The rule changes that came into effect in April 2017 not only remove tax and NICs advantages from a wide range of benefits when provided through optional remuneration arrangements; they also change the chargeable value of the benefit itself, in some circumstances. This article focuses on benefit values under the new rules and their implications.
*Editor's note: In light of comments below several amends have been made to this article. If you have any other queries do let us know in the comments box below*
By now, hopefully, most payroll professionals and their agents will be familiar with the new term ‘optional remuneration arrangements’, or OpRA, that HMRC coined to refer to schemes where employers provide benefits in exchange for, or as an alternative to, cash pay.
The most common of such schemes are probably salary sacrifice arrangements. But it is important to realise that the OpRA rules cover any employer arrangement where an employee can choose between a benefit or cash, regardless of the individual choice made.
From April 2017, the tax and NICs advantages of providing benefits through an OpRA are largely withdrawn (there are exceptions for some benefits as well as transitional provisions). This means that the chargeable value of affected benefits must be processed through the payroll in order to report the employer Class 1A NICs due, where appropriate, and must be reported in P11Ds so that the tax is collected through tax codes. Alternatively, the tax can be collected through the payroll if the employer is voluntarily payrolling benefits.
A key aspect of the rule changes is identifying the chargeable value of the benefit, which is revised in some circumstances.
In August, HMRC updated the OpRA guidance in its internal Employment Income Manual, which is available on GOV.UK (indexed at EIM44000). The pages include helpful examples about identifying the chargeable value.
The chargeable value
Central to the definition of an OpRA is that the employee has the option of receiving cash or receiving a benefit. The cash option might be arranged as a reduction in normal remuneration, such as a salary sacrifice arrangement, or it might be an amount of cash added to salary, such as a cash allowance.
The amount of salary that the employee gives up in order to receive the benefit or the value of the cash allowance that the employee chooses not to take, is the amount foregone.
From April 2017, where a benefit is provided through an OpRA, the chargeable value is no longer necessarily the taxable value of the benefit under normal benefit rules. If the amount foregone is higher, then the chargeable value is revised and becomes the amount foregone.
For example, if an employer provides private medical insurance costing £250 to all its staff, with no cash option, then it is not an OpRA and the chargeable value of the benefit is £250. But if staff could choose £280 cash instead, then the scheme is an OpRA and the chargeable value is £280 because the amount foregone is higher than the cost of the benefit.
As another example, say an employer’s company car scheme offers a range of cars to reflect seniority with chargeable values from £2,500 to £8,000 and matching car allowances. Under the old rules, if the CEO decided not to take a high-end executive car but to set an example by taking a more modest ‘greener’ vehicle, he or she would be taxed on the value of the smaller vehicle: perhaps valued at £3,000. However, under the new rules, the CEO would be taxed on the generous car allowance that had not been taken: £8,000.
The revised chargeable values may well lead to changes in the choices that individuals make and the point was made during the consultation process that people could be discouraged from taking lower emission vehicles. Therefore, ultra-low emission vehicles (at or below 75g CO2/km) were added to the list of excluded exemptions. Others are employer pension contributions and advice, employer-supported childcare and workplace nurseries, and the Cycle to Work scheme.
If an employer provides a bundle of benefits in exchange for a single amount and the amount foregone for each separate benefit is not known, HMRC says “apportionment is to be made on a just and reasonable basis”. Apportionment may be necessary where benefits in the bundle are reportable under different P11D headings.
HMRC’s example is a package costing £500 that includes medical insurance, life assurance and gift vouchers that staff must sacrifice £600 of their salary for, where “it may be reasonable to apportion by reference to the cost to the employer of providing the underlying benefit”.
Using this example, if the medical insurance and life assurance together cost, say, £400 – 80% of the total cost – then it may be reasonable to report their P11D value for Box I as £480 – 80% of the sacrificed salary. The total reported values must equal the total amount forgone: £600.
Mixing Type A and Type B
HMRC defines a ‘type A’ OpRA as one where the employee gives up the right, or future right, to remuneration in exchange for a benefit (such as a salary sacrifice arrangement). A ‘type B’ OpRA is any OpRA that is not type A.
Where an employee receives a benefit under both a type A and a type B arrangement, the chargeable value is the sum of the value under each arrangement.
HMRC’s example is an employee who has the option of a company car or a £5,000 cash allowance (a type B arrangement). The employee chooses a model with a higher specification and agrees to sacrifice £1,000 salary to pay for the upgrade (a type A arrangement). The total amount forgone is £6,000 (£5,000 plus £1,000).
Under the previous rules, the taxable value of the benefit would be based on the list price of the model chosen and its CO2 emissions. Under the new OpRA rules, if that value is less than £5,000, the taxable value of the type B benefit is revised upwards to £5,000.
If affected benefits are offered under unaltered terms, then the effect of the rule changes is to require the tax and NICs due on the potentially revised chargeable value to be processed and/or reported. This may require notional pay elements to be set up on the payroll to report the NICs due and steps taken to ensure that the correct value is reported on P11Ds at the end of the tax year.
If the employer is registered for voluntary payrolling of benefits (or is payrolling benefits on an informal basis), then the benefits values need to be reviewed and changed if necessary. Note that HMRC has introduced a concession for the 2017-18 tax year to ensure that employers who are registered for voluntary payrolling of benefits do not need to report the value of benefits affected by the OpRA rule changes on P11Ds. Legislation will follow to update the voluntary payrolling regulations for 2018-19 onwards.
Employers should also ensure the changes, particularly revised chargeable values, are explained to staff when transitional provisions end in April 2018 (or April 2021 for cars and vans, accommodation and school fees). Note that the transitional provisions only provide protection from the changes for arrangements that individuals entered into before 6 April 2017; protection ends immediately if the arrangement is modified or renewed.
Software developer specifications for the 2017-18 P11D form show that various benefit value fields will have ‘or Amount Forgone’ or ‘or Relevant Amount’ added to reflect the revised chargeable value. Similarly, the P46 (Car) form for 2017-18 will have a new ‘Cash forgone’ field.
Given the withdrawal of tax and NICs advantages from most benefits, and the revised chargeable value, employers may decide to end or alter their benefit arrangements. Other factors should be taken into account, such as the recruitment and retention value of the remuneration package.
As is often the case with tax and NICs changes, the OpRA rules are more complex and wider in scope than originally expected when the government first expressed its concerns about the cost and fairness of salary sacrifice arrangements. HMRC’s guidance, first published in March only weeks before the implementation date, has been updated and expanded as the implications have become more widely understood.
No doubt we will discover and learn more as we go through a full tax year under the rules and experience the first year-end reporting, and best practice will develop. If there is one thing that payroll professionals and their agents are particularly good at, it is adapting to regular rule changes.
About Terri Bethel
Terri is lead technical material author for the Chartered Institute of Payroll Professionals.