If you read nothing else, read this . . .
- From 6 April 2011, tax relief up to £55 a week on childcare vouchers will be restricted to basic-rate taxpayers.
- HMRC has issued guidelines on what employers should charge as a fair market value when transferring a bicycle offered through a cycle-to-work scheme to the employee at the end of the hire period.
- From 6 April 2011, employers will no longer be able to offer salary sacrifice canteen benefits for staff.
- Benefit-in-kind tax exemptions on bus travel no longer apply in certain circumstances.
The tax rules governing voluntary benefits are changing constantly and employers must keep up, says Debbie Lovewell
Benjamin Franklin once wrote: “In this world, nothing can be said to be certain except death and taxes.” Nowadays, the only certainty about taxes is that they exist. Keeping up with the myriad tax changes impacting benefits is no mean feat.
A number of changes affecting voluntary and tax-efficient perks have been announced, or come into effect, in the past year. Sue Robinson, director of tax and pensions at KMPG, says: “You have tax-efficient benefits that seem to be government-sponsored, but now HM Revenue and Customs is issuing clarifications that make it very difficult for employers to implement them.”
Some tax breaks have gone altogether, such as those gained from enabling staff to sacrifice a portion of their salary onto an electronic card to spend in workplace canteens. From 6 April 2011, employers can no longer offer this perk. Jeff Fox, head of consulting at Benefex, says: “The government has ruled out any opportunities to offer canteens via a salary sacrifice arrangement.”
One reason for this could be HMRC was concerned about money that was sacrificed but had not been spent by the end of the year, says Karen Thompson, associate director of policy, research and strategic visibility at the Institute of Payroll Professionals (IPP). “If an employee sacrifices £1,000 and, at the end of the year, has spent only £800, what happens to the [remaining] £200? Some employers have a policy staff lose it because they have already sacrificed the money. Others will pay it back to staff and some will transfer it to the new year. That was [HMRC’s] problem – if [employers] give the money back as earnings. It came down to HMRC not understanding how these schemes work, and so it has pulled the plug on them all.”
Benefit-in-kind tax exemption
Earlier this year, the former Labour government confirmed the benefit-in-kind tax exemption on bus travel schemes no longer applied in certain circumstances. For the tax and national insurance (NI) exemption to apply, employers must pay a subsidy to help finance a local public bus service that is potentially useful to employees. In return, staff get free or reduced-rate transport on the supported route, but must travel by bus for at least part of the way on journeys between home and work, or between workplaces.
Childcare vouchers were reprieved from the tax-cutting axe, however. Instead of the tax efficiencies being removed altogether as first announced, from 6 April 2011 only basic-rate taxpayers can receive tax and NI relief on up to £55 a week. Tax relief will be restricted to £28 a week for 40% taxpayers and £22 a week for 50% taxpayers.
The restricted tax rates will apply only for staff who join a scheme on or after 6 April next year. All existing members will continue to receive tax relief on the full £55 a week. Alison Chalmers, director of Kiddivouchers, says: “Employers are encouraging as many staff as possible to sign up before [6 April 2011] to safeguard their savings.”
She adds that if employers currently permit staff to leave a scheme and rejoin later, they may want to consider keeping staff in the scheme, or communicating why they should do so. After 6 April, when an employee rejoins, they will be treated as a new member, so may not get the same tax relief as before.
Further discrepancies may arise because an employer must decide on an employee’s tax rate for the purpose of the scheme at the beginning of each tax year. Assuming it is based on accurate information, the employee will remain at that tax rate for the entire tax year. “So if they are a basic-rate taxpayer but get promoted and end up in a 50% bracket, they will still get the relief on £55 a week,” says the IPP’s Thompson. “If they are a 50% taxpayer and then go on maternity leave and have no pay, or they reduce their hours and end up a 40% or basic-rate taxpayer, they continue to get relief on £22 a week until the following year, when it is reassessed.”The industry is still waiting for updated government guidance about how this will work in practice, says Chalmers.
Cycle-to-work scheme changes
Cycle-to-work schemes have also been subject to several changes. In October 2009, the Labour government clarified employers must offer the perk to all staff in order for it to qualify for tax efficiencies.
