In January 2014, the Office of Tax Simplification published their ‘Review of employee benefits and expenses: second report’...
View the ‘Review of employee benefits and expenses: second report’. Chapter 2 talked about ‘Broadening PAYE Settlement Agreements’, i.e. widening the scope of the PSA to allow employers to settle any tax liability on expenses and benefits.
What is a PSA?
PSAs are statutory arrangements whereby administrative easements are applied for the benefit of the employer and HMRC. Simply, the employer agrees to make an annual payment to HMRC covering the tax and National Insurance that would have been paid if certain items were declared as a benefit. Agreed annually, the expenses and benefits that are eligible to be included fall into one or more of the below categories:
- Irregular and / or
- Impracticable to calculate the value per employee
The timing of the PSA application to HMRC is all-important. If something falls into one of the above categories and is received by the employee before a PSA is agreed, it cannot be included. If it is received the days after agreeing a PSA it can be included.
Once the PSA is agreed, employers account to HMRC for the grossed-up tax and Class 1B National Insurance Contributions (NICs) on the agreed items. This can be a long and complicated exercise, as employers need to consider the value of the benefit and the marginal rate of tax paid by each employee.
Consultation August 2016
A consultation ran between 09 August and 18 October 2016. This aimed to address a number of issues with the PSA process, recognising that the existing process was burdensome on employers and HMRC. Essentially, this looked at the current process of agreeing items annually and the associated administration burden. Further, it looked at providing guidance as to what can and cannot be included in a PSA. It did not looking at widening the scope of the things that can be included.
The consultation only sought views on proposals to:
- Remove the need for employers to agree with HMRC the items that can be included in a PSA. This would be for the employer to assess by reference to the legislative rules and guidance
- Remove the requirement for upfront annual agreement
- Explore digitalising the PSA return
- Remove ‘minor’ items from the criteria (given the introduction of the £50 Trivial Benefits exemption)
Responses December 2016
A Summary of Responses was published on 05 December 2016. In this, the Government responded with two main announcements:
- There will be no requirement for an annual agreement from 2018/19. These will be replaced with ‘enduring agreements’
- A digital PSA return will be in place for 2018/19 tax year. The digitalisation will be accompanied by improved guidance
The Government will not be:
- Removing the ‘minor’ criterion
- Extending the scope of the PSA
Certain enabling legislation was contained in Finance Bill 2017 but did not actually make it into legislation until Finance (No.2) Act 2017 in November. This amended the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) and is effective tax year 2018/19.
However, more legislation is necessary to make this work in practice for 2018/19.
Consultation February 2018
The two announcements go down to one. Digitalised PSAs are out of the window (for the moment), though the below legislation puts this into place to allow for it to happen in the future.
The one thing that is changing from 2018/19 tax year is lifting the requirement on employers to renew the PSA annually, moving to this enduring agreement. Simply, the Income Tax (Pay As You Earn) (Amendment) Regulations 2018 will amend the necessary PAYE Regulations 2003 to say that once a PSA is agreed, it will apply for that tax year and any subsequent tax years. The enduring agreement will last until:
- The PSA is varied by the employer
- The PSA is withdrawn by the employer, or
- The PSA is cancelled by HMRC
A Policy Paper / Consultation asks three questions:
- ‘Do you think adopting an ‘enduring agreement’ will create any issues for employers?
- ‘Do the regulations as drafted achieve their objectives as set out above?’ – i.e. the form of the PSA and how the revised PSA process will work
- ‘Do these draft regulations produce any unintended consequences?’
It is open until 21 February 2018.
The Explanatory Memorandum explains that ‘New guidance will be published in the PAYE Manual in due course’.
Far be it from me to criticise any simplification.
- I would say that the simplification we are getting in 2018 is far removed from the simplifications that were proposed in 2014
- Plus, the legislation is extremely complicated to read as it also makes a lot of cosmetic changes, amending the words Inland Revenue to HMRC. With guidance only coming in ‘due course’ and a very short consultation period, how are employers who use PSAs really able to understand the changes and comment meaningfully in answer to the questions?
Seems a strange consultation to me!