13.07.11 Aspire issue response to HMRC’s Pay Day by Pay Day Tax Relief Models Statement

Response to HMRC’s Statement dated 11 July 2011

Pay Day by Pay Day Tax Relief Models

HM Revenue and Customs (HMRC) issued a statement on 11 July 2011 relating to what it described as a “pay day by pay day tax relief model”.  

On the face of it, the statement appears to be a weak attempt at clouding what is a genuinely available by reference to current legislation and case law, in order to prevent a leakage of tax revenues at the expense of the most vulnerable workers in our society – the low paid.        

National Insurance Contributions (NIC’s)   

At the outset, we wish to point out that the statement contains a glaring inaccuracy in connection with NIC’s.  We duly contacted HMRC’s policy division on the day of its release in an attempt to correct the inaccuracy and have been promised a response “in due course”.

Briefly, the inaccuracy concerns the disregard from NIC’s which is available for travelling expenses (Regulation 9 Schedule 3 Social Security (Contributions) Regulations 2001).  HMRC states that this regulation “provides that payments made by the employer to the employee to cover certain travelling expenses incurred by the employee can be disregarded in the calculation of earnings for National Insurance purposes…….”  

The regulation itself makes no reference to the fact that the employer is required to make a payment.  In fact, it clearly states that;

“any specific and distinct payment of, or contribution towards, expenses which an employed earner actually incurs in carrying out his employment”  shall be disregarded from NIC’s.

It follows that in the event that an employee incurs a qualifying business expense it is not

“earnings” as it is not “remuneration or profit derived from the employment”.  

In his judgement in the recent case involving Cordant plc, Judge Parker confirmed the position in relation to expenses to be as follows;

“He or she cannot perform the job without incurring them. Such expenses, therefore, may not fairly and reasonably be treated as forming part of the worker’s remuneration, or the pay that he or she would otherwise take home and could otherwise apply to current consumption or saving and so should not form part of the amount on which income tax and NIC are charged. It does not matter whether the worker has paid the expenses (he deducts the expenditure from chargeable income), or the employer has reimbursed the worker for the expenditure, or the employer has paid the expenditure on behalf of the worker (in the latter cases, the amounts received or paid do not form part of the chargeable emoluments of the employment, or if they did, they would be immediately deductible as legitimate expenses of the job.   

The Judge clearly saw the proposed amendment to the NMW Regulations as bringing the method of computing income for National Minimum Wage purposes into line with that adopted for income tax and NIC purposes.

In relation to taxation, HMRC continually fails to explain why there is no facility to grant tax relief on a weekly or monthly basis preferring to suggest that the benefit of tax relief for expenses is enjoyed at the end of the tax year and that there is no statutory framework for employers to operate the re-claim process. 

This statement fails to take account of the fact that coding restrictions apply on a weekly or monthly basis and that the proposed “Real-Time Information” (RTI), effective from April 2013, aims to ensure that the correct amount of tax will be paid “in year”.

The statement is further undermined by the consultation document “Integrating the operation of income tax and National Insurance contributions” which was published this week.    

This document seeks evidence on the alignment between tax and NIC’s and states;

For decades, we have operated income tax and NICs as two fundamentally different systems with different periods and bases of charge. The resulting anomalies impose costs and complexity on employers, and cost the taxpayer through the administration burden on HM Revenue & Customs. We believe that greater integration of the two systems has the potential to remove economic distortions, reduce burdens on business, and improve fairness across individual earners.   

Conclusion

It is over six months since the judgement in the Cordant case and HMRC has come up with what can best be described as a vain attempt in justifying its standpoint against what is clearly available by reference to the legislation and current case law.  Such justification has just one aim – the protection of HM Treasury revenues at the expense of low-paid workers.  

In its own conclusions, HMRC invited those operating the pay day by pay day relief models to “consider whether your business model is compliant with tax and NIC legislation”.  It adds that “if you are in any doubt, you are recommended to seek advice from a professional adviser or HMRC”.  At Aspire, we are able to provide you with a robust supporting technical argument supported by reference to an opinion from leading counsel, that such relief is available for genuine business expenses incurred by employees.  

We suggest that the HMRC statement falls well short of suggesting that employers should cease using such arrangements and there is certainly no warning concerning possible retrospective action.

Using carefully selected phrases such as “HMRC understands that…” Information obtained by HMRC thus far indicates”…… might just suggest that HMRC is far from confident that it has got the technicalities right.  Indeed, with a GLA Board Meeting scheduled for this week, it had to produce something to justify comments made in the GLA Brief which appear to have been prompted by HMRC.

 

Aspire Business Partnership LLP

July 2011