The payroll news sponsored by HRD & Payroll Solutions every week or so is researched and written up by Ian Congreave. The material is copyright to HRD & Payroll Solutions but they have kindly given permission for it to be reproduced regularly in PayPerShop.

Although great care has been taken in the compilation and preparation to ensure the accuracy of the news items made available by PayPerShop, Ian Congreave and "HRD & Payroll Solutions" cannot in any circumstances accept responsibility for errors or omissions or advice given. Subscribers and visitors should be aware that only Acts of Parliament and Statutory Instruments have the force of law and that only the courts can authoritatively interpret the law.

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Finance Act 2003

The Finance Bill has received Royal Assent and brings the following new measures into force:

• The intermediary (IR35) legislation is amended to apply to engagements where a worker personally performs, or is under obligation to perform, services for the client. As a result, work performed personally for the client is brought into scope of the legislation, not just work performed for the client's business. The change applies to services performed on or after 10 April 2003.
• No tax liability arises where an employee receives a payment towards reasonable additional expenses connected with the day to day running of the employee's home that are incurred by the employee when working at home under arrangements where the employee regularly works at home. Although not defined in the legislation, the Inland Revenue will accept that this exemption applies automatically if the payments do not exceed £;2 per week, £;104 per year. Employers will have to provide evidence that higher payments are reasonable. This new measure applies from 6 April 2003.
• The lower CO2 emissions threshold for company cars for the 2005/06 tax year will be 140 grams per kilometer.
• Various changes are made to the provisions for
  • share incentive plans, SAYE option schemes and CSOP schemes.
  • employee securities, and options to obtain such securities. See Taxation of employment-related securities, below.
  • the tax relief available for qualifying employee share ownership trusts.
  • restricting deductions for contributions by employers to third parties for the benefit of employees.
  • the making of PAYE Regulations in a range of new situations.

• The period of time allowed for an employee to reimburse the employer for tax due on notional payments is extended from 30 days to 90 days.
• The 10% supplement paid by Government on top of donations under payroll giving schemes is extended to 5 April 2004.

...back to 18 July 2003

Further Budget information

The Revenue published a set of Notes for Software Developers immediately following the Budget announcements, to provide clarification on their implications for payroll systems. The Notes contain useful guidance in the following areas.

Tax bands and allowances

The emergency tax code continues unchanged as 461L. There will be no general uplift of tax codes when the Budget changes take effect on the first payday on or after 15 June (i.e. week 11 or later). Any changes will be advised on form P6(T) or equivalent. The schedule for implementing tax code changes is as follows:

• before 15 June - apply tax code changes notified on form P6(T) dated 24 May or earlier
• on the first payday on or after 15 June - apply tax code changes on form P6(T) dated 25 May
• no forms P6(T) will be issued after 25 May until 15 June
• tax codes dated 15 June or later should be applied from the next payday as normal
• if there are any remaining "H" or "A" suffix codes at this time, contact the tax office
• the Budget Pack will include a new version of booklet E12 PAYE and NICs rates and limits and new tax tables SR + B to D.

Compulsory electronic payments

The Regulations to make electronic payment compulsory for large employers (i.e. those with 250 employees or more) from April 2004 will be published in June. They will include the following new provisions:

• The filing date for electronic payments will be later than the 19th of each month, to compensate for the cash flow advantage of cheque payments. This follows the lead already set by Customs & Excise for payment of VAT.
• Employers who are habitually late in making their electronic payments will have to pay a surcharge of up to 0.83% of their annual payments to the Accounts Office. This is equivalent to 10% of the employer's average monthly payments.

PAYE on notional payments

If employees receiving notional payments fail to repay any tax and NICs due to their employers within the new 90-day period, the existing rule requires the unpaid amount to be reported on form P11D at the year-end. In addition, the unpaid amount will also be subject to Class 1 NICs at the end of the 90-day period.
(Source: IR Notes for Payroll Software Developers)
...back to 18th April 2003

References to the Revenue's news releases and budget notes are provided at the end of each news item. Access to those documents is available at www.inlandrevenue.gov.uk/budget2003/index.htm . They may be downloaded individually or as a group.

