Taxing Times – November 2017

In this edition: 

  • Termination payments: a brave new world is coming!
  • The continuing ‘Making Tax Digital’ saga
  • Dates & deadlines
  • Pitch Perfect – why it should be all about the client (not about you!)
  • PAYE updates
  • What’s new in the world of tax?

Dodd & Co are working in conjunction with The Natwest Commercial Banking Team to deliver a Fraud Awareness Breakfast Seminar on Thursday 16 November and would be delighted if you could join us. Helen Potts from NatWest Fraud and Security & Jeanette Brown Partner of Dodd & Co will focus on; how to protect your business and stay safe online, the latest advice in spotting and preventing fraud and helping to keep your business secure as well as the real life aspects of GDPR. For further details and for booking information please click here.

Termination payments: a brave new world is coming!

Ask many a  company director/HR department/tax savvy employee about the “£30k termination payment exemption” and they will nod sagely and tell you that this is the £30k tax free payment that people are entitled to when they leave employment.  Unfortunately however, this is just not correct; the £30k tax free payment is not an entitlement and cannot be relied upon in every situation! It can sometimes apply, but not always, and to establish the correct tax treatment for a termination payment, there are actually a lot of details to flush out and analysis to do.  You have to read the contract, the staff handbook and other terms of employment; you have to identify what elements the payment is made up of; and you have to correlate the payments made to the contractual terms – and all that before you can determine if even some of it (not necessarily all of it, depending on what the different elements are) falls within the £30k ex-gratia limit!

Therefore, the whole area of termination payments can be quite difficult from a tax perspective, probably as a result of the £30k ex-gratia exemption being misunderstood and often misapplied.  In particular, payments in lieu of notice (PILONs) on termination have been quite contentious in HMRC’s eyes for many years, with employers applying the £30k exemption in circumstances where HMRC do not agree it applies (although HMRC have not always been successful in challenging the tax treatment).

Therefore, from 6th April 2018, the rules on termination payments are changing. So it will be a case of forget what you know (or think you know) and instead embrace a brave new world!

A short recap

Remember that under the pre April 2018 rules, only ex-gratia (non contractual) payments can benefit from the £30k exemption.  Contractual payments are always taxable and NICable as earnings through the payroll.  So contractual PILONs will always be taxable and NICable (as these are where the contract permits the employer to make a payment to “buy” a leaver out of their notice period early so it is part of the contract and not ex-gratia in any way). Non contractual PILONs are different as these can be made where there is nothing in the employment contract (or other documentation) which specifies that a PILON could be made, so the £30k exemption is available.

The changes

From April 2018, the idea is that all PILONs will be taxable and NICable regardless of whether they are contractual or non contractual.  This sounds like a fairly simple and straightforward change and quite easy to get one’s head round (whether or not you think it is fair).  But as this is tax, the actual implementation of the change and the legislation bringing it in is not quite straightforward!

The tax treatment of non-contractual PILONs will depend upon a new concept called the post employment notice pay (PENP).  PENP is the amount of salary that an employee would have received had they worked their notice period.  The PENP has to be calculated and then it is subject to tax and NIC through the payroll as earnings in the usual way. So if employers want the employee to leave before their notice period expires, they can of course still calculate and pay a PILON to “buy” them out early, but even if it is non contractual it will be taxable and NIcable up to the level of the calculated PENP (and of course taxable in full, as per the current rules, if it is contractual).

In addition, from April 2019, Class 1A NIC (paid by employers) will be charged on all termination payments to the extent they exceed £30k.  Previously, if a termination payment was made in excess of £30k, and the £30k exemption was available, the excess would be subject to tax but NONE of the payment was subject to NIC, either to employee or employer NIC.  From April 2019 employers will have to pay NIC on the amount over £30k (although the individual will not have to pay Class 1 employees NIC).  This is rather a sneaky change that is going to be rather costly for employers who make large termination payments, but note that the NIC change will take place a year later than the tax change to PENP, in 2019 not 2018 (it was originally going to happen at the same time as the tax change but just last week it was announced that the NIC Bill will be delayed).

The tax treatment of statutory redundancy payments remain unchanged, but note that redundancy payments still count towards the £30k exemption.

What this means for employers

In theory, the tax treatment should be simpler as the distinction between contractual and non-contractual PILONs becomes irrelevant.  But there is a new concept of PENP to understand instead and the mechanics of calculating the PENP are quite complicated.  The formula to calculate PENP is “basic pay” x “no. of days in post employment notice period”/365 days.  You then deduct any amounts of the termination package which have been taxed already (ignore normal salary, overtime, commission, holiday pay, and bonus entitlement here; the formula is only interested in the monies relating to the termination itself).  This leaves you with PENP. So one has to a) work out what is “basic pay”, b) work out what is the number of days in post employment notice period and c) remember to deduct the amounts of the package already taxed!

Therefore, employers will need to be careful to identify very specific information about the employee’s remuneration package in order to work out the PENP correctly.

