With salary-sacrifice schemes ever increasing, HMRC introduced new rules affecting optional remuneration arrangements (OpRA) in April 2017. Although no real reason was given for this, the likely reason for this was to attempt to mitigate the impact of such schemes on the Treasury’s revenue.
Complex measures mean employers must pay more attention
Due to the complexity of the legislation employers must now give careful attention to how current benefit packages may alter their tax position. It is also important to ensure they get their calculations right, or they may risk a potential-costly HMRC enquiries.
The OpRA legislation is wider than just salary-sacrifice schemes and also encompasses activities such as any situation, with only a limited number of exceptions, where an employee gives up a proportion of their salary in exchange for a benefit, regardless of whether the money they give up represents current or future income. It can therefore affect the package offered to a new employee where a choice of cash or benefits is available. While the rules were introduced in April 2017, HMRC allowed a transitional period to take into account existing benefits arrangements. As such, with a few exceptions, the rules will have affected individual employers for the first time when their salary sacrifice arrangements were amended or renewed, or in April 2018, whichever date came sooner.
Impacts of structuring benefits packages
While for many businesses, these new regulations will mean careful consideration will need to be made in regards to their salary-sacrifice arrangements, their overall impact will depend on how the benefits packages are structured. In General, the OpRA rules result in tax being charged on the higher of the benefit in kind value or the amount of the salary sacrificed by the employee. Although the rules will have no impact on those employers that have existing arrangements that are structured in a way where the cost to the business is the same as the sacrifice. For example, if an employer pays £1,000 towards a medical benefit and the amount of salary sacrificed by the employee is also £1,000, then there will be no change to the taxable benefit, it remains £1,000.
Less benefits are tax free than before
An essential area of legislation for organisations to consider is the risk of converting tax-free benefits in kind into taxable benefits. With some employers offering salary-sacrifice schemes for benefits such as office car parking unaware that these now incur a tax liability. This could lead to a potentially costly investigation should they fail to take this into account when making returns to HMRC. Another key area of risk for an increased tax liability is benefits that require a specific calculation, for example, company cars, as there is a chance that the value of the salary sacrificed may now exceed the cost of the taxable benefit in kind.
Be aware of the revisions to OpRA rules (company car scheme)
Businesses need to be aware of revisions to the OpRA rules, included in the draft Finance Bill 2018/19. They are designed to address unintended loopholes in the original legislations affecting company car schemes. With a proposed implementation date of April 2019, the first amendment means an employee is no longer permitted to treat a proportion of their salary sacrificed on a company car scheme for elements such as ‘vehicle insurance and maintenance’. In effect, this means the full salary sacrifice must be compared to the car benefit to determine the assessable amount.
Secondly, due to these changes, any employee contributions will now be proportional to the period of time that an employee has the taxable benefit. Such as, in the case of a company car, should the employee only use it for three months, the entire salary sacrifice is matched to the benefit for those three months.
The following case study for a company car scheme illustrates how OpRA rules and the amendments set out in the draft Finance Bill 2018/19 impact the sum of a business’ taxable benefits. Take, for example, a company car of over 75g/km, with an assumed benefit of 20 per cent of the £20,000 list price:
|Total cost to company||400||4800|
|Before OpRA Rules||Current Position||Post draft 18/19 FB|
|Car benefit (normal calculation||4000||4000||4000|
*Of the total £400 salary sacrifice, a flaw in the legislation enabled £50 to be matched with the insurance and maintenance costs with only £350 to be compared to the car benefit.
** The proposed new legislation removes the issue and the whole salary sacrifice is compared to the car benefit figure to determine the taxable benefit.
As shown in the table, it is increasingly likely that the taxable benefit will be increased to the level of the salary foregone.
Mistakes could be costly
In addition to the increased administrative burden to employers calculating employee’s taxable benefits, the complexity of OpRA rules will increase the risk of businesses making errors resulting in unforeseen and unwanted HMRC investigations. It is also important to keep in mind that a salary sacrifice results in changes to an employee’s salary, thus this agreement must be accurately reflected in their employment contract. Failing to include this information could have employment law implications, as well as having the possibility of it being regarded as ineffective for tax purposes.
Are you giving the best benefit for you and your employees?
Employers should take a meticulous approach when reviewing their reward and remuneration packages and selecting the benefits to offer employees going forward after taking into account the tax liability associated with each. If certain benefits are no longer financially viable, businesses may need to rethink or consider alternative benefits, for example, flexible working. As a result of the new measures, employers should also think twice before offering cash as an alternative to a benefit in kind, as this now falls under the OpRA rules.
However for employees, it is important to remember an alteration to their salary as a result of a salary sacrifice could impact their entitlement to certain earnings-related benefits and also their ability to borrow money. Thus, it is essential to keep careful track of how OpRA changes may impact their financial position.
Optimise your tax position by understanding the legislation
For a large number of employers currently offering salary-sacrifice schemes to their employees, the introduction of OpRA rules could have an impact on the National Insurance Contributions they are required to pay to HMRC. By securing a thorough understanding of how the legislation affects them and carefully evaluation any benefits on offer, it should now be possible for businesses to optimise their tax position whilst allowing the workforce to continue taking advantage of benefits in kind.