The Finance Bill introduces legislation designed to remove the Income Tax benefits of Optional Remuneration Arrangements (OpRA). However, some question marks remain.
Who should read this?
All employers who provide Benefits in Kind (BiKs) or car allowances to employees, particularly those who operate salary sacrifice or flexible benefit arrangements. These changes will be of particular interest to those who work within payroll, tax, finance, HR and flexible benefit programme delivery.
All employees whose remuneration packages include salary sacrifice or flexible benefit arrangements.
Summary of proposal
The proposed changes are contained in clause 8 and schedule 2 of the Finance Bill and are designed to remove the Income Tax advantages that currently arise when certain non-cash benefits are provided as part of a salary sacrifice or flexible benefit arrangement.
Broadly speaking, the Finance Bill provisions do this by treating the taxable value of BiKs provided as part of an OpRA as the higher of:
It is important to stress that the changes affect more than traditional salary sacrifice – the new rules define an OpRA to be arrangements where:
Broadly speaking, where an employee has an option to receive cash or benefits, the new rules may be in point.
Benefits which are not provided as part of an OpRA will not be affected by the changes.
And the following BiKs are specifically excluded from the scope of the new rules and so will not be affected even if provided via an OpRA:
Key changes from the draft legislation
The publication of the Finance Bill and associated draft guidance has clarified that:
Notwithstanding that the Finance Bill has clarified several areas, the following issues still require some clarification:
The changes come into effect from 6 April 2017.
They are, however, subject to the following ‘grandfathering’ provisions (but see below regarding ‘variations’):
Employers and employees should exercise extreme care when dealing with grandfathered OpRA as any “variation” to the terms may lead to the grandfathering status being lost from the date of the variation and the benefit coming within the scope of the new rules from that date. Only variations required due to the following will not lead to grandfathering status being lost:
Likewise employers should be aware that a renewal of a grandfathered OpRA will not itself be grandfathered but will come within the scope of the new rules from the date of the renewal. This includes automatic renewals.
One of our primary concerns is that many employers will still not appreciate that the proposed OpRA legislation is wider than salary sacrifice and also impacts any arrangements where the employee can choose between cash and a benefit (e.g. company cars). There is a risk that many will continue to think that, as they do not offer traditional salary sacrifice, no further action is required by them.
In terms of action, the grandfathering provisions are clear that an OpRA, or a variation to an OpRA, entered into pre-6 April 2017 will be subject to the grandfathering provisions discussed above. Employers and employees therefore have a very short window in which to review and amend their various arrangements – of particular importance are arrangements involving company cars and accommodation given the extended grandfathering period.
We await further clarification regarding Life Assurance arrangements. If they are provided as “part” of a pension scheme, it is worthwhile reviewing the relevant documentation now to confirm that this is in fact the case. It is not unusual for these to be legally separate and distinct, notwithstanding that they appear to be bundled into a single offering.
Those employers payrolling BiKs provided via an OpRA agreed post-5 April 2017 will need to urgently update their systems and procedures to ensure the correct amounts are captured for payroll purposes.
Employers that do not payroll BiKs will need to update their systems and procedures dealing with the Form P11D process to ensure the correct amounts are captured.
The corresponding amounts of Class 1A NIC will also need to be collected following the end of the 2017/18 tax year and the Form P11D(b) completed accordingly.
A final key area for employers to consider is communication i.e. how the changes are communicated to their staff and indeed what the future of their employee reward proposition looks like as a whole. More can be found on this topic here on KPMG Employers’ Club (registration required).
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