Simplifying the PAYE Settlement Agreement process

Simplifying the PAYE Settlement Agreement process

Following a report by the OTS, a consultation on simplifying the PSA process has been published by HMRC.

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A consultation on simplifying the PAYE Settlement Agreement (PSA) process has been published by HMRC. This picks up on work undertaken by the Office of Tax Simplification (OTS) in their report on employee benefits and expenses. PSAs are formal annual agreements between an employer and HMRC where the employer agrees to pay the tax and NIC (on a grossed up basis) on certain employee Benefits-in-Kind (BiKs). Only BiKs which are minor, irregular or impractical to apportion can be included in a PSA. Typical items HMRC have accepted on PSAs include staff entertaining, staff gifts, gift vouchers and non-qualifying relocation costs.

The Current Inefficiencies

While the PSA system was introduced to make the system more workable, the OTS identified several inefficiencies in the PSA process which they felt could be streamlined:

  • The process requires an annual application by the employer even though the substance of an employer’s application tends to be the same year on year;
  • The application must agree in advance which items are to be included in the PSA and this cannot always be accurately anticipated requiring variations to the PSA to be submitted throughout the year;
  • The date on which the PSA is agreed (it may be made at any time and varied up to 6 July following the tax year end) can impact on the NIC payable and the NIC and Income Tax treatments to diverge;
  • Each submitted PSA calculation is checked by HMRC to ensure it matches the advance agreement. If it does not then an administratively burdensome process must be entered into and concluded to achieve the same result as would be achieved by just accepting the PSA (which HMRC cannot currently do); and
  • The tax/NIC due under the PSA is not payable until 19/22 October following the tax year.

The Proposed Fixes

HMRC have accepted the OTS’ findings and are now proposing that:

  • No upfront agreement be required. Employers will be expected to assess for themselves whether items to be included fit the statutory description.
  • PSA returns be moved from paper to digital.
  • The PSA payment dates be aligned with the P11D deadline (19/22 July).
  • Misreporting of items in good faith receive only an initial warning from HMRC followed by action if inaccurate reporting persists in subsequent years.

These will be significant changes, particularly from a timing perspective, given the move of deadline from 19 October to 19 July. It will also require employers to have robust processes in place to identify what benefits are exempt, which need to be reported on Form P11D and which benefits remain taxable and can be included within a PSA. Key to this will be having appropriate expense controls to identify taxable benefits clearly, especially with regard to more complex costs like staff entertaining.

The Proposed Changes to BiKs within a PSA

HMRC are also proposing to more clearly define what can be included within a PSA as follows:

  • As trivial BiKs are now exempt, HMRC are proposing to remove minor BiKs from the scope of PSAs on the basis that they are no longer taxable anyway.
  • Further guidance to be issued to clarify the meaning of irregular BiKs i.e. no discernible pattern and not a contractual right.
  • Further guidance to be issued to clarify that impractical to apportion expenses does not include impracticality arising from deficiencies or lack of functionality in an employer’s reporting software.

HMRC are also considering whether anti-avoidance legislation is required to prevent abuse by office holders who will necessarily be in a position to control ‘irregular’ BiKs and have asked for comments as to whether such legislation is necessary.

Responses to the consultation have been requested by 18 October 2016. KPMG welcomes this consultation and your views. If you would like to discuss this consultation or any of the reform options further, please do get in touch with your normal KPMG contact.


For further information please contact :

Mike Lavan

Ian Goodwin

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