 |
  
|
A Ms. O’Farrell worked for Publicis Consultants UK Ltd. Her contract provided for three months’ notice. She was made redundant in May 2009 and was provided with statutory redundancy pay and holiday pay. Her dismissal letter also said that she would receive an ex-gratia payment equivalent to three months’ salary (£20,625) free of Tax and NI deductions. Continue reading
Amendments to the PAYE Regulations in effect from 6 April 2011 mean that the perfectly legal “trick” of deducting only basic rate PAYE from termination payments made to departing (or more accurately recently departed) employees who are higher rate tax payers will no longer work.
Currently where a payment to an employee is deferred until after he or she has left the employment in which they were employed, the employer has to deduct tax at the basic rate only, using PAYE code BR. This is because the payment will not be included on the individual’s P45. The result is that higher-paid employees may not pay enough. Of course they have to pay in due course but not until after their tax return for the year has become due. This can give a substantial cash-flow advantage to higher paid ex-employees who can thus have interest free use of the postponed tax, sometimes for many months.
From April 2011 the employer has to operate code 0T instead of code BR, so that affected ex-employees will pay tax upfront at the basic, higher and additional rate as appropriate. Tax code 0T is a “worst case” code: it does not allow for any personal allowances and requires deduction of tax on a non-cumulative (Week 1/Month 1) basis.
In some cases it may well be that this will result in more tax being deducted than eventually turns out to be appropriate. In that case the employee will have to reclaim the overpaid tax later.
It is worth stressing that this is “merely” a change in PAYE coding, effectively meaning that the change is a cash flow change rather than a change of substance. In particular the exemption from tax for the first £30,000 of compensation paid on termination of employment which can apply in many cases is not changed.
It is also worth noting that the effect of the new rules can be mitigated if the termination payment is made under contractual terms which provide for payment by monthly instalments. This is because in that case each instalment will be taxed separately. Depending on the amounts involved, it may be possible to work out a system where only basic rate tax is payable under Code 0T on each monthly instalment even though the cumulative total of the instalments will mean that the ex-employee is a higher rate taxpayer.
A government “Plan for Growth” document was issued along with the Budget on 23 March 2011. From an employment law angle the following items are of most significance:
• extension to businesses with fewer than 250 employees of the right for employees to request time to train has not been implemented on 6 April 2011 as previously planned;
• extension to parents of 17 year olds of the right to request flexible working has not been implemented on 6 April 2011 as previously planned;
• the “dual discrimination” rules in Equality Act 2010 have not been introduced on 6 April 2011 as previously planned
• the government “will consult to remove the unworkable requirement in the Equality Act for businesses to take reasonable steps to prevent persistent harassment of their staff by third parties …”.
Other relevant matters include:
• basic personal income tax allowance to go up by £1,000 (to £7,475) in April 2011 and by a further £630 (to £8,105) from April 2012;
• consultation on simplification and merging of income tax and National Insurance;
• abolition of the so-called “Default Retirement Age” (at 65) has proceeded as planned from 6 April 2011;
• up to 50,000 additional apprenticeships and up to 100,000 additional work experience placements over the next four years;
• a moratorium exempting micro (fewer than 10 employees) and start-up businesses from new domestic regulation for three years from 1 April 2011;
• promote labour mobility “by boosting the supply of housing through support for the housebuilding industry, with a FirstBuy shared equity programme to assist over 10,000 first time buyers to get on the housing ladder”;
• increase Approved Mileage Allowance Payments from 40 pence to 45 pence per mile and extend it to cover volunteers travelling as passengers;
• the National Insurance rate rise which the last Government announced will have to go ahead.
• ending the practice of “disguised remuneration” which “sees highly paid employees offered tax-free, lifetime loans that are never repaid”.
