Salary sacrifice is a well-recognised concept that has been adopted by a significant number of employers in the UK. A simple but prime example of such a scheme is a company flexible benefits scheme. Broadly, a tax effective salary sacrifice happens when an employee gives up the legal right to receive part of their remuneration due under their contract of employment, and the employee is not freely able ot revert to their original higher salary in place of the benefit being provided.

However, for that to happen, two conditions need to be met: firstly the employee’s contractual entitlement to future remuneration must be relinquished, before the point at which it is treated as received for both income tax and national insurance contribution (NIC) purposes; an secondly, the revised contractual arrangement must genuinely entitle the employee to a reduced cash payment, in exchange for the provision of a benefit by the employer.

In practice, this means that appropriate amendments to the individual’s employment contract must be formally agreed well in advance of any payments being made under the salary sacrifice arrangement. Failure to do so will result in HMRC regarding the employee’s previous contractual arrangements as remaining in force, and seeking tax and NIC on the salary payments due under that arrangement, irrespective of whether a lower amount was actually paid to the employee. Similarly, where there is an absence of documentation to support a claim that the terms of a contract have been varied, there is a significant risk that HMRC will consider the arrangement to be ineffective, and seek tax and NIC under the terms of the pre-existing contract.

HOME-WORKING EXPENSES:

With employers seeking to embrace more flexible working arrangements for their employees, we are seeing an increasing number of individuals who spend some or all, of their time working from home. Where this occurs, some employers may choose to reimburse a proportion of the household expenses (e.g. electricity, gas, or water bills) which they consider relate to an employee’s work from home. HMRC allows some leeway on reimbursing employees additional home working expenses, but it’s not that generous.

From 6th April 2003 onwards, a tax exemption covers payments made by an employer to an employee in respect of reasonable additional household expenses (i.e. Expenses connected with day-to-day running of the employee’s home) which the employee incurs in carrying out duties of the employment at home under home-working arrangements (i.e. arrangements between the employee and the employer under which the employee regularly performs some or all of the duties of the employment at home).

To simplify matters, from 6th April 2003, employers can pay up to £2 per week (£104 per year), without supporting evidence of the costs the employee has incurred, and this payment will be free of both tax and NICs. Other than this, fully receipted costs are required.

However, if an employer does not pay any home-working expenses and the employee tries to claim a deduction from earnings against their additional costs incurred in working at home, then they run into problems. This is because their home must be deemed their permanent place of work to claim a deduction. This means the employee’s duties can only be carried out at their home an nowhere else. This is not the case, for example where an employer decided to close one of its offices and have its employees work at home.

It is good advice for an employer to clarify with their PAYE tax office what they will not allow by way of payment of home-working expenses, and this especially applies when an employee is claiming travel costs attending, for example, head office for meetings etc.

CONSTRUCTION INDUSTRY SCHEME:

Many employers do not realise that, subject to fulfilling certain criteria, they are required to register for and operate the Construction Industry Scheme (CIS). Failre to do so could mean the imposition of financial penalties and HMRC may seek to recover the tax which should have been withheld by the employer unde the CIS. An employer may be required to operate the IS as soon as the necessary conditions apply – ie, the business’ average expenditure on construction operations exceeds £1 million per annum over a three-year period, ending with the end of that business’ last period of account. That business will then continue to come within the CIS until it can satisfy HMRC that its expenditure on construction operations has fallen below £1 million in each of three successive years. Furthermore, the CIS is changing and new rules will come into effect from April 2007.

LATE NIGHT TAXIS:

It is common for employers to provide taxis to staff where they are required to work late. However, in order for an employer to meet these costs tax-free, an employee cannot be provided with a taxi before 9pm, or on a frequent or regular basis. On occasions it can be difficult to meet these criteria where employees are working on major projects over a prolonged period of time. Similarly, early-morning taxis between an employee’s home and their usual place of work will not attract the tax-free treatment.

TIPS:

Within the service industries (eg. Hotels, restaurants, and pubs) there are often arrangements in place for the pooling and distribution of tips, gratuities and service charges amongst employees. The term generally used to describe such an arrangement is a “tronc”. Where a tronc is in place, it may be possible to distribute tips to staff without a class 1 NIC charge arising, though this is broadly dependent on the employer not having any control or say over the distribution of the tips.

Mandatory service charges are liable to class 1 NICs even when paid through a tronc. HMRC has recently revised its guidance in this regards and, where applicable, employers should review their current arrangements to establish whether the correct tax and NIC treatment is being applied. In some instances, where NIC has been paid historically, it may be possible to apply to HMRC for a refund in light of the recently revised interpretations of the low.