The Chancellor presented his first and last Spring Budget on 8 March. There were no major surprises with his aim being to keep things on an even keel through what could be a choppy period with the Brexit negotiations about to commence.
How we tax work – Employment, Self-Employment and Personal Service Companies
This is an area which is currently under considerable scrutiny and one where we were expecting an announcement. We had thought that perhaps the Chancellor would take this opportunity to announce a more far-reaching reform and look to level the tax differentials between different ways of working, be it through employment, self-employment or a personal service company.
Such a reform would no doubt be a radical shake-up of the status quo and in reality would most likely take some years to achieve. There would be winners and, no doubt, losers. The Chancellor chose to pick the low-hanging fruit and announced a partial alignment between the employed and self-employed by closing the gap on National Insurance Contributions (NIC). The self-employed will see a rise in the Class 4 NIC rate from 9% to 10% from April 2018, and then to 11% from April 2019, moving closer to the 12% employee’s Class 1 NIC rate.
He also chose to remove some of the tax advantages available through the use of personal service companies by reducing the dividend allowance from £5,000 to £2,000 from 6 April 2018.
But no further reform was announced; the Chancellor perhaps deciding to keep his powder dry until the Taylor Review into Employment Practices is delivered in the summer. It remains to be seen what action will then be taken although preliminary findings quoted by the Chancellor did indicate that tax considerations are driving recent trends in working practices. So action of some sort can be anticipated.
The elephant in the room of course is Employer’s NIC which at 13.8% is seen by many as a material driver in recent working practice trends. The line between employment and self-employment continues to get more blurred and Employer’s NIC is a significant employment-related cost for business. And with increasing automation it acts to reinforce the threat to jobs in the medium to long term. We hope that following publication of the Taylor Review, the Government will give careful consideration to what to do about Employer’s NIC and alternative approaches to raise revenue in its stead. Some recent media commentary has focused on a tax on robots – this may sound far-fetched but replacing the £68 billion per annum that Employer's NIC generates would certainly require some radical thinking!
Salary Sacrifice (Optional Remuneration Arrangements, or OPRA)
The relatively quiet Budget is to be welcomed given the volume of employment tax changes that have come in over the last two fiscal years, many of which are commencing this April. But one area where we had hoped to hear a bit more was salary sacrifice (or Optional Remuneration Arrangements – OPRA). It looks as if employers will have to wait for the publication of the Finance Bill and draft guidance to be released on 20 March for more clarity. This is unfortunate given how close this is to the start of the new tax year.
As promised at Autumn Statement 2016 , there will be a consultation on employer-provided accommodation which will commence on 20 March 2017, along with calls for evidence on employee business expenses and the taxation of benefits-in-kind, both also commencing the same day.
It will be interesting to see what the terms of reference are for the accommodation benefit consultation in order to better understand the Government’s direction of travel on the potential taxation of currently exempt job-related accommodation.
The call for evidence around the taxation of benefits-in-kind will focus on valuation methodology and appears to follow on from the changes being introduced from 6 April on salary sacrifice and benefits-in-kind.
The call for evidence around employee expenses is being driven by the Government’s wish to better understand “the use of the income tax relief for employees’ expenses”. Quite what this means we will have to wait and see but there is a suggestion that relief should only apply when expenses are reimbursed by the employer.
The Government has announced that it will be making certain amendments to the rules governing UK-based defined benefit ‘section 615’ schemes but has indicated that lump sums paid out of funds built up before 6 April 2017 will continue to be subject to the existing tax rules, which is welcome. However, it is unclear whether this ‘grandfathering’ is applicable only to section 615 schemes or will also apply to the changes on foreign service relief affecting non-UK ‘employer-financed retirement benefit schemes’.
Qualifying recognised overseas pension schemes (QROPS)
The Government has announced that transfers to ‘qualifying recognised overseas pension schemes’ (QROPS) requested on or after 9 March 2017 will be subject to a 25% tax charge, subject to certain exceptions, e.g. where the individual and the QROPS are both within the EEA (this is interesting in the light of Brexit) or where both the individual and the QROPS are within the same non-EEA country. The UK pension scheme administrator or manager will be required to withhold this tax.
Additionally, we understand that:
a) if the individual subsequently moves to another country, it might (depending on the precise circumstances) be possible to obtain a refund of such tax charge – but equally, he/she might be exposed to a retrospective tax charge where none was previously applied; and,
b) the relevant individual could, notwithstanding the payment of such upfront tax charge, still be exposed to later UK and/or foreign tax charges on taking benefits from the QROPS.
The circumstances in which an individual can be liable to special UK tax charges on taking benefits from a QROPS are also being widened. Where the transfer is made on or after 6 April 2017, the individual will potentially be liable to such tax charges until such time as five full UK tax years have elapsed since the transfer was made (even where the individual ceased to be UK tax resident long before the transfer was made).
Anti-Avoidance – Image Rights and the NIC Employment Allowance
A topic which has been in the news in recent months is perceived avoidance involving the use of image rights whereby employers make payments under separate contractual arrangements to employment income. The Government has announced that new guidance will be released later this year to clarify existing legislative rules.
Although no new measures were announced, HMRC continue to monitor compliance around the NIC Employment Allowance as a consequence of businesses appearing to use avoidance schemes in order to avoid paying the right amount of NICs. Further action is promised if avoidance in this area continues.
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