Employers may also wish to consider ensuring that termination packages are agreed and paid before April before the PENP kicks in, in order to benefit from the current treatment of non contractual PILONs.

Making Tax Digital – Free software “not viable”

In talking about its Making Tax Digital project, HMRC has said that free software will be available.  But HMRC will not provide that software itself.  So the question is, with VAT reporting starting in April 2019 after implementation was pushed back a year due to time constraints, who then will provide the free software service?

Software providers have voiced their concerns about not being able to provide free services due to the costs which they will occur when making, maintaining and running the programmes required. For example, Xero has said that providing free programmes for Making Tax Digital quarterly reporting is not practical and should not be expected as the costs to build the software and provide a good service to taxpayers are too high.

So it looks as if MTD software will be available within the new time constraints, but there will be a cost attached to it.

If you want to get ahead of the game and look at your digital options early contact our Cloud Accounting team on 01228 530913 or 01768 864466 to arrange your free consultation to discover how it can help you and your business. 

Pitch Perfect – why it should be all about the client (not about you!)

I read a really interesting article in a business magazine produced by a famous airline recently (no, not Ryanair!)  It was interesting because it struck so many chords, and not necessarily in a good way! It was a tongue in cheek look at a hypothetical company which couldn’t understand why it didn’t win new clients when it made a pitch. The story went that nobody at the company (except the most junior member of the team) had put any effort into the pitch.  Nobody had thought about what they were going to say or how they were going to say it, or even what the client’s issues were and how they could help (which was sort of the whole point of the pitch!)  In the end, the team spent the majority of the pitch talking about how big THEIR company was, how many well known/large/successful clients THEIR company had, how many offices THEY had – note they said nothing about the prospective client in front of them! They didn’t address the client’s issues or talk about how they could help.  In essence, they wittered on, and relied on their size and the success of their other clients to show how good they were.  Only the junior member of the team had thought about what the client might actually be interested in (some proposed solutions and ways of working together) but he got bumped from the pitch because they ran out of time…obviously…because they were too busy talking about themselves. Unsurprisingly they didn’t win the new client.

The moral of the story (and why I am telling you) is this; if you want to win clients (and keep them of course) you need to make it all about them. Not all about you!

At Dodd & Co we pride ourselves on client service – your problem is ours and your success is very important to us.  So for accountants who take a different approach, talk to us.  Please contact Alison Johnston or Claire Philips if you would like to know how Dodds can work with you.

Dates and deadlines for your diary

31 December 2017

Corporation Tax: company tax returns for accounting periods ending 31 December 2016 should reach HMRC.

Accounts: Private companies with 31 March 2017 year ends must file their accounts with Companies House.

PAYE update

Overnight subsistence allowance for lorry drivers

Those in the haulage business will be well aware that there are industry approved scale rates with HMRC under which expense payments can be made to employees tax and NIC free.   It was always the case that these industry scale rates could be paid without prior “approval” from HMRC.  However, there were some wider changes to dispensations and scale rates generally and HMRC have updated their guidance to say that employers must get an approval notice not only for bespoke, non-industry specific allowances, but also for industry scale rates.  The RHA have lobbied against this change but HMRC remain unmoved.  So what does this mean for employers?

Where the employer is satisfied that the employee unavoidably incurred expenses as a result of a night spent away from home and their permanent workplace, HMRC accepts that a payment of 75% of the allowable figure (currently £34.90 per night) does no more than reimburse the expense incurred when the driver uses their sleeper cab overnight. The amount paid should not exceed a reasonable reimbursement of evening meal, breakfast, washing facilities and upkeep of bedding in the cab.  Employers should apply for an Approval Notice in order to continue paying their lorry drivers the overnight subsistence allowance free of Income Tax and National Insurance.  Note that although the legislation requires that the employee claiming industry scale rates has to have incurred some spend when they were away on work duties , it does not say that the entire scale rate has to be spent.  Employers will have to confirm that they have a procedure in place to check employees actually did incur and pay some expenses and will need to keep evidence of the procedures and checks they undertake to make sure that receipts are obtained and allowances are only paid to employees who are entitled to them.

If operators wish to pay in excess of the Industry Scale Rate they will need to apply for a Bespoke Agreement instead.   This will require undertaking a sampling exercise to obtain receipts from employee to demonstrate to HMRC the amount of the bespoke scale rate to be agreed upon.

The approval will last up to 5 years.

Changes for student loan borrowers

HMRC has confirmed that the Plan 2 repayment threshold will rise from £21,000 to £25,000 from 6 April 2018.  The £21,000 repayment threshold for Plan 2 student loans was to be fixed until 2021. The threshold change comes after the Prime Minister announced changes to the student finance system at the recent Conservative party conference, which is widely seen as an attempt to attract young voters.

