Beware of tax and legal anomalies in benefits

The devil can be in the detail for certain employee benefits, and HR professionals must be alert to any tax or legal anomalies.

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• Employers must be aware of all the tax and legal implications of benefits.
• Bikes-for-work schemes are often misunderstood. The bike is owned by the employer and must be used by the employee to get to and from work.
• Certain flexible benefi ts can require changes to an employee’s contract.
• Maternity leave can be a tricky area.

Any HR professional worth their salt knows what employee benefits are available for their workforce, and understands exactly how they work. But there are benefi ts anomalies that even the most experienced professional might be forgiven for not knowing.

Employers should first consider how their benefits are funded, particularly perks that employees pay for and are then refunded, to make sure staff are not out of pocket.

Take mobile phones, for example. According to Lesley Fidler, associate director at Baker Tilly, mobiles are exempt from tax and national insurance (NI) when the contract is between the employer and the phone provider. But this is not the case when the contract is between the phone provider and the employee, who is then reimbursed by their employer. In this case, the employer must make a P11D entry and account for class 1 NI contributions for both itself and the employee through payroll each time it makes a reimbursement.

Bikes for work

A bikes-for-work scheme is another tax-efficient benefit that can baffle employers and employees alike. It provides a tax-efficient means, via a salary sacrifice arrangement, for employers to offer staff access to a bike for commuting to work. Under the government scheme’s rules, the bike is on loan from the employer and not, as some people assume, owned by the employee. Under the rules, at least 50% of the employee’s travel on the bike must be for work purposes.

At the end of the loan period, the employee can opt to buy the bike at the full market value in a separate agreement. But if the price paid is substantially lower than the market rate, the bike can become a taxable benefit-in-kind. Alternatively, the employee can continue to use the bike for up to 36 months in return for a small refundable deposit of 3% or 7% of the equipment’s value. They then have the option to take ownership of the bike at the end of this period at no further cost.

Fidler says: “The scheme is often misunderstood because is it the employer’s provision of the use of the bike, owned by the employer, which is the taxable benefit. It is not the gift of a bike to use however an employee wants; it is supposed to be used to get to and from work.”

There should be no automatic entitlement for the employee to take ownership of a bike at the end of the loan period to avoid the hire agreement becoming a hire purchase agreement, which would result in the loss of tax exemption. Employers should be mindful of their communications strategy around bikes for work to prevent this happening.

Download a PDF on the process at the end of bikes-for-work schemes

Similarly, employers should scrutinise the wording of employment contracts when providing a flexible benefits plan. For example, an employer that agrees to pay a four-times salary death-in-service benefit might allow staff to trade down to one-times salary and use the cash saved to fund an alternative benefit. If the employee’s employment contract has not been amended to take this into account, their dependants could, technically, argue for the four-times salary figure, irrespective of any reduction made by the employee, because it is written into the employee’s contract.

Philip Hutchinson, managing director at Reposition Consulting, says: “It is a question of employment law, and depends on what is written into the contract. Typically, what will happen in a flexible benefi ts scheme is that right at the end of the enrolment process, there will be a schedule of what the employee has chosen, then there will be a carefully worded script, which states that the employee has agreed to the changes and these will now supersede the contract the employee has.”

Maternity leave

Employers should also carefully consider employees’ contractual rights on maternity leave, because they could end up being liable for all the benefits, including voluntary and salary sacrifice arrangements, the employee has signed up to, during their absence.

For example, if an employee going on maternity leave has joined a bikes-for-work scheme, the employer could find itself liable for the cost of the bike unless the scheme’s contract exempts it from such a liability.

The rules around the type of maternity leave also require close examination. By law, employers are obliged to give expectant mothers, and those planning to adopt a baby, 52 weeks’ leave and up to 39 weeks’ pay. In the case of adoption, this applies to both the birth mother and adoptive mother.

But in the case of children born through surrogacy, it is only the birth mother who is entitled to maternity leave and pay. Employers are under no legal obligation to provide leave or pay to the woman who will raise the baby.

Download a PDF on the basics of Statutory Maternity Pay

Corporate entertainment

With the festive season almost upon us, employers should also be aware of the tax rules relating to corporate entertainment, such as Christmas parties. There is a per-head limit on the amount spent on entertainment, which applies cumulatively over a year. If the limit is exceeded, employees could become liable to pay extra tax.

But Cheryl Scott, employment solutions tax manager at Tolley, says this can be avoided by employers contacting HM Revenue and Customs (HMRC) and negotiating a PAYE settlement to pick up any tax due.

Employers should also take care to stay within HMRC limits on taxi provision. An employer can provide a taxi home for employees after 9pm if they cannot get home by their normal route and do not normally leave work at that time. However, this provision is limited to 60 trips a year, after which such journeys are taxable. Of course, not all benefits anomalies will cause HR professionals a headache. In fact, some perks can save money in more ways than one for both employers and employees.

Salary sacrifice

Salary sacrifice is a case in point. Most employees and employers understand salary sacrifice as a means of accessing various tax-efficient benefits, but it can also be used to reduce an employee’s salary to avoid them becoming a higher-rate taxpayer and losing certain state benefits.

Chancellor George Osborne announced in his Budget in March 2012 that, from January 2013, households receiving child benefit could be subject to additional tax if one person in the household earns over £50,000 and could lose the benefit if their income reaches £60,000. Also, from April 2013, changes to the personal allowance and tax brackets will mean more people could be paying the 40% tax rate.

However, if employees sacrifice part of their salary for a tax-efficient benefit such as pension contributions, this reduces their taxable income and may avoid them losing child benefit or being in the higher tax bracket. Matt Duffy, head of online benefits at Lorica Employee Benefits, says: “People on the borderline of an income tax bracket could reduce their salary significantly but not lose it by putting it into a really worthwhile benefit to save for retirement.”

Staff who earn significant bonuses can also sacrifice the extra cash into a pension scheme to avoid losing part of it to tax, says Duffy.

Another benefit anomaly to consider is that, in April last year, changes were made to the childcare voucher system, with staff paying higher and additional tax rates being restricted on the amount of tax-exempt vouchers they can receive. What employees may not know is that if they were in the voucher scheme before April 2011, they can leave it for 12 months and still rejoin under the pre-April 2011 rules.

So, while there are many examples of benefit anomalies, most can be managed with the right expertise, pragmatism and adviser support to ensure they comply with the latest legislative and tax regimes.