HMRC has published its summary of responses to the consultation, ‘National Minimum Wage workers: Travel and subsistence expenses schemes’ that was published in February of this year. The consultation was initiated in response to the practice of some Employment Businesses and umbrella companies of using travel and subsistence payments as part of a worker’s National Minimum Wage (NMW).
Typically, such schemes involve a worker sacrificing from their gross pay, a sum equivalent to the travel and subsistence payments paid by the Employment Business or umbrella company. When implemented correctly, no PAYE and NICs are payable neither on the salary sacrificed nor on the travel and subsistence expenses.
NMW legislation and tax/NIC rules treat expenses paid by the employer for travel to a temporary workplace in different ways. For NMW purposes, such expenses are treated as not being in connection with the worker’s employment and so counts as pay. In contrast, these expenses are not included as pay for tax and NIC purposes as they qualify for tax relief.
The Government believes this practice exploits low paid workers and has decided to amend the NMW regulations so that temporary workplace travel expenses paid to an employee will not count as pay for NMW purposes. The revised legislative clause(s) will take effect from 1st January 2011 to allow employers time to make necessary changes to systems and processes.
‘Improving the operation of PAYE’ is the subject of a discussion paper recently published by HMRC. PAYE has been with us for 66 years and costs HMRC £1 billion to administer but the Government want to reduce these costs further and also reduce employer’s costs by making the system easier to manage.
The paper proposes two solutions, Real Time Information and Centralised Deductions. Under Real Time Information employers paying electronically would send HMRC details of an employee’s pay, tax deductions, NIC and student loan repayments, along with information about the employee’s identity, at the point that payment is made to the employee. HMRC believe the benefits of such a system are:
Simplification of the P45/P46 procedures when people change jobs;
Substantially reduced and simplified end of year procedure for employers as information would have been provided continuously throughout the year;
Improvement of the benefits and tax credits system through streamlined administration and reductions in fraud, error and overpayment.
Employers would still remain responsible for the calculation and deduction of tax, NIC and student loan repayments.
Following on from Real Time Information, HMRC propose a further radical step, Centralised Deductions. This option would pass the responsibility for doing the PAYE calculations away from the employer to HMRC. The idea is that the employer would send HMRC the gross payment through the electronic payment system to a central calculator where the deductions would be calculated automatically. HMRC would then send the resulting net payment to the employee’s bank account and the deductions paid directly to the Treasury.
As employers would no longer be responsible for calculating the tax, NIC and student loan deductions, there would be no need for tax codes thereby making life simpler for individuals.
Information about deductions may not, however, appear on an employer generated payslip. Instead, individuals could be given access to their consolidated tax account which would show how deductions have been calculated.
HMRC is also interested in receiving suggestions as to how the reporting of benefits-in-kind could be simplified using Real Time Information.
The closing date for responses to the consultation document is 23rd September 2010.
Whilst proposals to make life easier for both employers and employees alike are to be welcomed, is more Big Brother the answer? HMRC does not have a particularly impressive track record when it comes to IT implementation and given that Government departments are having to reduce spending by up to 25% will it really have the resources to provide advice to employers when the questions come flooding in?
Real Time Information certainly has merits and is worthy of further exploration but Centralised Deductions may well be a step too far for many.