If you read nothing else, read this…
• The tax treatment of benefits varies, so employers should ensure their flex scheme takes account of these differences.
• Employee communications about benefits tax should be clear, simple and targeted to enable employees to make informed decisions about benefits.
• Employers should review their flex schemes regularly to ensure they meet HM Revenue and Customs requirements.
Case study: Cofunds calculates tax positions
Cofunds, an independent platform for financial services, employs about 650 permanent staff at its London and Chelmsford offices.
All employees are members of the company’s flexible benefits scheme and receive core benefits including private medical insurance (PMI), a 5% employer pension contribution and income protection.
Flex options include childcare vouchers, a bikes-for-work scheme, dental insurance and increased pension contributions.
Andrew Deveney, head of reward and HR operations at Cofunds, says: “It is a real mix of tax scenarios, so it is important to communicate this to employees to help them make decisions when they are picking benefits.”
To do this, Deveney works with Thomsons Online Benefits and Cofunds’ auditors to map the tax position of each benefit. This information is then included in Cofunds’ flex renewal brochure and on its online benefits portal.
“For every benefit, we include information on whether an employee can save tax, national insurance or both,” says Deveney.
Cofunds plans to introduce more information on employees’ payslips. “We tax at source rather than through P11D because employees prefer to pay tax as they go,” says Deveney. “A benefit such as medical insurance can be a big tax hit through a P11D, especially if the employee has not claimed. More granularity on the payslip would improve the information provided to employees and reinforce what they have picked through the flex scheme.”
Tax and national insurance savings can be derived from certain flexible benefits, but employers must make sure the right arrangements are put in place, says Sam Barrett
Flexible benefits schemes are designed to give employees access to a wide range of products and services that they can pick and mix to suit their particular needs.
But for the employers responsible for running or overseeing flexible benefits schemes, the tax position on some of the perks they offer can at best induce a headache and at worst a visit from the tax inspector.
HM Revenue and Customs (HMRC) requires employers to be able to explain the tax implications of their flex schemes, particularly if they feature a salary sacrifice arrangement, so here are 10 tax tips and traps to help organisations stay on the right side of the law.
1. Restrict flexibility to ensure compliance
Employers offering benefits through a salary sacrifice arrangement should take care not to make it too easy for employees to exit these at any time. Matthew Gregson, managing consultant at Thomsons Online Benefits, says: “If employees can freely come out of a benefit, it may invalidate the salary sacrifice and the employee will be taxed on their original, higher salary.”
2. Understand the market values
For a number of products provided through a loan scheme, such as bikes and mobile phones, it is important to understand what happens at the end of the loan period. Mark Groom, employment tax partner at Deloitte, says: “Although the bikes-for-work scheme uses the market value at the end of the loan period, subject to figures laid down by HMRC, with a phone or a computer, if the employee decides to keep the product, they will be subject to a tax charge on the market value at the beginning of the loan period. This can be a nasty sting.”
3. Do not be driven by tax-efficiency
Julia Turney, head of benefits management at Jelf Employee Benefits, recommends that employers undertake an annual review of their benefits. “This will help ensure that the tax treatment is up to date, but will also allow an employer to rationalise its benefits,” she says. “Even if they are tax-efficient, there is no point hanging on to them if there is no demand.”
4. Talk to the taxman
Employers implementing salary sacrifice arrangements within their flex scheme must inform HMRC. Oliver Bence, principal consultant at Benefex, says HMRC will not give an employer approval for its scheme before implementation, only once it has launched it. “It is prudent to tell them when you introduce a flex scheme and when you make any changes to it,” he says.
5. Keep tabs on childcare
Childcare vouchers are a popular and tax-efficient benefit to offer staff, but it is important to ensure they are used appropriately. Deloitte’s Groom says he has seen instances of employees putting vouchers towards their child’s school fees. “Although staff can use them for after-school clubs, using them for school fees is a big no-no. Providers should police this, but if [an employer] finds they have been used in this way, [it should] unwind it as quickly as [it] can and ensure the tax is paid.”
6. Consider taxing at source
Taxing through payroll rather than P11D can be beneficial for employers. Thomsons’ Gregson says: “It is much easier to show the employee what they have really spent and saved if the benefits are taxed at source.”
This option is not fully endorsed by HMRC, although it does state that employers can do this if they get agreement from their local tax office. Gregson says there is also a chance that HMRC will look to abolish P11D. “Get ahead of the game and consider the switch now,” he adds.