Tax bands and allowances

The tax bands are confirmed as already announced in The Income Tax (Indexation) Order 2003, as follows:

• starting rate of 10%, on taxable earnings up to £;1,960
• basic rate of 22%, on taxable earnings between £;1,960 and £;30,500
• higher rate of 40%, on taxable earnings above £;30,500

Income tax allowances are confirmed as follows:

• personal allowance - unchanged at £;4,615
• personal allowance (age 65-74) - £;6,610, up from £;6,100
• personal allowance (75+) - £;6,720, up from £;6,370
• married couple's allowance (65+) - £;5,565, up from £;5,465
• married couple's allowance (75+) - £;5,635, up from £;5,535

Electronic payment

From April 2004, mandatory electronic payment of PAYE will be introduced for "large" employers. The intention is to "prevent the unfair exploitation of the current cheque payment rules, which can be used to delay transfers to the exchequer". However, the cash flow advantage, currently enjoyed by businesses that pay by cheque on the due date, will be built into the system and will not be affected by the change. A "large" employer is not yet defined but, if it is the same as that being used for mandatory filing of year-end returns, i.e. 250 employees or more, some 8,000 employers will be affected.
(Source: Budget news release PN6)

Company cars

As defined when the new method of taxing company cars using CO2 emission levels was introduced in April 2002, the levels of CO2 emissions that qualify for the minimum charge reduce by 10g/km to 155 for 2003/04 and again to 145 for 2004/05. It is announced that the qualifying level for the minimum charge will reduce for the 2005/06 tax year by 5g/km to 140.
(Source: Budget news release PN4)

Company vans

A forthcoming consultation on proposals for reform of the taxation of company vans was announced. This was presented as if it were a new initiative; in fact, the Chancellor made the same announcement as part of the 2002 Budget. The proposals will take into consideration environmental benefits, fairness and modern working practices. No indication has been given as to when any new provisions will take effect.
(Source: Budget Note REV BN1)

Homeworkers' incidental costs

With effect from 6 April 2003, payments that are made to employees who regularly work at home under agreed flexible working arrangements to cover their additional household costs will be exempt from any tax liability on those payments. Such payments are already exempt from Class 1 NICs.

However, in order to minimise the need for record-keeping, only payments that do not exceed £;2 per week (£;104 per year) will enjoy automatic exemption. Payments that exceed that threshold may still enjoy tax exemption, but employers will have to provide supporting evidence that the payments do no more than cover the additional expenses incurred by employees in carrying out their duties at home.
(Source: Budget Note REV BN3)

Gifts, awards and parties

The following changes to four minor tax exemptions will take effect as soon as the amending regulations are brought into force. The changes also apply for Class 1 NICs purposes.

• Long-service awards: the limit on the amount that may be spent on awards without incurring a tax charge is increased from £;20 to £;50 for each year of service. The qualifying conditions remain the same, i.e. that the employee must have at least 20 years of service and no award must have been given in the preceding 10 years.
• Annual Christmas and other parties: the costs incurred in putting on annual events are not taxable on the employees enjoying the benefit unless the annual costs per head attending the events exceed a statutory value. The limit is increasing from £;75 to £;150.
• Third party gifts: Gifts (but not cash) given to employees by third parties are not taxable if their value in a year does not exceed a defined limit and the statutory conditions are met. This limit is increasing from £;150 to £;250. The principal conditions are that the employer is not involved in procuring the gift and that the gift is not given in recognition of any particular services rendered by the employee.
• Cycling breakfasts: The limit on the number of employer-provided breakfasts that have no tax liability if they are provided on cycle-to-work days is being removed altogether. It is currently limited to 6 breakfasts in a tax year. Note that this does not mean that employers may provide tax-free breakfasts to employees whenever they cycle to work; the exemption only applies on designated cycle-to-work days.

