next will be the most obvious measure of success.

Through their commitment to closing the UK’s gender pay gap, the Government is trying to tackle a long-standing social challenge around gender inequality. The gender pay gap reporting regulations present an opportunity to put the issue back in the spotlight, and to push it up the agenda of employers across Great Britain.

Whilst it is only a small step at the start of a much longer journey, if implemented effectively it may help to encourage companies to actively address the issue. Although the intent is positive, any spotlight on league table comparisons may encourage unhelpful behaviours. Instead it would be beneficial to focus attention on the action taken by employers to reduce any gap in pay and to ensure that all policies and processes are genuinely gender neutral.

Off-payroll working in the public sector

Last year, HMRC published a consultation document discussing improvements to the effectiveness of the intermediaries’ legislation (IR35). This consultation was not a surprise as there has always been governmental concern that there is widespread non-compliance. HMRC are concerned that this may indicate a significant loss of tax and National Insurance Contributions (NIC).

The Government’s proposals for reform have now been concentrated on the public sector (as announced in Budget 2016). The closing date for this consultation is 18 August 2016.

Whilst the Government has stated that the rules in the private sector will remain unchanged, it is not unreasonable to assume that any changes will eventually extend to it, particularly if the proposed reforms result in greater levels of compliance along with increased tax and NIC revenue.

Under current rules, workers who contract to work through their own intermediary, typically a personal service company (PSC), are responsible for assessing whether their engagements with clients are subject to IR35 regulations and account for PAYE and NIC where appropriate. At the moment, there is no obligation on the end user of the worker’s services to be involved in the IR35 assessment, or to have any responsibility or liability for PAYE and NIC.

It is proposed that from 6 April 2017, the obligation for considering the IR35 ‘status’ and for deducting and accounting for PAYE and NIC (if appropriate) will shift to the public sector body engaging with the PSC. If there are other agencies or intermediaries in the supply chain, the intermediary that makes payment to the worker’s PSC will be the party responsible for meeting these obligations.

There has been some suggestion that the IR35 status test would be simplified, however, the consultation document has not made this area clear. To support engagers in assessing IR35 status, HMRC have said they will provide an online interactive tool designed to provide a definitive view on whether IR35 applies to a particular engagement.

During the consultation process, the Government is seeking to explore ways to make the decision making process as simple and certain as possible. The consultation paper provides a series of examples and decision trees designed to help engagers identify those workers to whom the rules may apply. It suggests that workers are to be automatically treated as being within the scope of the rules if there is both a right to personal service and the engager decides or has the right to decide how the work should be done.

If a PSC fails the automatic test, but is otherwise potentially in scope then the next step would be for the engager to use the digital tool to provide a decision. HMRC would be bound by the outcome of the digital test as long as accurate information is entered by the engager and circumstances remain unchanged.

Having determined that the new rules apply to a PSC, the person paying the PSC would then deduct PAYE and national insurance through RTI and will therefore need the usual ‘employee’ information from the worker such as their NI number, name, address etc. to facilitate this. In calculating PAYE and NIC a 5% general expenses deduction may be made from gross pay; similar to the IR35 deemed payment rules.

Apprenticeship Levy

The former Chancellor George Osborne announced in November 2015 that he was introducing an Apprenticeship Levy with effect from April 2017. Some eight months later some details are clearer but many are not, in particular how employers in Northern Ireland, Scotland and Wales will access funding for apprenticeships.

The levy applies whether or not a business actually employs apprentices. It is set at 0.5% of an employer’s paybill. For these purposes, paybill means all earnings liable to employer’s national insurance. Every employer, however, will receive an annual allowance of £15,000 to offset their levy, meaning in effect only those employers with a paybill in excess of £3m per year will actually have to pay it. Note, however, that groups who have a number of employees across a number of companies are only entitled to one allowance.

Interestingly, currently there are national insurance exemptions for employing those aged under 21 and apprentices under 25. These exemptions will not apply to the levy.

The levy will be paid by employers via their normal payroll processes and as such they do need to be speaking to their payroll providers to ensure their software is going to be ready to implement the changes required.

It will be vital that employers have a robust system in place to identify payments liable to the levy including irregular payments such as bonuses.

In England, the Government has created a portal called the Digital Apprenticeship Service to which all businesses in England will have access. The levy they have paid will be credited to it and topped up by 10% by the Government. However it also appears that all funds “expire”, if unused, after 18 months.

Employers can use the funds to pay for accredited training though it is at least doubtful whether many will actually be able to use all the funding potentially available. Most employers will likely spend much less than 0.5% of their paybill on allowable apprenticeship costs.

It is at least of note that the British Chambers of Commerce have said that a risk is that the levy could have a “chilling effect” on business. The concern for many is that in-house training, in particular, will not be eligible for funding. The Confederation of Business Industry (CBI) have also previously called for a “radical rethink” of the proposals including how funds might be spent.

The Government has indicated that further clarification on the levy will be published before the end of 2016 and that will certainly be welcome.

In Northern Ireland, however, the situation is much less certain. The reason being that the levy itself is set by the UK Government. The funding element, by contrast, is devolved to the local administrations in Scotland, Wales and Northern Ireland.

The Chancellor had indicated that potentially up to £0.5 billion could be available to those three administrations. As matters currently stand the Northern Ireland Assembly has yet to decide how the levy funding should be used or distributed here and indeed at this stage there is no certainty as to what Northern Ireland’s share of that amount could be.

It is therefore vitally important that employers prepare now both for the cost and administration of the levy. They should consult their professional and trade bodies and their professional advisors. We expect that further clarification will be made available both from central Government and Stormont and it is to be hoped that employers here are put on a level playing field with their counterparts in England, Scotland and Wales.

Salary sacrifice

The 2015 Autumn statement indicated that HMRC were looking at introducing anti-avoidance to combat some types of salary sacrifice; effectively they appear to want to legislate to allow such arrangements where they are for employee welfare etc.; e.g. bike to work or pensions but perhaps not others. We await the proposals with interest but this issue is perhaps representative of many others; its primary concern being perceived tax loss rather than making the tax system for employers and employees any simpler.

Conclusion

Employers are going to have to invest in their payroll processes and systems to ensure that they can cope with the additional information requests from HMRC. More time is going to have to be dedicated to administration roles to ensure that the correct processes, statistics and reporting requirements are met. The rising cost of employment is going to cause a burden on employers and unfortunately it looks like more changes are on the way. Employers may have to look at ways to mitigate the costs – perhaps looking into other areas such as salary sacrifice arrangements.

Vincent Adams, Senior Tax Manager at EY leads the Human Capital practice. He has over 17 years’ experience advising clients on a range of employment tax matters. Email: vadams@uk.ey.com