An update on the Chancellor's first (and last) Autumn Statement.
The Chancellor's first (and last!) Autumn Statement took place this afternoon, and amongst the more unexpected announcements was a move to an Autumn Budget and Spring Statement from 2017 onwards. There were also a number of updates from a people and pay perspective, following on from the latest round of consultations, together with the announcement of plans for further reviews and calls for evidence in 2017.
From an employer's perspective, the main developments were as follows:
Full details are set out below.
Following the recent consultation, the Chancellor announced that the tax and employer NIC advantages of salary sacrifice schemes will be removed from April 2017. However, the following salary sacrifice arrangements will continue be protected:
Any arrangements not included in the list above will therefore see their tax/NIC advantages removed. This will include technology (tablets/mobile phones), medical benefits, car parking, discounts on own goods and many other popular arrangements. However, it has been clarified that any arrangements entered into before April 2017 will be protected by transitional measures until April 2018, meaning that employees signing up for flexible benefits pre-April 2017 should not be impacted by the measures for another 12 months. In a similar vein, it is understood that the transitional provisions will apply to cars (not ultra-low emission), accommodation and school fees through until April 2021.
Employers will now need to consider how they wish to provide benefits and will therefore need to give consideration to employee communications on reward and pay, as well as how they can continue to recruit and retain the best talent. Employers should also give thought to when they should launch their Flexible Benefit choice windows, given the transitional provisions if arrangements are entered into pre-April 2017. HMRC's full response to the consultation, together with draft legislation, is expected upon publication of the draft Finance Bill 2017 on 5 December 2016.
Following the recent consultation, the Government will reform the off-payroll working rules in the public sector from April 2017, by moving responsibility for operating IR35, and paying the correct tax, to the body paying the worker's company (either the end user, agency or other intermediary, as may be the case).
The 5% tax-free allowance currently available under the IR35 rules will be removed for those working with the public sector, on the basis that such workers no longer bear the administrative burden of deciding whether the rules apply.
The Government has projected an increase in future tax revenues of circa £20mil per annum as a result of this measure. Given that last year the stated tax leakage from non-compliance with the IR35 rules was in the region of £430mil per annum, one might conclude that an extension of these new rules would remain under consideration by the Government to plug this gap.
PAYE Settlement Agreement (PSA)
Whilst the detailed response to this consultation is still pending, the government announced today that legislation would be introduced in Finance Bill 2017, to simplify the administration of the PSA. It is expected that these measures will take effect from April 2018, though it remains to be seen whether HMRC is prepared to concede any ground with the much-hoped for extension of the scope of the PSA and the items which may be included therein. We await publication of the consultation response with interest….
In line with proposals made in the recent consultation, from April 2018 termination payments over £30,000, which are subject to income tax, will also be subject to employer Class 1 NIC.
However, it is pleasing to see that the Government has responded to concerns raised during the recent consultation by confirming that tax will only be applied to non-contractual PILONs by reference to the employee's basic pay during their notice period, if their notice is not worked, making it simpler to apply the new rules. There has been no further announcement, as yet, regarding the potential abolition of Foreign Service Relief, however, it is expected that the first £30,000 of any qualifying termination payment will remain exempt from income tax and National Insurance (subject to the new rules on non-contractual PILONs).
Office of Tax Simplification - Tax/NIC alignment and Employment Status
The Government has responded to the OTS's most recent report on steps which may be taken to align the treatment of income tax and NIC. Somewhat disappointingly, the Chancellor has decided that it is not the right time to progress the move to an annual, aggregated and cumulative basis for collecting Class 1 NIC. Similarly, the proposal to move all Employer NIC charges to a payrolled basis will be "kept under review" by the Treasury in future.
Interestingly, however, the Chancellor's response does acknowledge that there are wider issues with the different tax treatment of different forms of labour, highlighted by the growth in self-employment and the number of single person incorporations, leading to increased complexity and increased fiscal costs to the Exchequer. The government has therefore undertaken to look at how it can ensure that the taxation of different ways of working and different forms of employee remuneration is fair, sustainable and efficient - quite how this will manifest itself in 2017 remains to be seen, however the report of the Cross-Government Working Group on Employment Status, due in early 2017, is one which we await with interest in light of these comments.