(Source: Budget Note REV BN4)

Pensions earnings cap

As already announced in The Retirement Benefit Schemes (Indexation of Earnings Cap) Order 2003, confirmation is given that the pensions earnings cap is increased by statutory indexation from £;97,200 to £;99,000 from 6 April 2003. The application of the pensions cap is also confirmed as applying to employer and employee contributions to personal pension schemes, even though contributions are also limited by a percentage of earnings that is related to the employee's age.
(Source: Budget Note REV BN5)

Domestic workers

The intermediaries legislation, which imposes special tax and NICs rules to individuals who provide services through a service company, is extended to domestic workers such as nannies and butlers. Income received during 2003/04 for services rendered from 9 April 2003 onwards will be subject to the special rules if the individuals would be treated as employees if they were employed directly rather than through the service company.
(Source: Budget Note REV BN9)

Deductions for interest on overdue tax

Tax legislation does not permit interest incurred on overdue payments of tax, NICs, student loans etc. to an employer's Accounts Office to be deducted in computing income and profits for tax purposes. The same rules are to be extended formally to employers and contractors in the construction industry for accounting periods ending on or after 9 April 2003.
(Source: Budget Note REV BN10)

Employee Benefit Trusts

Where earnings are paid by someone other than the employer, e.g. in particular an intermediary such as an Employee Benefit Trust (EBT), the liability to account for and pay NICs lies with the secondary contributor, usually the contractual employer. Legislation is to be included in the Finance Bill to give effect to the proposals announced in November 2002 to defer employer's corporation tax deductions until a payment is made out of the EBT in a form that gives rise to a liability to income tax and NICs. This will not affect deductions that are allowable:

• for contributions under retirement benefit, personal pension or accident benefit schemes, or
• under the new statutory corporation tax deduction for employee share schemes.

(Source: Budget Note REV BN27)

Simplification of employee share schemes

The following are some of the measures that are to be introduced to simplify employee share schemes legislation and reduce the administrative and regulatory burden on employers. Readers that are involved in the administration of share schemes should read Budget Note 28 in full.
(www.inlandrevenue.gov.uk/budget2003/revbn28.htm)

• Currently, Company Share Option Plan (CSOP) tax relief is dependent on exercising an option after three years from grant and three years from a previous tax-relieved CSOP exercise. The second "three year rule" is to be removed to allow tax-free exercise of a CSOP option within three years of a previous tax-relieved CSOP exercise.
• Exemption from tax and NICs is to be extended to members of CSOP schemes who leave due to injury, disability, redundancy and retirement and the options are exercised within three years of the date of grant. This provision already applies under SAYE schemes and SIPs.
• The right to exercise SAYE options is currently lost where employees lose their job following injury, disability, redundancy, or retirement following a move between associated companies, usually after a takeover or a restructuring. The right of exercise will be retained in such circumstances.
• Under the current rules for Share Incentive Plans (SIPs), employees can only purchase partnership shares through deductions of up to £;125 or 10%, whichever is lower, from monthly salary. This rule is to be changed to permit employees to purchase up to the annual limit of partnership shares at any time within the year.
• Currently, an employee's total salary is used to calculate the maximum percentage that can be spent on partnership shares. This causes practical administrative difficulties because of monthly variations in overtime payments and bonuses. Employers are to be allowed to decide whether all or part of an employee's salary will be used when calculating the maximum percentage of salary to be spent on partnership shares.

Changes to CSOPs, SAYE schemes and SIPs will take effect from Royal Assent.

• When the value of shares or share gains under unapproved share schemes are subjected to PAYE tax and Class 1 NICs, there may be insufficient earnings for the employee to meet the full tax and NICs bill. The deadline for reimbursing the shortfall to the employer is to be changed from 30 days to 90 days from the exercise of the option. The change is effective from 9 April 2003 for tax purposes and from an appointed date after Royal Assent for NICs purposes.

(Source: Budget Note REV BN28)

Recovering Class 1 NICs

In the event of an under-deduction of Class 1 NICs for an employee, the current rules limit the rate of recovery in each earnings period to an amount that does not exceed the employee's regular contribution in that period. This limit on the amount that may be recovered in each period is to be removed and the period over which the recovery may be made is to be extended into the following tax year.
(Source: Budget Note REV BN28)