The CIPP's Samantha Mann responds to the consultation to simplify the process of agreement between the employer and HMRC on the working of a PAYE Settlement Agreement and examines the wider payroll landscape.
Policy and legislative development as a result of recommendations made in the name of simplicity and transparency can quite often leave the employer and their agent scratching their heads to find any obvious benefits to be had.
In 2016 two things happened that have led us to this point of discussion today – two things that at first glance appear to have no correlation could, in fact, have significant factors in common.
In their spring report, the Low Pay Commission (LPC) recommended that “… the government… considers introducing a requirement that payslips of hourly‑paid staff clearly state the hours they are being paid for… which should impose little new burden.”
In the summer, HMRC launched a consultation looking to simplify the process of agreement between the employer and HMRC on the working of a PAYE Settlement Agreement (PSA). Consultation built on recommendations made by the Office of Tax Simplification (OTS) in its second report from their review of employee benefits and expenses where it had observed: “there should be no need in this era of self assessment to seek HMRC prior approval for what can be included in a PSA”
Two very different recommendations, one seeking transparency and the other simplification and modernisation.
PAYE Settlement Agreements (PSA)
Introduced in the 1990s, PSAs are a statutory agreement that allows for an administrative easement for both employers and HMRC which allow employers to settle, in a single payment, the income tax liability on certain benefits in kind (BiKs) and expenses payments. Employers become liable for the income tax and class 1 NICs payable and employees are relieved of liability on the benefits and expenses included in the agreement.
To be included within PSA items should be minor, (as in cost) or provided or paid on an irregular basis or they should be payments that create impracticability in calculating income tax deductions for each employee.
In short, the consultation paper in 2016 proposed to remove the need for employers to agree with HMRC which items can be included in a PSA instead, employers would assess whether items are eligible for inclusion in a PSA return by reference to the legislative rules and guidance together with:
- removal of the requirement for an upfront annual agreement between employers and HMRC as to what will be included in the PSA that year
- exploration into whether it would be cost-effective for the process to be ‘digital by default’
- remove the requirement for ‘minor’ items currently found within the PSA criteria.
Fast forward to 2017/2018, we know that ‘minor’ remains within the definition.
The concept of a digital PSA service was welcomed and in the summer of 2017 the CIPP policy team hosted a roundtable that saw members meet with HMRC analysts who were in the discovery phase of development to explore the pinch points for employers, looking to the P626 and the PSA1 process together with consideration of the impact of an employer’s internal processes.
This research sought to reveal how a digital service could improve the administrative process of PSA administration for both the employer and HMRC.
Draft regulations were recently published on 6 February 2018 which looked to make amendments that will permit digital processing of applications, without the need for agreement with an officer of HMRC, in the future and as the explanatory memorandum confirms this will only be the case if and when digital processes are introduced.
From that, we now know that agreement with an officer will remain in place but not as before. The significant change brought in with the regulation has been the removal of the need for an annual agreement to be made between the employer and HMRC. Instead, there will be an ‘enduring agreement’ which once made will remain in place unless it is varied or cancelled by either the employer or HMRC.
The enduring agreement appears to respond to feedback from earlier consultations that made clear that for many employers, albeit not all, their PSA agreements remained constant in terms of the annual content and so annual renewal was an unnecessary burden. These employers should see a saving on administrative burden.
However, for employers who experience regular fluctuations and change within the detail of their PSAs now would be a good time to review past agreements and consider what should be included in the first ‘enduring agreement’ so as to minimise the need for an annual variation.
The Employer Bulletin informs us there will be a delay in the issue of P626s for 2018/19 until consultation outcome is confirmed.
The final regulations will also be amended to take account of the final impact resulting from changes to Scottish tax rates and thresholds.
Throughout consultation and in the earlier research by the OTS, stakeholders have made clear how important good guidance is to the ensuring clarity and a smooth PSA administration and in their response, HMRC has agreed and we have been assured that “new guidance will be published in the PAYE manual in due course”.
I’ve left myself little room to discuss how The Employment Rights Act 1996 (Itemised Pay Statement) (Amendment) Order 2018 (ERA) will impact employers and their agents as from 6 April 2019, and indeed now that the order has been laid and we know how BEIS (The Department for Business Energy & Industrial Strategy) has responded to the recommendation of the LPC, there are many questions as to exactly how BEIS intend this order to be enacted by employers and their software developers.
The order amends section 8 of the ERA to add to the particulars required within an itemised pay statement to also ‘contain information regarding the number of hours worked by the employee for which they are being paid, but only in situations where the employee’s pay varies as a consequence of the time worked.
Additionally, we see in The Employment Rights Act 1996 (Itemised Pay Statement) (Amendment) (No.2) Order 2018 an additional change that extends the right to receive an itemised pay statement, together with the ‘associated enforcement provisions’, to all workers and not just employees who work under a contract of employment.
Questions abound and with the exception of the explanatory notes and impact assessment we currently have nothing further than an expectation that… new guidance will be published in due course.
Itemised pay statements for ‘time-work’ workers are just one small area of the subjects covered in the government response to Matthew Taylor’s review of modern working practice in their Good Work paper (and subsequent consultations) and I look forward to discussing further details next month.
Only time (and much commentary) will reveal if modernisation, simplification and transparency are achieved with these latest changes. Meanwhile, I look forward to catching up with you next time.
About Samantha Mann
CIPP senior policy and research officer