6 employment changes CAs need to be aware of in 2017

By Justine Riccomini, Head of Taxation (Scottish Taxes, Employment and ICAS Tax Community)

9 January 2017

CAs can expect ongoing change in 2017 to the calculation and implementation of employee taxes, explains Justine Riccomini, Head of Taxation (Scottish Taxes, Employment and ICAS Tax Community).

The Autumn Statement revealed yet more changes to employment taxes, albeit not necessarily the ones most employers, professional advisers and other bodies put on their Christmas list. Namely, the OTS’s recommendation to fully align income tax and NICs within the next five to 10 years.

Employee shareholder relief abolished

The damp squib of employee shareholder relief was in the end only taken up by 400 companies over a three-year period.  The tax breaks involved will be abolished after 1 December 2016 and the scheme will be shelved as soon as possible.

The scheme was originally introduced after much negative commentary across employer sectors as it effectively allowed companies to encourage employees to exchange employment rights, including unfair dismissal, for shares in the business.  The companies who took it up were found to be start-ups favouring “old boys’ networks” where in reality there was no risk of employment rights being breached.

Those who did take up the incentive will now need to unpick the arrangements and reinstate employment contracts to include employment rights.

Restrictions to salary sacrifice/exchange schemes

From April 2017, new salary-exchange schemes will only be permitted where they include:

  • Pension contributions
  • Childcare
  • Cycle-to-work bicycle purchases
  • Ultra-low emission cars

For all other salary exchange schemes, tax relief will end in April 2018.

Employers need to concern themselves with two issues:

  1. Deciding whether they will continue “as is” in terms of the suite of tax-efficient benefits they currently offer – which means either they, or the employees, will need to bear the additional tax cost – or unpick everything except the above four benefits.
  2. Whether or not salary exchange is to cease, the terms and conditions of employment will need to be amended to reflect the position in terms of each separate benefit and who is expected to bear the tax.  However, employees have rights under their contracts of employment and must be consulted before any changes are made, and agree to the changes.  Accountants and tax advisers should bear in mind that the risk of employment tribunals is increased if this is not handled properly and employment lawyers should ideally be involved to cover off this area.

Rise in the National Living Wage

The National Living Wage (NLW) (for employees 25 and over) increases from April 2017 to £7.50, representing an additional £500 of pay per annum for each full time equivalent (FTE) employee.  

This also means additional costs to employers in terms of pension contributions, additional National Insurance Contributions, increased holiday pay and for large employers with pay bills exceeding £3m, the Apprenticeship Levy.  Be aware that some previously exempt employers may be brought into Apprenticeship levy territory because of this.

Employers should be vigilant that this rise, which equates to 4.2%, does not create disengagement and motivation issues with other higher-paid workers who are not in receipt of a 4.2% pay rise.  

Careful management of expectations is required and employee communications should reflect this.  

Many employees at the grade above NLW have complained that they have more responsibility but the lowest paid people in the organisation are catching up with them pay-wise, and that employers have stopped paying other things such as perks and bonuses to cover the additional cost of the NLW.

Changes to treatment of workers engaged via Personal Service Companies (PSCs) in the public sector

Public sector advisers will be aware that the majority of the 20,000 public sector contractors no longer automatically have the right to be treated as “self-employed” where they are contracted to work through a PSC.  The agency, recruitment firm or public sector body must now operate payroll taxes on these individuals, and report and pay over liabilities to HMRC, where a deemed employment relationship exists.  Previously, the PSC was responsible for operating payroll taxes on relevant fees received under so-called IR35 legislation.

The implications are twofold. Advisers must:

  • consider their personal service company clients and help them to decide whether to continue running a company; and
  • advise their public sector clients of additional liabilities which may be incurred as a result of this change, including pension contributions, apprenticeship levy and employer national insurance liabilities. These liabilities could occur if the individual worker is simply brought on to the payroll and not paid through his PSC.  Some public sector bodies may simply decide to adopt this as their default position to avoid losing the contractors.
  • There is likely to be a struggle between procurement departments and finance departments in that headcount reduction and budgetary cuts are important whilst continuity of service and retention of relevant expertise and knowledge are also a priority.

Advisers should also bear in mind that this measure is highly likely to be rolled out to the private sector and may be the subject of one of the two 2017 or the 2018 Budget statements.

Boosting productivity

In a bid to improve managerial skills, the Government has recognised that investment needs to be focussed on improving workplace productivity, starting with eradicating bad management practice. It has pledged £13m to the Productivity Leadership Group to deliver this.  

While the investment is not monetarily significant it does represent a step in the right direction – but other areas need to be tackled simultaneously such as adult skill sets, apprenticeships and continuous learning and development.

The Brexit vote appears to have caused consternation among HR professionals in the fields of recruitment, learning and development and talent management.  They consider more managers will be required to help companies compete in a global arena, as opposed to a European one.  

This, combined with low productivity forecasts from the Office of Budget Responsibility, could hamper businesses in terms of their strategic ambitions and advisers should bear this in mind for the next couple of years.  

Indeed, Brexit will require employers to focus on strategic markets, and require them to consider potential global mobility issues, closures, new opportunities, and decide whether there is instability or confidence to be faced up to in this new British agenda. Serious financial and political problems in Spain, Italy, France, Greece and Portugal also require reconsideration of those markets.  

Executive pay and gender pay reporting

It would appear that Prime Minister Theresa May has done a U-turn on insisting that elected employees should be present at Board meetings.  Now she says that the “voices of workers and consumers” should be represented at board level; advisers should watch out for a green paper which examines this and the disparity of executive pay with that of ordinary workers.

This, together with the gender pay gap reporting requirements which are being introduced from April 2017 for employers with 250+ employees, will provide a significant challenge to advisers in terms of costings, reputational issues, grievances from employees who consider their pay to be gender-biased and the overall requirement for employee relations to be more transparent.

Topics

  • Tax

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