Where a benefit is provided as part of optional remuneration arrangements, the rules for valuing the amount of the benefit treated as earnings have changed.
Optional remuneration arrangements are arrangements where the employee gives up the right, or the future right, to salary, or some other form of cash pay in return for a benefit.
The tax year ended 5 April 2018 is the first year that they must, in certain circumstances, be reported to HMRC on P11Ds.
This is new legislation and the guidance that HMRC have produced is so far quite limited. The information below is based on our current interpretation of the rules, however this may change as HMRC release further guidance and we start to see how the legislation is interpreted in practice.
When do the rules apply?
The rules apply to two types of arrangement:
- Type A covers an agreement to give up a right, or future right, to an amount of earnings or salary in return for a benefit. An example would be a salary sacrifice arrangement.
- Type B is one in which there is an agreement to receive a benefit instead of an amount of earnings or salary. An example would be a flexible benefits package, where an employee has a choice between a benefit and a cash allowance.
The rules apply to all benefits unless they are specifically excluded (see below). Benefits that could be affected include:
- Company cars (unless CO2 emissions of less than 75g/km)
- Company vans and commercial vehicles
- Employer provided accommodation (see separate section below)
- Work related training
When do the rules not apply?
The following benefits are excluded:
- Employer pension contributions
- Employer funded pensions advice
- Cycle to work schemes
- Qualifying employer supported childcare, such as childcare vouchers
- Ultra low emission cars (CO2 emissions of 75g/km or less)
In addition, the rules do not catch arrangements where no cash pay has been given up:
If an employee is provided with a company car or accommodation as standard, with no option to receive a higher salary instead, the new rules will not apply, the normal benefit in kind (BIK) rules must still be considered.
A flexible benefits package involves employees being granted a ‘benefit allowance’ from which they can select a range of benefits, such as private medical insurance, gym membership or cycle to work. If the employee can only vary the level of benefits within their benefit allowance and cannot adjust their cash salary up or down, then the new rules will not apply. The normal BIK rules must still be considered.
What is the tax effect of the new rules?
Where the rules apply, the BIK to be declared is the higher of:
- The BIK calculated in the normal way; and
- The amount of salary given up in return for the benefit.
The effect of this is that any income tax and employer’s NICs saving of providing the benefit instead of cash is removed. There may still be an employee’s NICs saving.
For benefits such as private medical insurance, where the salary given up is likely to be the same or similar to the value of the benefit, the new rules will have little or no tax effect.
For company cars and vans, the tax effect will depend on how the P11D benefit of the vehicle compares to the amount of salary given up:
- For cars with high CO2 emissions, where the P11D benefit exceeds the yearly salary given up, there will be no tax effect, as the amount to be declared will continue to be the P11D benefit.
- For cars with low CO2 emissions and commercial vehicles, where the P11D benefit is generally lower than the yearly salary given up, there will be an income tax and employer’s NICs increase, as the amount to be declared will now be the amount of salary given up rather than the actual P11D benefit.
- Cars with CO2 emissions of 75g/km or less are not affected by the new rules.
When are the new rules effective from?
Whilst the rules were introduced from 6 April 2017, transitional provisions mean that arrangements entered into before 6 April 2017 will be protected until the earlier of:
- The date on which the salary sacrifice contract ends, or is changed, modified, varied or renewed; and either
- 6 April 2021 for cars, living accommodation and school fees; or
- 6 April 2018 for other benefits.
Therefore, for the 2017/18 tax year it will only be necessary to declare new arrangements entered into since 6 April 2017 and pre-existing arrangements that have been varied during the year.
A variation includes varying any of the terms of the arrangement, such as changing the contract mileage associated with a company car. However, a variation will be disregarded if it arises due to reasons beyond the control of the parties, such as a company car being replaced due to accidental damage, or if it occurs in connection with a person’s entitlement to statutory payments, for example a salary sacrifice arrangement being suspended whilst a person is on maternity or sick leave.
How will the rules affect employer provided accommodation?
The rules will not apply where an employee pays rent for the property out of their net, after tax salary.
The rules will not apply where the accommodation is provided as standard, for example, where a nurse or on-call vet is required to live in the flat above the practice with no option to live elsewhere and receive a higher salary. Instead, the normal BIK rules must be considered. Further details on accommodation benefits are attached behind.
The rules will apply where accommodation is provided under a salary sacrifice arrangement (rent deducted from pre-tax salary) or where, on commencement of their employment for example, an employee has taken up optional staff accommodation and agreed to a lower salary.
This is the case even where the accommodation has historically been exempt on the basis that it was provided to an on-call veterinary assistant. Whilst the exemption still exists, it is effectively overridden where the new rules apply. The tax advantage for these employees will be limited to the employee’s NICs saving only going forwards.
The transitional provisions mean that the new rules only apply in respect of existing accommodation arrangements from 6 April 2021, unless the arrangement is varied or renewed before that date. A variation would include a rent increase or property move, however variations can be ignored if they arise due to reasons beyond the control of the parties, for example a fire or flood resulting in alternative accommodation being offered. New accommodation arrangements entered into after 6 April 2017 will be affected immediately.