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Too Hot to Handle - The Rise and Fall of Salary Sacrifice

Issue 34 - February 2010

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Oh the dilemma of being a politician, you come up with a great policy to get mums back into the workplace. You call it childcare vouchers and expect employers to offer all their working parents an extra £55 a week on top of their salary tax-free. Then those darned employers and their clever advisers realise that they can offer this attractive scheme and save employer NICs at the same time. As a government you need the policy to work so you have to start welcoming salary sacrifice with open arms. Trouble is those same advisers start to apply salary sacrifice to all tax-efficient benefits and suddenly you find to find a gaping hole in your NI receipts, and whilst the NI fund is in surplus you have been able to use that surplus to help with restoring the public finances, so any significant loss of NICs is now becoming a problem you just can’t ignore.

In the five years since 2005 when childcare voucher tax relief was introduced salary sacrifice has moved from a niche device utilised to assist the favoured few with pension saving to a widespread approach to reward policies for even low paid employees. It was perhaps this last point that seemed to have escaped the notice of special advisers when they suggested to the PM that it was time to reign in childcare vouchers given that only affluent middle class parents were taking advantage of them. In fact many hundreds of thousands of low paid public sector employees had been encouraged to join voucher schemes attracted by the NICs savings they could make. And so a quiet policy U-turn was announced in a letter to backbench Labour MPs with more detail promised in the Pre-Budget Report (PBR), except someone forgot to tell the Chancellor as the issue of childcare vouchers was conspicuous by its absence in the PBR. As I write all we know is that childcare voucher schemes have had a reprieve. There is no longer a rush either set up a scheme or drive up enrolment before the April 2011 deadline. Schemes can continue as now but with tax relief only available at basic rate. Those employees enjoying relief at either 40% (or 50% post April 2010) will find that they have been in receipt of excess tax relief just as will be the case with pension tax relief from April 2011. We have no details yet of how HMRC will require employers to handle this but there is no doubt that payroll and HR teams will be involved, as the majority of recipients will not be covered by self-assessment.

 

Getting tough on bikes, buses and canteens

 

So with the removal of childcare tax relief policy in tatters the government had to look to other popular sacrifice schemes and the opportunities they provided to restrict the loss of NICs. The Pre-Budget Report on 9 December did provide one salary sacrifice announcement and that was in relation to subsidised meals in a works canteen. HMRC had been unhappy for some time with the salary sacrifice schemes adopted by a number of city firms that allow employees to give up a cash amount each month that they can load on a swipe card that can then be used to purchase meals in their works canteen. HMRC’s contention was that these were not true sacrifices and they moved to shut down such schemes with an announcement in the PBR. With effect from April 2011 there will no longer be a tax exemption available in respect of the subsidised portion of the meals in a works canteen where this is delivered though a salary sacrifice or flexible benefits arrangement. Section 317 of ITEPA, that provides for the exemption, will be amended to render it invalid in such circumstances. The reason HMRC have been able to defend this approach is in itself a salutary reminder of one of the requirements of a sacrifice scheme. If it is to be effective i.e. achieves the desired outcome in tax and NICs terms the cash must be given up before it is received i.e. it is not simply a net pay deduction, for example as medical insurance might be. In the case of food and drink swipe cards, the employee has not given up the cash in question; he still has the control over how the money is spent.  

 

The next sacrifice schemes in the government’s sights were cycle to work and public bus subsidies. Many employers have implemented cycle to work schemes recently taking advantage of the NICs savings on offer coupled with limited administration where the scheme is delivered by a third party. It is section 244 of ITEPA that provides an exemption from tax and NI for the provision of a bicycle and bicycle safety equipment subject to certain conditions being met.

 

In a classic piece of non-joined up government the Department of Transport launched the Cycle to Work Guarantee in October - http://www.dft.gov.uk/pgr/sustainable/cycling/cycletowork/. Its aim was to encourage employers to become more bicycle friendly by going further than simply introducing a cycle to work scheme but also providing suitable storage, repair and locker facilities. Alongside the launch the DfT published Cycle to work implementation guidance covering the conditions that needed to be met for the tax exemption to be possible, and how this worked within the context of salary sacrifice. Whilst encouraging green travel is high on the DfT’s agenda, the promotion of salary sacrifice tied to the exemption obviously rang alarm bells at the Treasury. On 18th December HMRC published a statement on their new approach to cycle schemes, aiming to make it absolutely clear that the tax exemption was not achievable for all employers and acknowledging that some existing schemes were ineffective and that HMRC had been lax in approving them. It would have been more helpful to employers if the DfT and HMRC had published joint guidance that could have included the caveats, rather than one department promoting the ease of scheme set up at the same time as another was indicating how tightly the rules are drawn.

 

The issue that HMRC drew attention to on 18^th December was the condition that bicycles must be 'generally available to all employees', some employers have fallen foul of this condition for three reasons:

• The scheme was not open to employees aged under 18 as they could not enter into the credit sale agreement that facilitates the bicycle being loaned to the employee for a fixed period for a set weekly/monthly amount
• The scheme was only offered as salary sacrifice and certain employees were unable to participate as to do so would have brought their wages below the level of the national minimum wage
• Only employees at certain sites or offices were able to join the scheme

Enforcing the legislation with immediate effect is interesting not least for the message it sends out, Employers may not want to:

• Arrange for an adult guarantor to allow under 18 year old employees to participate
• Offer lower value bicycles or the loan of a ‘pool’ cycle to low paid employees with insufficient pay
• Extend the scheme to all its sites because of the cost of administering more participants

HMRC said in their statement that any agreements entered into before 18^th December 2009 would be allowed to continue unaltered until the end of the employee’s loan agreement but any subsequent agreements would not be considered as tax exempt unless the scheme rules weresuch that the “generally available” condition was met in full. Where cycle to work agreements were entered into after 18^th December or were have to come into effect after 6^th April 2010 and the tighter conditions were not met, the employee has received a taxable benefit that must be reported on the P11D and be subjected to Class 1A NICs.

 

You may at this point be thinking that you also have a problem with your childcare voucher scheme as that also:

• Is only available to employees at a particular site and those with insufficient excess pay cannot participate.

Confusingly this is not an issue in respect of childcare vouchers as it is acceptable for such schemes to be restricted to one location and for certain employees to be unable to participate because of minimum wage restrictions. HMRC have just republished their E18 booklet http://www.hmrc.gov.uk/helpsheets/e18.pdf on employer-supported childcare and this confirms both these points.

 

Finally we turn to schemes that subsidise travel on public buses. Again these have developed in popularity recently but are not as flexible as employers may have believed. The exemption in section 243 of ITEPA requires that the subsidy or free fare is only offered on a bus that the employees can use to and from their workplace. If the scheme provides for a bus pass that can be used across a number of different bus routes within a geographical area the exemption does not apply. Again HMRC acknowledge that they have been too lenient in the application of the rules of the exemption, so from 18^th December 2009 only schemes that provide support for a specific bus route will qualify. Agreements entered into before 18th December 2009 can continue until the end of the agreement as long as this is for no longer than 12 mouths and the scheme is due to commerce no later than 6^th April 2010.

 

The future?

 

Should we be worried about the future of salary sacrifice in light of these developments? No we shouldn’t, where an employer wants to provide a benefit that has a favourable tax or NICs. treatment then salary sacrifice is still the most tax efficient way to proceed. What is likely to change is the number of benefits that are tax-exempt and therefore candidates for salary sacrifice, but that of course brings us full circle to politics!

 

 

Kate Upcraft

Director, ISIS Support Services