Also, HMRC has given a clearer definition of what constitutes fair market value at the end of a cycle’s hire period. Keith Scott, head of business services at Halfords, says: “HMRC was in a position where the volume of requests meant it had to take a formal view.”
Employers now have two choices for setting a fair market value for a bike. First, they can carry out a formal evaluation to determine what it would be worth in a private sale. HMRC will accept their findings if employers can provide documentation, such as photographs and evidence of mileage covered, to support their valuation.
Second, employers can use the valuation matrix issued by HMRC to identify a fair market value. If they go for condition-based assessments, HMRC may challenge the valuation if it is lower than its own.
Benefex’s Fox says this could affect the popularity of bikes for work, but employers can take steps to simplify their schemes and ensure they remain attractive. “Our view is it is simpler for the employer to give bikes away [at the end of the loan period] and accept the benefit-in-kind tax charge that arises.”
Alternatively, employers could extend the length of the hire period for staff. The more time that passes before transfer of ownership occurs, the lower the fair market value of the bike in HMRC’s valuation matrix.
Retail vouchers via salary sacrifice
Also on the government’s radar are retail vouchers bought through salary sacrifice, following a ruling by the European Court of Justice (ECJ). In the case of AstraZeneca, the ECJ ruled the employer must account for VAT on vouchers bought through salary sacrifice, but AstraZeneca can reclaim the VAT incurred on buying the vouchers. HMRC said AstraZeneca was either not entitled to reclaim the input VAT, or, if it was entitled, must account for output VAT on the value of the vouchers provided to staff on a sum equal to the salary sacrificed. The ruling was passed to the government to decide whether to review VAT under salary sacrifice arrangements.
Fox says this has led to speculation about what the ruling could mean for other benefits. Employers should also bear in mind the VAT increase to 20% in January 2011.
An increasingly popular tax-efficient benefit is car salary sacrifice schemes, through which staff save on income tax and NI, and use their employer’s buying power to get manufacturer discounts. Employers can save on NI and corporation tax.
“This can tick so many boxes,” says KPMG’s Robinson. “It can help with corporate governance by [employers] setting it up so it looks like everyone has company cars, [and with] environmental issues. Employers can control the standard of cars more easily.”
Keeping up with the changes affecting tax-efficient and voluntary benefits can be a time-consuming and complex task. With many of the finer details still up in the air, employers may want to simply ensure they remain compliant with legislation and guidance as it currently stands.
Pensions tax changes
- Voluntary salary sacrifice for employee pension contributions is a popular way for staff to reduce income tax and national insurance contributions (NIC), and for employers to cut their own NIC bills.
- For the very highly paid this perk will lose its lustre next April.
- Last month, the government confirmed it would cut the annual allowance for tax-privileged pensions savings from £255,000 to £50,000 from April 2011.
- The government also reduced the lifetime allowance limit from £1.5 million to £1.8 million from April 2012.
Neville Bramwell, a tax partner in Deloitte’s pensions advisory team, says: “The impact is unlikely to affect individuals earning less than £100,000 a year, although long-serving participants in generous final salary schemes could be affected at lower salary levels, perhaps £70,000.”
Case study: Spires Healthcare enters the bicycle valuation matrix
Spires Healthcare has adopted HMRC’s valuation matrix to determine the fair market value of bicycles in its cycle-to-work scheme. It went live with the latest offer under its Halfords-provided scheme in September, after introducing the benefit for its 7,000 staff in January 2008.
Jim Carson, head of reward at the private hospital network, says: “There is not a lot of difference, to be honest. We have always donated the money [paid by staff] to charity, because the employee has already paid for the value of the bike [by that stage].”
He adds that, overall, take-up of the scheme has increased since the guidance was issued, although the organisation has seen a change in the type of staff using the scheme. “We made it clear to people that the rules had changed and they had to understand the change before committing to the scheme,” says Carson. “It did not dilute take-up among those who wanted to buy a bike. The mix was very different. It was generally genuine cyclists at the lower-value end and less taking up high-value bikes.”
The forthcoming tax changes to childcare vouchers are also likely to impact on the organisation’s workforce. Because of this, it will encourage staff to sign up to the scheme before the new rules come into effect on 6 April 2011. “We will be having a marketing push on that and trying to get a couple of offers in,” says Carson.
Read more on voluntary benefits