7. Watch out for double tax
Employers that make the switch to taxing through payroll should communicate the change to employees. Benefex’s Bence says: “Think carefully about the communications. In that first year [employees] will pay double the tax, so unless [the employer] explains the advantages of taxing through payroll, it might not feel like much of a benefit.”
8. Keep it simple
Flex schemes can be complex, so it is best to keep employee communications as simple as possible. Jelf’s Turney recommends using colour-coding in employee literature to show which benefits are taxable and which are tax-free, while Bence suggests using the internet to provide more information about the tax position of different benefits.
9. Target tax communications
Gregson suggests that employers consider targeted communications based around employees’ earnings or earnings potential in light of the possible variety of tax treatments across a flex scheme, and the fact that employers are prohibited from giving staff advice. For example, he suggests telling top earners about higher-rate tax relief on their pension contributions. “This information would be irrelevant to basic-rate taxpayers and could be an unwanted distraction,” he explains.
10. Get advice
The tax position of benefits within a flex scheme can vary greatly. For example, although some benefits will be tax-exempt through salary sacrifice, others are taxable and deducted from net pay. Given these differences, and the potential hassle from the taxman if the perk is set up incorrectly, it may be worth using a benefits consultant to arrange a flex scheme. This also means that the employer will have recourse if something is wrong.
Turney adds: “If [employers] go direct, make sure they get evidence that [the benefit] is tax-efficient where appropriate. It can be a minefield as each benefit has its own tax complexities.”
Best practice on tax: opinion by Lesley Fidler, tax director at Baker Tilly
Unless tax specialists are working at the giddy heights where tax planning merges into tax avoidance/political outrage, the substance of a transaction is usually of little concern. Down at ground level in the well-trodden realms where payroll and flexible benefits schemes collide, it is the form the transaction takes that is key to the tax and national insurance contributions (NICs) treatment.
Mobile phones for employees are a good example. If an employee is promised free mobile calls, does it really matter who owns the handset or who has contracted with the mobile phone provider? The tax system thinks so. A single, employer-provided mobile phone is free of tax and NICs, but if employees reclaim the costs of their personal phones, then there is a tax cost for them and NIC costs for both employer and employee. One result, but two very different tax treatments.
Similarly, employer-provided training is free of tax and NICs, but if staff fund their training personally, it must be done out of post-NICs income and it is unlikely tax relief will be given for the cost of doing so.
So, where an asset or facility can be provided:
• Tax and/or NICs-free by the employer, but not the employee (as a result of specific provision in the tax system); and/or
• More cheaply by the employer than the employee (for example, group healthcare insurance); and/or
• By the employer, but not the employee (for example, additional holiday), then it is an ideal candidate for inclusion in a flex scheme.
When it comes to providing information, much is written about communicating flex schemes so that employees take up the advantages on offer, but that is only the first instalment. Two further areas are key to a successful scheme:
• Reminding employees what they really earn. A quick look at the job advertisements shows that the headline cash figure remains a key measure. I would be pleasantly surprised to find a job advert that gave the percentage of employer’s pension contributions, but do the employees who benefit from pensions flex remember this when comparing their own salaries with what is on offer elsewhere?
• The second area is probably more difficult: explaining the tax consequences and ensuring that no surprises arise. The pay-as-you-earn (PAYE) system is based around cash and near-cash pay, so flexing into tax and/or NICs-free items tends to work smoothly from a tax point of view. The payroll process operates on the amount actually paid, and that’s that.
The difficulties arise with a wide-ranging flex scheme where taxable and NIC-able items are provided. These are not free of tax and so, although employees will usually be giving up salary in instalments throughout the year, the tax bill arrives long afterwards, once the P11D return of expenses and benefits has been submitted by the employer.
Payrolling benefits in kind is one solution, if the employer can face the complexities of P11D completion that arise from taking this non-statutory approach. The alternative is plenty of warnings about the need to budget for the subsequent tax cost and a reminder that not all the initial savings are for keeping. This is a tricky message to deliver after promoting the flex scheme on the strength of its cash savings. But if the scheme is to live longer than its first year, this issue needs to be addressed.
For a scheme to continue to be valued by employees, the administrator must address the tax and NIC issues and ensure that, even if employees do not fully understand those matters, they will have no unwelcome financial surprises.
Lesley Fidler will be appearing at the tax drop-in clinic at Employee Benefits Live on 26 September to answer tax-related questions. Book a place at the tax clinic here
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