The current threshold for 2017-18 for Plan 1 is £17,775 and for Plan 2 is £21,000 and the Department for Education have confirmed that from 6 April 2018 the threshold for Plan 1 loans will rise to £18,330 and Plan 2 loans will rise to £25,000.

This figure will apply to all current and future borrowers for whom employers make Student Loan deductions.

More changes may be on the way as the government says it is looking at the entire student finance system over the coming months.

Rights for bereaved parents

The Parental Bereavement (Leave and Pay) Bill was formally introduced to Parliament in July and the bill was to have its second reading debate on Friday 20 October 2017.

When the bill receives Royal Assent and becomes an act of law, it will amend the Employment Rights Act (ERA) 1996 to entitle parents who lose a child (under 18) to two weeks of statutory parental bereavement leave.

Currently the ERA gives a “day one” right for an employee to have ‘reasonable’ time off work to deal with an emergency, such as a bereavement involving a dependant. ‘Reasonable’ is not defined and will depend on the situation. An employer does not have to pay an employee for this time away from work but many employers offer paid special or compassionate leave.

Only employees with at least 26 weeks of continuous service will be entitled to statutory parental bereavement pay, as long their normal weekly earnings for the period of 8 weeks ending with the relevant week are not less than the current lower earnings limit.

All employees, regardless of length of service, will be entitled to two weeks of statutory parental bereavement leave.

Too afraid to be sick

According to research reported by HR News, almost a quarter of UK workers – around seven million people – say they would only take time off work if they were hospitalised and had no other choice.

Nine in ten (89%) UK workers say they’ve gone into work when feeling ill, a proportion which is virtually unchanged compared to 2016 (90%), suggesting employers’ efforts to improve wellbeing are failing.

The research revealed some of the key reasons why employees have come into the office when ill:

  • 69% said “even though I felt unwell, I didn’t think it was serious enough to warrant a day off”
  • 34% said “my workload is too great for me to have time off, even if I feel unwell”
  • 22% said “I worry about the financial implications of taking time off”
  • 12% said “other colleagues/senior members of staff make me feel guilty for taking time off even if I’m ill”
  • 11% said I don’t feel secure enough in my job/I feel too threatened by the risk of redundancy to take time off for illness

What’s new in the world of tax?

In “Deep” trouble – rock band’s accountant banned

Deep Purple’s accountant Dipak Shanker Rao, who worked for the band for 20 years, has been banned from providing professional services for 11 years after ‘borrowing’ over £2m of the band’s earnings without permission.

BBC stars face tax bills after actor loses case

Actor Robert Glenister has lost a court battle with HMRC over NI contributions. For ten years, Glenister’s BBC earnings were paid to his Big Bad Wolff company, meaning he cut his tax bill from 45% (income tax rates) to 20% (corporation tax rates), but a London court ruled he should have been paid as a full-time employee. He will now have to pay £147,547 in backdated NIC.

Spy scandal engulfs Vatican auditor (No, it’s not a new Dan Brown plot line!)

Police have accused an auditor hired by the Vatican to clean up its accounts of spying on senior prelates. Libero Milone, 69, who previously ran Italian operations for Deloitte, was appointed in 2015 to shed light on the Vatican’s secretive bookkeeping. But he resigned in June and said last month that he had been ousted because he found out too much…

Director fakes death to avoid disqualification

Bradley Trevor Silver, also known as Bradley Silva, has been disqualified from acting as a director for 14 years.  In the days prior to the disqualification hearing, the Insolvency Service’s lawyers were contacted by “Adam Solomans”, who claimed to be a friend of Silver’s, informing them that Silver had committed suicide. He insisted Mr Silver had died in a car crash and he stopped responding to emails.

In her Judgement, Registrar Derrett said that she did not accept that Mr Silver had died, and that, in all probability Mr Silver and Mr Solomans were one and the same.  Commenting on the disqualification, Cheryl Lambert, Chief Investigator at the Insolvency Service, said: ”This is one of the more bizarre cases of dishonesty and misuse of Limited Liability I have ever come across. That Mr Silver appears to have tried to fake his own death through suicide in order to avoid disqualification is disgraceful.”

What tax receipts tell us about Britain’s four nations  

A study by HMRC shows that the proportion of tax paid by the four regions of the UK has barely changed in 20 years. But there are some national traits identified: tax receipts show Northern Ireland is drinking more than everyone else, with Welsh alcohol consumption down; smoking has waned in popularity with successive tax hikes now putting smokers off. Finally, corporation tax receipts show Northern Ireland businesses are still paying less than they were pre-crash, while receipts have now reached or surpassed pre-crash levels in England, Wales and Scotland.

Accountancy safety choice

Chelsea midfielder N’Golo Kante has revealed he trained as an accountant in his teens, as a back-up plan if his football career failed to take off. He did two years of study as an accountant after his baccalaureate at the age of 18.

Motivational thought of the month:

Tax joke of the month

Q: Who makes the best detective – Sherlock Holmes or a tax accountant?

A: The tax accountant – she makes more deductions!

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