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 is tax director at Baker Tilly
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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