Salary sacrifice arrangements are a growing trend, but what does the future hold, asks Vicki Taylor
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Organisations introducing new tax-efficient benefits would be forgiven for being apprehensive about the government’s commitment to the longevity of schemes.
Since the shock removal of the home computing initiative (HCI) in April’s Budget statement, there has been much speculation around the status of other benefits offered through salary sacrifice arrangements.
First came the publication of a pensions tax simplification note, which some benefits advisers felt hinted that salary sacrifice on pensions was under threat. Since then, HM Revenue & Customs (HMRC) felt the need to clarify its rules on the provision of mobile phones under salary sacrifice. The latest in the firing line seems to be holiday pay fund schemes – a vehicle increasingly being used by employers to pay for holiday entitlement, while making National Insurance (NI) savings for the organisation and employees.
Alistair Denton, managing director at Motivano, believes employers have had their fingers burnt by the removal of HCI and are now more likely to think twice before introducing other tax-efficient benefits. “People are perhaps [being] a little more cautious than they would have [been] prior to HCI [being taken away],” he says.
Removing a benefit because of a change in government policy isn’t the best motivator for staff, but it seems that savvy employers might benefit from using a rough rule of thumb when trying to decide whether schemes they introduce are likely to remain within the boundaries of HMRC-approval.
Quite simply, that is by looking at government policy and whether benefits tie in with issues it is keen to promote. Bikes-for-work schemes, for example, fit with both the government’s drive on improving public health as well as its environmental policy on reducing the number of cars on the road.
A distinction can also be drawn between schemes the government has introduced specific legislation for, such as childcare vouchers and bikes for work, as opposed to perks that are offered by employers through salary sacrifice arrangements, such as mobile phones.
Denton doesn’t believe mobile phones will be allowed to continue under salary sacrifice much longer, despite HMRC reiterating that employees can only take one phone each under such an arrangement. “I still think there is a great risk that the benefit of giving mobile phones through salary sacrifice will be taken away. [Though] childcare is one that the government will continue to support,” he adds.
Salary sacrifice on pension contributions is another example of a benefit that has arisen through employers realising there were tax savings to be made, rather than the government pushing the agenda.
John Davies, head of business law at the Association of Chartered Certified Accountants, explains: “Savvy employers have been trying to operate such schemes for a time, although there was some uncertainty as to whether or not these schemes would be acceptable to [HMRC]. There has been at least one case looking at whether or not these schemes are legitimate as far as tax [is] concerned.”
The issue has been examined closely by HMRC, but it now appears that salary sacrificed pensions arrangements are deemed acceptable, providing they are set up correctly.
In cases where there is no specific legislation allowing a tax-efficient benefit to be set up, employers should take professional tax advice to ensure the scheme operates within HMRC salary sacrifice rules.
Holiday pay schemes But even schemes that have been approved by HMRC can be at risk of a closure, as demonstrated by the end of HCI. Tony Morgan, director of employment tax at accountancy firm KPMG, says that where schemes look like they are being abused, it is likely the government will make moves to close them. He believes, for example, that some employees were taking home entertainment systems through HCI rather than computers as intended. “There is some evidence that where things are perhaps being misapplied then [HMRC] can act to close those down very quickly,” he says.
Holiday pay schemes is another instance in which it is suspected HMRC may clamp down. The legislation behind the schemes was originally intended to ensure employees in the construction industry, who may change jobs frequently, receive the holiday pay they are entitled to.
“Holiday pay [schemes] at the moment [are] being applied by organisations outside of the construction industry. While that is not technically incorrect, I think it is very clear it fits somewhat outside the whole intent [of the legislation],” Morgan adds.
A HMRC spokeswoman says that although it wouldn’t normally expect staff outside of the construction industry to be included in such schemes, there is nothing in the legislation to prevent employers in other industries using the provisions. However, she adds: “We are reviewing the operation of the legislation by reference to its original policy intention.”
She refuses to be drawn on the status of other tax-efficient benefits, and will only say that the HMRC “keeps things constantly under review”.
Looking into the future, employers are keen to see the introduction of eldercare vouchers. A campaign group, which is currently lobbying HM Treasury on the issue, has the support of many employers including HSBC, BT, the John Lewis Partnership, and Ford UK. A spokesman for the campaign group says: “We are meeting regularly with the Treasury [which has] committed to look at the idea.”
The vouchers it is proposing would be similar to childcare vouchers and would be used by employees with caring responsibilities for elderly relatives. ?It is thought that they will pay for things such as domiciliary care services and befriending schemes.
While it is hard to predict the future, taking as much advice as possible and keeping up with policy developments can help to ensure any tax-efficient benefits are safe and operated in line with current regulation.
Case study: Nationwide
?Although Nationwide Building Society was affected by the removal of the home computing initiative earlier this year, it has not been deterred from offering tax-efficient benefits.
?Rosemary Crabb, rewards analyst, says: ¬“There¬’s no evidence that withdrawing the scheme has had any negative impact on our employees. We keep a keen eye on any proposed legislation, which might impact on the schemes we offer, but feel that it¬’s [still] important to seek out and participate in initiatives that are of benefit to our employees.¬”
Nationwide introduced a holiday pay fund, a way of funding holiday entitlement while making tax and national insurance savings for the employer and the employee, in December 2005. ¬“We will wait to see how this will impact on our scheme and we¬’ll respond appropriately to ensure we remain compliant with the relevant law,¬” she adds.
Salary sacrifice schemes
?There is a distinction between tax-efficient benefits the government has introduced specific laws around, such as childcare vouchers, and other perks that can be offered through salary sacrifice arrangements, such as pensions.
With salary sacrifice schemes the benefit is likely to be wholly or partly exempt from income tax and/or NI. However, schemes need to be set up correctly to ensure tax savings.
Patricia Goldie, employment taxes manager at accountancy firm PKF, says employers can never be certain HMRC won¬’t clamp down on certain benefits offered through salary sacrifice, so they should ensure they are set up correctly: ¬“If you set [a scheme] up in good faith and you go and get the approval, the worst thing that can happen is that at some point [HMRC] will say ¬‘you can¬’t do this anymore¬’, but at least it is not going to be a retrospective problem.¬”