Employment Taxes

Termination due to illness Tax and NIC exemption
Relevant to public and private sector

Most people are aware of the £30,000 income tax exemption for certain employee termination payments.

However, it is possible to obtain advance HMRC clearance for much larger amounts if the leaver’s compensation is for an illness or disability. An employee who is forced to retire early due to illness might receive tax free compensation of say £100,000, potentially saving £50,000 income tax and £13,800 employer NICs.

Careful planning is required to ensure HMRC’s requirements are met.

Elysian has recently successfully negotiated ill-health clearances with HMRC.
Please contact Robin Woodhouse for more information.

HMRC Risk ratings (Relevant to all public sector)

All large employers are currently being assessed by HMRC to establish whether they are considered to be low, moderate or high risk entities in terms of their taxation position. A low risk rating is desirable, as it will result in a lower level of HMRC intervention in the future. This presents an opportunity to work with public sector bodies to review all their policies and procedures in the employment tax area.

New penalty regime (Relevant to all public sector)

With effect from 2008/09 onwards, HMRC will seek penalties on unpaid tax and National Insurance (and other taxes) according to a sliding scale depending on whether the error occurred as a result of innocent error, carelessness or deliberate understatement. Significant abatements are available for voluntary disclosures thus presenting an opportunity for public sector bodies to consider whether they have issues they wish to disclose to HMRC now, which could save considerable penalty charges rather than waiting for a review by HMRC where penalty charges would be far higher.

Termination payments (Relevant to all public sector)

It is an often mistaken belief that a £30,000 tax exemption applies to all payments made on termination/redundancy; however, this is not necessarily the case and great care should be taken in such cases, especially where these include any element of payment in lieu of notice. Careful planning of termination packages can save considerable amounts of tax for employees and significantly reduce Employer’s National Insurance charges.

Employment status (Relevant to all public sector)

Public sector bodies engage many thousands of self-employed individuals each year and often these are on terms that are tantamount to employment thus creating a considerable risk in terms of underpaid tax/NIC. This is the most common employment tax-related issue that is raised by public sector bodies. However, careful consideration and planning can significantly reduce the risk faced in this area. Certain categories of workers are automatically subject to Class 1 National Insurance Contributions, that is, employee’s and employer’s contributions, even if they are deemed to be self-employed under general principles. For example, anyone categorised as a teacher in an educational establishment is liable to Class 1 NIC, which could include sports coaches and peripatetic music teachers brought in on an occasional basis. This could also apply to Further and Higher Education colleges engaging part-time lecturers. Additionally, schools must by law appoint School Improvement Partners (SIPs) to work alongside the head teacher. As this is a post created by statute, the SIPs are deemed to be office holders and must be subject to PAYE/NIC as if they were employees. Many local authorities seem to have overlooked this. Housing Associations are potentially affected where non-executive directors – increasingly used in this sector – are engaged on a self-employed basis. As office holders, the PAYE/NIC regulations apply to these individuals.

Equal Pay (Relevant to local authorities)

There are some local authorities that have not finalised their equal pay negotiations with their employees under the Single Status requirements. Where compensation payments are still to be made, there is an opportunity to negotiate composite tax rates with HMRC that are favourable to local authorities.

Wardens in Residential Housing Schemes (Relevant to housing associations and local authorities)

For many years accommodation provided to wardens in residential housing schemes has been exempt from a benefit in kind charge provided that the warden was on call outside normal working hours. However, the terms of employment for many wardens have changed as a result of the Working Time Directive restricting the hours that may be worked. As a result, the basis for the exemption has been removed in many cases and HMRC is now seeking to tax the accommodation provision. Notwithstanding this, there are opportunities to mitigate the extent of any liabilities that may arise.

Construction Industry Scheme (CIS) (Relevant to all public sector bodies)

Whilst many non-construction businesses in the private sector are no longer required to operate CIS, public sector bodies spending in excess of an average of £1m per annum on construction operations must still operate the scheme in full. This creates compliance issues in terms of monitoring the operations that are included within CIS, verifying the status of the contractors and making the monthly returns to HMRC. Additionally, great care should also be taken in terms of the employment status of subcontractors, especially those engaged on a labour only basis.

Provision of vehicles (Relevant to the emergency services)

Fire and police authorities, as well as NHS Ambulance Trusts, provide vehicles to certain members of staff that are not categorised as “company” cars in the conventional sense, because of modifications made to the vehicles, e.g. two-tone sirens, flashing lights. As a result, the private use of these vehicles is taxed under the rules regarding the provision of assets. These are complex and appear to be applied inconsistently by HMRC. Therefore, there is an opportunity to agree a basis for taxation which reduces an individual employee’s tax charge and the National Insurance charge to the employer.

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