PAYE Settlement Agreements – Key information for employers to know about the requirements

PAYE Settlement Agreements – Key information for employers to know about the requirements

Thu 26 Jul 2018

The PAYE Settlement Agreement (PSA) is an effective simplification enabling employers to pay tax and National Insurance Contributions (NIC) directly to HMRC after the end of the tax year on certain employee expenses and benefits without needing to inform employees and without the costs impacting on employee self-assessment tax returns.

How does it work?

A PSA works by giving employers the opportunity to report certain benefits and expenses directly to HMRC without needing to include them on an employee’s Form P11D or via payroll. Effectively, employers seek agreement from HMRC to have certain benefits and expenses included within their PSA. Following this and subject to HMRC accepting the application, the employer then submits a calculation to HMRC with these reportable costs and pays tax/NIC on a grossed up basis to HMRC by 19 October following the end of the tax year.

Typical examples of standard PSA items are:

  • gift vouchers provided to reward performance;
  • staff entertaining to celebrate good team results; and
  • non-qualifying relocation costs.

Up until 2017/18, it was necessary to renew the PSA each tax year which needed to be in place by 6 July following the end of the tax year but HMRC has simplified the process going forwards by only requiring the employer to enter into a PSA for 2018/19. This will then automatically apply to each future tax year until the PSA is no longer required or amendments are necessary.

Putting a PSA in place can therefore help make the reporting process more efficient, help with employee reward and engagement (given they do not suffer any tax/NICs impact) and ensure that HMRC compliance is appropriately managed.

What can be included?

There are three criteria for inclusion on a PSA:

  • Minor: There are no pre-set monetary limits to define the valuation of ‘minor’ and so objective judgement should be used to decide whether an item is minor in value. Occasional awards of non-cash gift vouchers are a common example.
  • Irregular: Again there is no pre-set definition but consideration should be given to the nature of the item, the normal frequency of its payment across the workforce and how often it was given to the individual employee. Expenses of a spouse occasionally accompanying an employee abroad are a good example of this type of item.
  • Impracticable: This condition relates to whether it is ‘impracticable’ for the employer to operate PAYE on that item, or to identify how much of a shared benefit is attributable to a single employee. A common example would be the bill from a staff entertaining meal for a number of employees where it is difficult to work out the exact cost for each employee that attended.

Sounds great but we have not put an agreement in place for 2017/18?

Whilst it is too late to obtain a new agreement for the 2017/18 tax year it is possible to submit similar computations as a voluntary disclosure of items that should otherwise have been included on P11Ds.

Unlike a PSA, HMRC may impose a penalty where a disclosure is made which relates to a failure to withhold income tax or Class 1 NICs. However, where an unprompted voluntary disclosure is made there be an opportunity to negotiate a penalty down to zero percent and demonstrate to HMRC that remedial actions have been implemented, thereby reducing the likelihood of further HMRC compliance activity.

Where HMRC undertakes a review and find liabilities, penalties will imposed and there are statutory minimum penalties based on the perceived type of behaviour. Therefore, taking this voluntary proactive approach (where a PSA has not been put in place) is recommended to manage risks and costs effectively.

Deadlines

This is often the greatest area of confusion for employers and the HMRC guidance is not particularly helpful in this respect.

The deadline for computations is set out on the employer’s specific PSA agreement and often stated as 31 July following the end of the tax year, although in some instances the agreement will instead state 31 August or another date. This is to help HMRC’s manage their PSA workload.

What should be noted is that 31 July or 31 August are not statutory deadlines. This means that if this stated deadline is not met there is no penalty or interest charged.

The statutory deadline is in fact 19 October for both payment and submission of the computation so, in practice, HMRC will accept computations up to this date. This news is often welcomed given the pressures on employers resulting from summer holidays, other deadlines and the often considerable work required to extract the relevant information for the return.

However, it should be noted that missing the 19 October deadline for submission of computations and payment of the tax and Class 1B NIC is likely to result in a contract settlement on the same basis as a voluntary disclosure (see above). Interest and penalties may then be charged too.

Don’t forget…

Although not applicable in 2017/18, from 2018/19 Scottish taxpayers will be subject to slightly different income tax rates following devolution and employers will need to factor this into the PSA computations when submitting a return.

However, it will be necessary to ensure Scottish higher rate tax payer are identified given the small divergence in tax band thresholds between Scotland and the rest of the UK for 40% tax payers in 2017/18.

Next steps

The PSA return is in theory relatively straightforward. However, identifying what costs are subject to tax and NICs and which need including in a PSA can be more complex, particularly following the recent introduction of the trivial benefit exemption. Our team can help you with all aspects.

Please contact our regional specialists for more information: