Is it time to review your payroll operations?
If you are a business owner and offer your employees benefits in kind, you will be familiar with forms P11D. These are required to declare all benefits provided and to allow HMRC to calculate any additional tax due. Small and medium sized businesses will typically submit this information to HMRC using the Online End of Year Expenses and Benefits Service, an interactive PDF service operated by HMRC. However, the Online End of Year Expenses and Benefits Service is no longer available for 2021/22 submissions. This article explains what the service was, together with the changes, with details of what this means for SME payroll operators. Now may be a very good time to overhaul your business payroll processes for the future.
Understanding the Online End of Year Expenses and Benefits Service
Employers used to have three ways to submit their forms P11D electronically. They could either use appropriate payroll software, the HMRC PAYE Online service (for submissions of up to 500 employees) or use the Online End of Year Expenses and Benefits service (for submissions of up to 150 employees).
The Online End of Year Expenses and Benefits Service was very convenient, because it allowed SME payroll operators to easily create electronic P11D forms for employees.
Would you cut salaries by 20% through salary sacrifice?
The recent decision by one London law firm to enforce a rule that staff wanting to work from home full time should accept a 20% pay cut was met with some controversy. It will mean that a junior lawyer for example, on a salary of £90,000, will see that figure reduced to £72,000 for the benefit of working from home every day.
Whilst this is a salary sacrifice in return for the benefit of working from home, there are also salary sacrifice schemes that replace the amount sacrificed with something else, in which case the situation is not as bad as it initially sounds. This is because salary sacrifice can reduce a person’s marginal rate of tax whilst providing other benefits.
Given that personal allowances have not been increased and the rate of national insurance contributions (NICs) increased from April 2022, more people have been pushed into higher tax brackets and are paying higher taxes. Anything that can mitigate these effects by reducing gross salary can help to minimise tax rates in real terms.
Understanding how salary sacrifice works
Salary sacrifice is the exchange of salary for a non-cash benefit, for example, pension contributions, childcare vouchers, a cycle to work scheme or a company car.
The advantage of using salary sacrifice as a method of reducing employee’s earnings is that employees can save on tax and NICs and employers can save on employers’ national insurance contributions. Of course, it is necessary to look at whether a tax liability arises on the benefit provided in place of salary.
The best ones to consider in order to reduce tax liabilities are as follows:
- £500 annual allowance for employer funded pensions advice;
- Workplace car parking vouchers;
- Travel season tickets;
- Mobile phones and tablets;
- Childcare vouchers / employer subsidised childcare;
- Higher education e.g. MBA courses;
- Cycle to work schemes;
- Ultra-low emission company cars (below 75g/km emissions);
- Beneficial company loan (up to £10,000).
If you are considering whether or not to introduce a salary sacrifice scheme for your employees, it is worth taking some specialist tax advice beforehand, because every situation is unique.
Important changes to R&D tax credits scheme
Research and Development tax relief has become one of the UK’s most successful tax advantaged incentives for companies. Government figures place the total number of R&D tax credit claims for the year ended March 2020 at 85,900, an increase of 16% from the previous year. In financial terms, the estimated total amount of R&D tax relief support claimed for the year ending March 2020 was £7.4 billion, an increase of 19% from the previous year. This corresponds to £47.5 billion of R&D expenditure, 15% higher than the previous year.
Recent Budgets have attracted speculation that the R&D tax credits scheme would be axed, and whilst this has not happened, the R&D landscape has changed significantly this year. Guidance to the legislation was published in December 2021 by HMRC who have described this guidance as ‘clarification’ of what they believe the legislation means. They expect the new R&D tax credits guidance to be followed for every claim submitted after December 2021, and this has implications for companies claiming under the SME R&D legislation.
Two R&D tax credit schemes
By way of background, there are two R&D schemes – the SME scheme and the large company scheme ‘RDEC’. The SME scheme is significantly more generous than RDEC. It is also much more widely used. For the year ended March 2020, 76,225 of the total claims made were SME R&D claims; a 16% increase on the previous year.
There are circumstances in which specific projects carried out by an SME do not qualify for relief under the SME scheme, despite the company itself qualifying. Instead, the tax relief for these projects needs to be claimed under RDEC. HMRC’s revised guidance has now extended those circumstances to cover more scenarios.
How has the R&D tax credits scheme changed?
Specifically, HMRC is concerned with cases in which the claimant company could be seen to be subcontracted to carry out work for another entity and/ or is subsidised for that work. If either is the case for any project, relief cannot be claimed under the SME scheme, but it can be claimed under RDEC.
Changes to HMRC guidance for SME R&D tax credits scheme
- HMRC would previously have accepted the claimant company is not subcontracted unless there is a specific subcontract agreement in place. This has now been significantly extended;
- HMRC would only have treated a project as subsidised if a grant had been received specifically for that project. Now they are taking the view that a project is subsidised if payment has been received from the client.
These changes effectively mean that now, any projects undertaken on request from a client are to be treated as contracted, and any payment received for a project from the client is to be treated as a subsidy.
The result is that relief for such projects can only be claimed under RDEC, and not under the SME scheme as previously.
The guidance has created a lot of unrest within the tax industry and uncertainty for their clients as many SMEs depend on R&D tax credits to finance new developments. We are hopeful that a tribunal case will be brought to clarify whether the guidance is in fact what the legislation intends.
