Tax Talk: Optional Remuneration

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From 6 April 2017 the taxation of cash or benefit agreements changed but speaking with clients it is clear that these rules are often not fully understood, or worse that employers are unaware of the new rules entirely!

In general terms, if an employee has the option of being provided with a benefit in kind in exchange for a reduction in their cash earnings, the new rules require the taxable value of the benefit in kind to be the higher of the normal cash equivalent value, or the cash given up. For example, if an employee has the option of a car allowance of £10,000 a year, or a company car with a taxable value of £9,000, under the OpRA rules the taxable value of the company car benefit is £10,000, being the higher of the normal benefit and the cash forgone.

OpRA rules cover traditional salary sacrifice arrangements as well as other “cash or benefit” agreements.

The rules are quite complex, and there are transitional arrangements as well as some benefits that are entirely exempt from the OpRA rules.

The exemptions apply to:
  • Death and retirement schemes
  • Pension savings
  • Company funded pension advice
  • Bike to work schemes
  • Childcare vouchers
  • Ultra-low emission cars
  • Buying holiday
The transitional arrangements apply from the earlier of the date after 6 April 2017 of any change, modification or renewal of an arrangement under which a benefit is provided, or 6 April 2018. In addition, certain benefits (company cars, accommodation and school fees) have a later transitional date of 6 April 2021. By the start of the next tax year, the transitional arrangements will cease and all but the exempt benefits will fall entirely under the OpRA rules.

From our work acting for clients going through HMRC Employer Compliance Reviews, it is clear that the OpRA rules are a key issue that HMRC focus on. Employers are often faced with significant unexpected tax and NIC liabilities arising from the application of the OpRA rules. This is also compounded by the fact that employers are unwilling to pass on the tax liability to their employees, and so have to settle the tax due with HMRC on a grossed-up basis.

Actions to be taken by the employer

  • Review what is currently in place for employees with cash or benefit arrangements. It is not uncommon for salary sacrifice or “flexible benefit” schemes to have been set up incorrectly at inception. Is there an “either/or” contract on record? Has this been agreed by the employee?
  • Compile the P11D benefit changes so that the benefits are being correctly reported.
  • It is important that employers communicate effectively and positively with their employees. What are the OpRA rules and how will they effect their benefits and tax liability? Are benefit offerings to be changed? What will the employer do, and what must the employee do? Bear in mind the possible negative staff relations arising from tax inequality between employees of different conditions for the same benefit.
  • Consider what the business is currently offering, and whether in the light of the new OpRA rules it is beneficial to change them.
Our Employer Solutions Team is here to help you work through the OpRA rules as they apply to you and your employees, and to give you reassurance that you are not going to end up with an unexpected large bill from HMRC for getting it wrong!

Written by Ian Gadie in our London office.