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emTax’s view on HMRC's flawed salary sacrifice consultation
3 October 16 | By: Jas Jhooty
In August HMRC set out its consultation document outlining proposed changes in taxation which would apply when benefits are provided by means of salary sacrifice arrangements, with responses requested by 19 October 2016.
The consultation proposes that, from 6 April 2017, salary sacrifice (which includes flexible benefits) should only be ‘permitted’ for benefits which HMRC approves of, the main ones being:
Other benefits provided in conjunction with salary sacrifice (including for instance company cars, health screening, and mobile phones) would then be taxed on the higher of the normal benefit calculation or the sacrificed salary.
In our view the proposals are significantly misguided, they are very unlikely to work in practice, and the timescale intended to introduce this fundamental change is ridiculously short.
The consultation begins by making a number of highly questionable assertions and justifications. It focuses on the potential tax/NIC cost to the Exchequer primarily, whilst overlooking the real driver for most flexible benefits; i.e. to give the employer a competitive advantage when recruiting and retaining staff (in most cases only pension salary sacrifice, which HMRC ‘approves of’, tends to deliver significant employer savings). Other HMRC commentary suggesting that salary sacrifice ‘creates an uneven playing field’, and that this has a significant effect on state benefits are (in our view) exaggerated or misplaced.
HMRC also seems to have little empirical evidence for its view that that salary sacrifice schemes are increasing significantly, and that there is indeed a real ‘problem’ (if you are going to count any new schemes surely you also have to identify, and deduct from that equation, any closed schemes).
The solution proposed does not seem to have been thought through fully. The idea is that, to identify arrangements caught under these rules, an employer (or indeed HMRC) should be able to apply a simple distinction between a voluntary benefit and one which the employee has no choice in (the latter being unaffected). This seems wrong in principle and would be extremely difficult to apply in practice. Surely if a level playing field is desired, the objective should be to ascertain what benefit the employee does actually enjoy, then tax this appropriately and even-handedly, rather than looking at what the employee might have received.
Contractual changes often involve convoluted points of employment law and we very much doubt that HMRC understands the minefield it proposes to open here, in trying to apply an over-simplified distinction. Changes to contracts may be implemented by numerous different methods; however the employer’s systems and employee documentation will not necessarily provide for an easy distinction, nor will this necessarily allow for the employer to identify any additional reporting obligation.
The proposed timing for change would also create a great deal of consternation, particularly among larger employers where changes to payroll and other systems do not ‘just happen’ but have to be planned (and paid) for. Many benefits (particularly cars) are agreed perhaps on the basis of an employer leasing commitment for 3 or 4 years, and a material change mid-term may have substantial cost implications.
Only workable alternative
If HMRC and the government has a genuine concern about salary sacrifice then we suggest the only workable solution would be to reconsider the benefit in kind rules, and to apply these evenly. For example in cases where a specific statutory exemption applies, it would be possible to ‘qualify’ that exemption if implemented in conjunction with salary sacrifice.
However before any such changes are implemented we would suggest HMRC pauses for reflection. What would be the reasoning for taxing say company cars or health screening on a different basis just because salary sacrifice is involved? In other areas (for example mobile phones) how often does this happen, and does this really justify the proposed change.
How emTax can help
As specialists in employment taxation we understand better than most the impact this consultation will have if it goes through in its current form.
If you think we can help in understanding the implications of these proposed changes for your organisation, or indeed to help in responding to these ill-thought proposals, please contact us.