Spring Budget 2017: Personal tax and employment taxes
ICAEW Tax Faculty provides analysis of the announcements relating to personal tax and employment taxes in the Spring Budget 2017.
The tax-free dividend allowance of £5,000 (more correctly described as a dividend nil rate band) which was introduced from April 2016 is to be reduced to £2,000 from April 2018. This change is one of the measures intended to reduce the differential between the treatment of the employed, self-employed and those trading through a limited company. It is unfortunate that this change to the increasingly complex array of rates and allowances is required, given the short period since it was introduced.
The rules for rent-a-room relief will be reviewed later this year to consider whether the current system supports long-term lodgings and property lets.
It was confirmed that the change to the legislation – which will make long-term UK residents not currently domiciled in the UK for tax purposes become deemed UK-domiciled after 15 out of 20 years’ residence in the UK – will go ahead as planned from April 2017.
The draft legislation published on 26 January is still work in progress and some changes are still required. Following meetings with HMRC, the Tax Faculty has published two TAXguides to clarify some of the provisions: TAXguide 04/17 Offshore trust changes – income tax legislation and TAXguide 05/17 Tainting protected settlements.
Alignment of deadlines for making good benefits-in-kind which are not payrolled
The deadlines for making good benefits-in-kind not accounted for in real time through PAYE (ie not payrolled) will be aligned at 6 July following the end of the tax year. The taxable value of the benefits-in-kind will be reduced or removed if making good takes place by that date.
The change will first affect making good on a tax liability arising in the tax year 2017/18 and subsequent years.
Optional remuneration arrangements (salary sacrifice)
The income tax and employer NIC treatment of benefits-in-kind provided through salary sacrifice or other optional remuneration arrangements will be changed from 6 April 2017.
Under the new rules, tax and employer NIC will be charged on the higher of the value of the benefits-in-kind and the cash foregone, instead of, as at present, tax and employer NIC being charged on the value of the benefits-in-kind, this will apply even where the benefits-in-kind is currently exempt from tax and NIC.
This provision is being introduced because the government considers that it is unfair that less tax and NIC is payable when employees exchange cash earnings for benefits-in-kind compared to when employees are paid in cash.
A transitional rule will protect employees who are in contractual arrangements before 6 April 2017 until the earlier of a variation or renewal of the contract or 6 April 2018, except for cars with emissions above 75g CO2/km, accommodation and school fees for which the final date is 6 April 2021. Employer-provided pensions and pension advice, childcare vouchers, employer-provided childcare and workplace nurseries, cycle to work schemes and ultra-low emissions cars, with emissions not exceeding 75g CO2/km will be excluded from this measure.
Reform of termination payments
The tax treatment of termination payments will be changed. This will include making all contractual and non-contractual payments in lieu of notice (PILON) taxable as earnings and requiring employers to tax the equivalent of an employee’s basic pay if notice is not worked.
The tax and employer NIC treatment of termination payments will also be aligned so that, for example, employer NIC will be payable on the elements of the termination payment exceeding £30,000 on which income tax is due.
The first £30,000 of a termination payment will remain exempt from income tax and NIC.
These changes, including to foreign service relief, will take effect from 6 April 2018.
Disguised remuneration avoidance schemes
The future use of disguised remuneration avoidance schemes will be prevented by strengthening the current rules. The existing use of schemes will be tackled by the introduction of a new charge on disguised remuneration loans that were made after 5 April 1999 and remain outstanding on 5 April 2019.
The proposed new rules will be revised to ensure the loan charge and the exclusions operate as intended. The close companies’ gateway will now be introduced in Finance Bill 2017 to commence from 6 April 2018. This will allow for further consultation to ensure it is appropriately targeted at disguised remuneration schemes. Proposals on how the tax and NIC arising from the changes will be collected will be set out in a technical consultation later in 2017.
Similar rules will apply to the self-employed with effect from Finance Bill 2017 Royal Assent.
Employers will be prevented from claiming a deduction when computing their taxable profits for contributions to a disguised remuneration scheme unless income tax and NIC are paid within a specified period. This will have effect for contributions made on or after 1 April 2017 for corporation tax purposes or 6 April 2017 for income tax purposes.
Off-payroll working in the public sector
Modifications are being made to the proposed reforms to the off-payroll rules (often known as IR35, or the intermediaries legislation) for engagements in the public sector.
The proposals move responsibility for deciding if the off-payroll rules apply from an individual worker’s personal service company (PSC) to the public sector body, agency or third party directly paying the PSC. This measure also makes that organisation responsible for deducting under PAYE and paying to HMRC associated employment taxes and NIC. These changes do not affect workers and PSCs who provide their services to private sector organisations. The 5% expenses allowance currently available to those who apply the off-payroll rules to reflect the costs of administering the rules will be removed for those who work in the public sector. These changes will also introduce a requirement for public sector bodies to provide information to agencies and workers about whether engagements are within the off-payroll rules.
As a result of feedback received during the recent technical consultation on the draft legislation, to which we responded in ICAEW REP 15/17, it will be optional for the public sector body, agency or other third party paying the PSC to take account of the worker’s expenses when calculating the tax due.
The application of the rules to statutory auditors (who as office holders would technically be caught by the new rules) and to parliament will also be clarified.
The change will come into effect from 6 April 2017 and apply across the UK.
Benefits-in-kind, expenses and accommodation
The government’s stated aim is to pursue a tax system with competitive rates and a sustainable base to ensure that the UK remains one of the best places in the world to set up and grow a business and builds on its reputation as a competitive and open economy. At the same time, the government wants to ensure that public services can be funded sustainably.
To this end, the government will be consulting on the following:
- Taxation of benefits-in-kind – exemptions and valuation methodology for the income tax and employer NIC treatment of benefits in kind.
- Accommodation benefits including board and lodging – including proposals for when accommodation should be tax exempt and support during any transition.
- Employee expenses – tax relief for employees’ expenses, including those not reimbursed by employers.
HMRC will publish guidelines for employers who make payments of image rights to their employees to improve the clarity of the existing rules.
NIC employment allowance: avoidance
HMRC is monitoring employment allowance compliance following reports of some businesses using avoidance schemes to avoid paying the correct amount of NIC. The government will consider further action if this avoidance continues.
NIC employment allowance: illegal workers restriction
We welcome the fact that, following a consultation on withholding employment allowance for one year from employers who receive a civil penalty from the Home Office (to which we responded in ICAEW REP 1/17), the government has decided that this should not be taken forward at present due to concerns raised about complexity.
NIC time limits to be aligned with tax
NIC is to be removed from the scope of the Limitation Act 1980 and the time limits for the recovery of NIC debts will be aligned with those for tax.
To allow time for a full consultation on the draft legislation, the government will be deferring this and will introduce the measure in a future NIC Bill.
The new Tax-Free Childcare scheme for working families with children under 12, providing up to £2,000 a year for each child to help with childcare costs, will start to be rolled out shortly. This scheme will in due course replace childcare vouchers and employer provided childcare. The interaction with these schemes and with the childcare elements of tax credits and universal credits is complex and careful analysis of which is the most favourable is advised.
From September 2017, the free childcare offer will double, from 15 to 30 hours a week for working families with three- and four-year-olds in England.Download the full report