National Living / Minimum Wage (NLW / NMW) update
Following the recommendations of the independent Low Pay Commission, the National Living Wage (NLW) will increase from £7.20 to £7.50 from April 2017.
Concurrently, the Government announced a further investment of £4.3m into the NMW/NLW enforcement teams. In recent years we have seen a significant increase in enforcement activity in this area, and NMW/NLW compliance remains a critical risk area for many employers to keep abreast of, especially given the public naming and shaming of employers who have found to be not compliant with the NMW/NLW regulations.
Employee Shareholder Status (ESS)
The tax advantages linked to shares awarded under ESS (previously announced by the Coalition Government) will be abolished for arrangements entered into on, or after, 1 December 2016. Where an employee is already part of an ESS arrangement (i.e. an Employee Shareholder), it is understood that the tax advantage will be preserved post-1 December 2016.
Personal Allowance & NIC alignment update
The Government will meet its commitment to raise the Income Tax Personal Allowance to £12,500 and the higher rate threshold to £50,000, by the end of this Parliament. For April 2017, this means that, the personal allowance will rise to £11,500 and the higher rate threshold to £45,000.
Following a number of tax years during which the Class 1 NIC thresholds for employers and employees have been unaligned, the Chancellor has announced that they will be aligned with each other at £157 per week from April 2017.
Finally, the time limits for recovery and enforcement of NIC debts will be brought into line with other taxes and no longer covered as part of the Limitation Act 1980. This is a long overdue and sensible change. We note that a consultation on this measure is intended, and we would welcome clarification on whether NIC debts in Scotland, which are separately covered by the Prescription and Limitation (Scotland) Act 1973, will also be covered by the proposed changes.
The UK Government has confirmed that they will be going ahead with their latest proposals to reform the taxation of long-term resident non-doms living in the UK. The proposed new rules have been subject to consultation but are set to come into force from 6 April 2017 with the draft legislation set to be published in the draft Finance Bill on 5 December.
All long-term UK tax resident, non-domiciled individuals will become 'deemed' domiciled in the UK and will become subject to UK taxation on their worldwide income and capital gains and their worldwide estate will potentially fall into the scope of UK inheritance tax once they have been resident in the UK for 15 out of the previous 20 tax years. Individuals who were born in the UK but have since acquired a domicile of choice in another jurisdiction will now be automatically deemed domiciled in the UK on re-establishing UK tax residency.
There are some opportunities associated with the new rules including a 1 year window from 6 April 2017 during which period all non-domiciled individuals (except for those who were born in the UK with a domicile of origin in the UK) will be able to re-organise their offshore mixed funds. This means they will have the opportunity to separate out their mixed funds into income, capital gains and clean capital elements which may then be delivered into distinct accounts or funds.
A potentially significant new announcement today was in relation to the tax treatment of foreign pensions. The government has said it will bring the taxation of foreign pensions into line with the taxation of UK domestic pensions. There is no detail on what the exact technical changes will be, but this would likely impact both the deductibility of contributions into such plans and the tax treatment of both lump sum and annuity distributions from these plans to UK residents. Such changes may therefore have a significant impact on the cost of assignments to employers where there is a mismatch in tax treatment of contributions and distributions.
In addition, the government announced some further specific changes including:
No further detail or timeline was given on these proposed changes. The taxation of foreign pensions is a highly complex area and we would, therefore, expect the government to publish consultations on any potential changes to the regime in future.
As part of its review of how all elements of an employee's remuneration package are taxed, in addition to the forthcoming changes to salary sacrifice, the government also announced that it will consider how all benefits in kind are valued for tax purposes.
In particular, the government has confirmed that at Budget 2017 it will publish:
In January 2017, the Government will publish its response to the Making Tax Digital consultations. Further details can be found here.
Additionally, the Government will continue to invest in tackling disguised remuneration and aggressive tax avoidance schemes.
If you would like further information on anything discussed above, then please do not hesitate to get in touch with your normal contact or e-mail firstname.lastname@example.org.