Non-executives hit by new rules for PSAs
HMRC has amended the rules for making a PAYE settlement agreement again, and this time it affects non-executive directors in particular.
What is a PSA?
PAYE settlement agreements (PSAs) are statutory arrangements under which an employer can settle the income tax and national insurance liabilities on benefits in kind and expenses payments provided to employees and officeholders.
A PSA is an extremely useful vehicle for an employer that avoids passing on an unexpected, and potentially demotivating, tax charge to an employee. Where items are agreed with HMRC as being suitable for inclusion in a PSA, this will obviate the need for any reporting on the individual’s P11D.
What’s allowed in?
When HMRC agrees to a PSA, it is deviating from the strict legislative position that the tax charge and the accompanying NIC (either Class 1 or Class 1A) should be met through the P11D process. For this reason, HMRC is not permitted to agree to the inclusion of certain benefits in kind and expenses, for example:
- company cars and fuel benefits
- round sum allowances
The items that HMRC is permitted to agree to be included in the PSA must meet one of these criteria:
- minor (in terms of the value of the item), or
- irregular (in terms of the provision of the benefit or expense), or
- impracticable (to apply PAYE or apportion between the employees receiving the benefit)
Effect of the PSA
Whilst agreeing a PSA is attractive to an employer in terms of avoiding both the end-of-year P11D admin and uncomfortable conversations with employees, it comes at a cost. As the employer is meeting the employee’s tax liability, that in itself is a benefit in kind so the tax due on the benefit is grossed up based on the employee’s marginal rate.
As well as paying the grossed-up tax, the employer is liable to pay Class 1B NIC on the total of the cash equivalent value of the benefits and the grossed-up tax. This will mean that for additional rate taxpayers the cost to the employer will be more than 100% of the face value of the item.
Changes to PSA
HMRC changed the PSA process from 2018/19. Initial applications for a PSA are still made in writing to HMRC. The Revenue will then issue a P626 contract, which states that the employer will pay the tax and national insurance liability. Prior to 2018/19, the agreement had to be negotiated annually but now it remains in place as an ‘enduring agreement’ unless, and until, HMRC revoke it or the employer wishes to amend it.
From 2019/20 another change to PSAs in the public sector has been made that tax advisers should be aware of.
Until recently, HMRC allowed taxable travel expenses to be included in public sector PSAs in respect of normal commuting costs for Non-Executive Directors (NED). This was in spite of the fact that these expenses would be likely to fail all three PSA criteria:
- the annual costs are not likely to be minor;
- they are paid in respect of regular attendances at board meetings; and
- there is no problem in establishing these expenses and attributing them to particular individuals.
The Department of Business (BEIS) wrote to the bodies it oversees on 30 May 2019 including this instruction:
“Any payments made to non-executives and other office holders will now have to be paid through payroll, with tax and National Insurance deducted at source.
“For cases where BEIS is responsible for paying fees and expenses, the default position is that the individual NED/office holder will pay the tax and National Insurance on any taxable expenses.
“The policy sponsor directorate may choose to cover these costs but this is a decision for them and will need to be met out their directorate budget.
“For cases where BEIS is not responsible for paying fees and expenses, individual organisations need to ensure that they are tax-compliant.”
Affected public sector bodies have been asked to confirm they have actioned the change to their PSAs by 14 June 2019.
It is also worth reiterating that fees for NED roles in the public and private sectors are always required to be subject to tax and NI through the payroll, as this is income for the holding of an office so it cannot be invoiced and paid gross to the NED.