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PAYE Settlement Agreements

22 April 13 | By: Jas Jhooty

PAYE Settlement Agreements

This week we are looking at a useful way to minimise your P11D workload by entering into a PAYE Settlement Agreement (PSA) with HMRC. Similar to a dispensation, any items covered by a PSA need not appear on an employee’s P11D.

Records

PSAs came into being in 1996/97 with the advent of self assessment. They allow an employer to settle PAYE tax & NICs due to HMRC on behalf of their employees for certain types of benefits & expenses i.e. those that are minor or irregular items, or items that are impractical to operate PAYE on, or to value for P9D/P11D purposes.

Items that can be covered by a PAYE Settlement Agreement

  • minor items, such as a small present for an employee in hospital or an employee’s use of a pool car where the conditions for tax exemption don’t apply
  • irregular items, such as expenses of a spouse occasionally accompanying an employee abroad, or relocation expenses in excess of the £8,000 tax exemption threshold
  • items it’s impracticable to operate PAYE on or determine a value for P9D or P11D purposes, such as shared benefits (like shared cars or taxi journeys, for example) that are difficult to attribute to individual employees

Items that can’t be covered by a PAYE Settlement Agreement

  • cash payments – including salary, wages, bonus, or other payments such as long service awards
  • large benefits provided regularly to individual employees, such as company cars or beneficial loans
  • round-sum allowances – lump sums provided to an employee to take care of all their expenses in a tax year
  • shares
  • items on which tax has already been deducted through PAYE
  • items which are already reflected in an employee’s tax code
  • profits arising from various mileage payment schemes and other regular items arising in Employee Car Ownership Schemes

Trivial benefits

Previously PSAs may have included items such as Christmas turkeys and bottles of wine, but they are now excluded as they are classed as de-minimis or trivial items and tax is normally not collected, regardless of the number of employees involved. However, if you give your employees an expensive vintage bottle of wine then HMRC definitely would not waive the tax.

Entering into the PAYE Settlement Agreement

Although the PSA has no specific format, it must be in writing, signed by the employer’s representative, and a HMRC officer. The arrangement must state the employees which it covers, the benefits in kind and/or the expenses, how the tax is to be calculated, the tax year to which it relates and the date that the tax and Class 1B is due. HMRC’s Form P626 is normally used in reaching an agreement because it includes all of the above elements, but an application for a PSA can be refused if the employer has a poor record of compliance.

The agreement can be reached with HMRC before, during or after the end of the relevant tax year but the deadline is 5 July following tax year end. This is because if the item is excluded from the PSA then it must be declared on the P11D or P9D and if applicable, Class 1A NICs paid.

Once an agreement is reached two copies are issued to the employer to sign and return to HMRC. Once signed by the authorising officer, one copy is retained on file and the other is returned to the employer.

Record keeping

Once a PSA has been agreed with HMRC the tax liability transfers from employee to employer. The employer has to keep sufficient records for at least three years plus the current tax year. The information which needs to be kept is in line with what would normally be recorded for P11D and P9D purposes, plus the amount of cash paid to an employee such as expenses. However, where it is difficult for an employer to record this information, due to the fact that the benefit in kind is shared by a number of employees, then the employer should record the cost of providing the benefits included in the PSA.

For example, a common item included in a PSA would be a Christmas party which costs more than the statutory concession of £150 per head including VAT and any transport and accommodation costs.

Employers must also record the number of employees to be included in the PSA and samples of marginal rates of the employees concerned.

Calculating the PAYE tax and Class 1B NIC due

Firstly the total value (inc VAT) of benefits & expenses covered by the PSA must be ascertained along with marginal tax rates of the employees involved. The PAYE tax is then calculated and then grossed-up at the employee’s marginal rate. This is because you are making good on the employees’ pecuniary tax liability. This in itself is seen as a further benefit to the employee so tax must be paid on the tax that the employee is not paying!

Class 1B NIC is an employer-only liability and is equivalent to the employer’s secondary Class 1 NIC rate. Class 1B replaces any Class 1 and Class 1A liability due on any items included in a PSA. Class 1B NIC is calculated on the value of the benefits and expenses agreed to be covered in the PSA plus the grossed up PAYE tax value.

HMRC’s Form PSA1 can be used to perform the calculation.

HMRC will finalise and confirm with you the total tax and NICs payable between 6 July and 19 October. To make sure HMRC can agree the amount due by 19 October, you should inform them of the value of the items included in your PSA at the earliest opportunity.

Due dates

The payment of tax and NIC for the PSA is due by 19 October where payment is made by cheque. If payment is made by electronic means the due date is increased to 22 October.

The payment of tax being made in respect of a PSA in October 2013 relates to benefits in kind and expenses provided to employees during 2012/13. The employer does not have to declare it on the employee’s P11D or P9D and the employee does not declare it on their Tax Return.

How we can help

All of our consultants have extensive experience of processing PSAs for companies of all sizes (including large corporates) and we are totally familiar with the complexities that can arise.

Please contact us if you require any assistance in agreeing the scope of your PSA with HMRC or in getting assistance in collating the details and calculating the amounts of PAYE tax & NICs due.

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