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How safe are your salary sacrifice schemes?
18 August 13 | By: Jas Jhooty
If you have a salary sacrifice scheme in place, have you also obtained HMRC clearance that it is valid?
Last year the Reed Group found out to their cost that their salary sacrifice scheme (that they had been operating for 8 years) was not valid. Subject to any valid appeal following the First Tier Tribunal decision, they could now face a devastating bill of £158 million.
When a scheme is being sold to employers, assurances are often given by the salary sacrifice scheme provider that all of the necessary HMRC clearance has been obtained. Unfortunately you cannot rely on this advice as there are numerous pitfalls that you could inadvertently fall into that would invalidate the scheme. Things to watch out for include: -
You have to ensure that the wording of the employee sacrifice agreements represent a legally binding reduction in contractual pay. If it doesn’t, the scheme falls at the first fence i.e. PAYE/NIC remains due on the pre-sacrificed income.
You must ensure that that communications to staff are clear and fully effective (to encourage staff take up, and dispel ‘myths’ etc). One of the reasons why the Reed Group’s salary sacrifice scheme was challenged was the (apparent) lack of clarity in staff guidelines.
Tax exemptions and dispensation
Most salary sacrifice schemes depend on achieving specific tax exemptions or dispensations. Many benefit providers will tell you that HMRC’s agreement can be ‘assumed’ (i.e. simply because this has been achieved in other cases), however unfortunately this is incorrect. Also, if the benefit or payment relies on a specific HMRC dispensation (rather than statutory exemption) it is vital to ensure a full facts disclosure is made in the application to HMRC – a point we have often seen misunderstood by even the large accountancy firms.
Other important scheme design elements include reference to how you will deal with: -
- How to set up the scheme (e.g. whether any employees might be automatically ‘opted in’ by default).
- Payroll and payslip matters; considering the effect on other payroll elements such as shift allowances, overtime etc, whether your payslips can cope with the additional fields required and can satisfactorily demonstrate the revised tax and NIC calculations.
- How to deal with leavers, or employees who are not in continuous employment (e.g. those on maternity leave or longer term sickness),
- Issues around statutory payments including SMP and SMP recovery, and monitoring potentially ‘excluded’ employees e.g. any staff paid close to National Minimum Wage or other statutory wage limits.
- Other legal issues, such as where employee agreements may be regulated by the Office of Fair Trading, as well as other tax and accounting issues.
How emTax can help
emTax consultants have extensive experience of reviewing existing salary sacrifice arrangements and have prepared successful submissions to HMRC to obtain tax clearance for them. This is definitely an area that will be looked at closely at your next Employer Compliance Review.
We can first of all review your current salary sacrifice arrangements and advise on their effectiveness as well as making suggestions on how to improve on any areas of weakness we discover.
We can then contact HMRC on your behalf to ensure that HMRC agrees the salary sacrifice is fully effective. Any submissions we make to HMRC will be carefully managed on the basis of full disclosure (i.e. cards face up on the table), to completely safeguard you against any future inspections by HMRC.
If you are interested in this or any other employment tax service, please do not hesitate to contact us.