• increasing employee contributions for public service pensions by “an average of 3 percentage points”;
• Lord Young’s recommendations on health and safety laws will be implemented in full;
• plans will proceed for introduction (over many years and not for current pensioners) of a single-tier flat-rate state pension (currently estimated to be worth around £140 to £150 per week)
For many years it has been the practice of the Inland Revenue, now HMRC, to publish “extra-statutory concessions”. These effectively correct errors in and omissions from legislation which would result in tax being collected where it would be inappropriate.
The practice has always been of questionable legitimacy. For HMRC to have discretion, even via published “extra statutory concessions”, to decide that tax should not be payable when the law says it should does not fit well with contemporary ideas of law enforcement. In order to regularise the position, HMRC has therefore engaged on a process of formalising extra-statutory concessions into law wherever possible. As part of that process a new statutory instrument, the draft Enactment of Extra-Statutory Concessions Order 2011, has been drawn up. It came into effect on 6 April 2011. Amongst other things it codifies a significant employee related concession.
The relevant extra statutory concession relieves an employee or ex-employee from income tax in respect of monies paid on their behalf by their employer to cover legal costs incurred by the employee exclusively in connection with the termination of his or her employment, provided the costs are paid by the employer pursuant to a court order or direct to the lawyer under the terms of a compromise agreement.
While in principle this codification is to be welcomed, it is worth noting that as drafted the regulations are less beneficial to employees than the concession they are designed to replace. The regulations as drafted apply only if the compromise agreement is made under the Employment Rights Act 1996, for example to settle an unfair dismissal claim. They therefore do not apply if the compromise agreement is under the Equality Act 2010 and they do not apply to legal fees paid in connection with an ACAS COT3 conciliation. This may turn out to be a mistake. However unless the regulations are amended (they have been enacted as drafted) the current position is worse for at least some employees than it has been for many years under the concession.
Our newsletter last month outlined employment law related proposals in the General Election manifestos of each of the three main political parties. Now of course these have no direct relevance. Instead the new Coalition Government Agreement states that there will be a review of “employment and workplace laws, for employers and employees, to ensure they maximise flexibility for both parties while protecting fairness and providing the competitive environment required for enterprise to thrive“.
What that means in practice is far from clear. However some key points are emerging:-
“The safety of children and vulnerable adults is of paramount importance to the new government.
“However it is also vital that we take a measured approach in these matters. We’ve listened to the criticisms and will respond with a scheme that has been fundamentally remodelled.
“Vulnerable groups must be properly protected in a way that is proportionate and sensible. This redrawing of the vetting and barring scheme will ensure this happens.”
Theresa May is known to have opposed the scheme, describing it as “draconian”. She told the BBC: “You were assumed to be guilty until you were proven innocent, and told you were able to work with children”.
Other Coalition proposals include a clampdown on “unacceptable” bonuses within the banking sector; extension of proposals for social security benefits to be conditional on willingness to work; a cap on immigration from outside the European Union; some form of tax break for married couples and civil partners (Lib Dems able to abstain) and a review of the IR35 tax arrangements (which neuters tax advantages of individuals, notably IT consultants, who provide their services through wholly owned limited companies).
[picappgallerysingle id="285602" align="left"]Hidden away in the coalition agreement is the following:
We will review IR35, as part of a wholesale review of all small business taxation, and seek to replace it with simpler measures that prevent tax avoidance but do not place undue administrative burdens or uncertainty on the self-employed, or restrict labour market flexibility.
IR35 is the controversial statement of Inland Revenue practice which was designed to identify people who are ostensibly self-employed but who are, in reality, employees of a business because they provide services more or less exclusively and effectively under the control of one business. The strategy was targeted in particular at “consultants” such as “one man band” tax advisers, creatives and IT consultants who operated on their own account, generally through a limited company, on the basis that this is more tax efficient.
The Professional Contractors Group was formed to oppose IR35. Its managing director, John Brazier, stated:
We are delighted that the new Coalition Government made this commitment to review IR35 as a priority only days after taking power…For the last ten years PCG has campaigned for honesty and fairness when dealing with the UK’s 1.4 million contractors and freelance workers. With the end of the iniquitous IR35 we have the opportunity to achieve fairness…