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The employment tax cycle: growth and expansion

TaxTalk - February 2023

Read time: 10 mins

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Tax

Publication: TaxTalk

In our December edition of Tax Talk, we followed the life cycle of a company that grew from being a one-person operation, to a company with employees. In this edition, we continue to follow the company through a period of continued success, which has given rise to fast growth in all aspects of the business, including income, profit, number of employees and the number of countries in which the company operates. We’ll look at some of the new Employment Tax obligations and liabilities that the company will need to consider when it reaches certain milestones.

Congratulations, now pay more tax!

When it comes to Government rhetoric on the rates of tax that individuals pay, we are all probably familiar with the statement that “those with the biggest pockets bear a bigger slice”. Therefore it probably comes as no surprise that a similar discourse is applied to employers, but with a few subtle changes.

As a result of expansion, growing businesses bear subtly increasing employment tax costs coupled with increases in their administrative payload. Employment taxes and administrative obligations are almost always tied in one way or another to a company’s size and rarely to the actual profit of the company.

 The costs of being an employer creep up

By the end of our previous article, our company had hired its first employee, and had begun fulfilling its new obligations in terms of payroll, pension and employment law. As the company continues to grow year on year, so do the number of employees, increasing not only wage costs (with it proportionally increasing liability for secondary class 1 NICs) but also the progression of the company’s pay structure.

To date, the company has been enjoying the £5,000 Employment Allowance, which helped reduce the company’s NIC liability each year. However, with continued growth and payroll costs, the company’s NIC liability reaches the threshold of £100,000 during a tax year, meaning that the useful Employment Allowance is no longer available in the subsequent tax year. Whilst £5000 is not a huge additional cost for a company to absorb, this is the first clear example of an increase in the tax/NIC a company must pay with no reference to how much money (profit) the company makes.

Providing staff benefit as part of an employee’s remuneration policy has many positives, not only for employees, but for the company also. As with paying cash to an employee however, the added cost of NIC is lurking, which increases the company’s costs of providing a benefit. Although this is expected and well budgeted for, the real impact of this milestone is the increased administration that comes hand in hand with providing staff benefits.

Most, but not all, benefits are subject to Class 1A NIC, which is an employer only liability (there is no employee element to 1A) charged at the same rate as secondary Class 1 at 13.8%. Unlike the secondary Class 1 NICs due on payroll earnings, which is charged on a payments basis, Class 1A is payable annually. The deadline for payment of a company’s Class 1A NICs is 19 July, following the end of each tax year, and following the submission of the Employers Annual Class 1A Deceleration which needs to be filed by 6 July following the end of the tax year.

The majority of benefits have to either be reported to HMRC via the PAYE system), or via an annual P11D form, which has to be filed with HMRC (and provided to employees) no later than 6 July following the end of the tax year.

There are a host of exemptions which might apply to different benefits provided in different scenarios. The treatment of employee benefits does however have extensive HMRC guidance (which requires a level of tax knowledge to understand) so correctly determining what benefits are taxable and the taxable value of that benefit is often more complicated than companies expect, and presents a significant compliance risk to manage.

When our company started providing benefits to its employees, it not only became liable for a new class of NIC (Class 1A) which further increased their costs and reduces their profit, but they also took on a new administrative obligation to report the benefits to both employees and HMRC.

The apprenticeship levy is a 0.5% charge that companies start to pay when their wages are subject to Class 1 NIC, exceeding £3 million per tax year. Technically all companies are liable to the levy but, due to a £15,000 annual levy allowance, do not start paying this until staff wages exceed £3 million per year.

The levy was introduced to stimulate an increase in the number of apprenticeships companies offer, and following the rollout of the scheme, many common qualifications have been redesigned to meet the specific criteria for the training/qualification that the scheme requires. The levy is not a direct tax cost and once paid, the funds remain available to the company to fund training costs for staff towards an approved apprenticeship qualification. Not only do the funds remain available to the company, but the government contribute 10% towards the apprenticeship training cost.

Incentives for companies who do not pay the levy (or who exhaust their levy fund) are significant, with the government meeting 95% of the training costs. There are limits and criteria surrounding apprenticeships and whilst these are used by many companies to assist with the funding of their training costs, there remain large numbers that do not access their levy fund at all and view the 0.5% levy as an additional cost only.

As the company’s growth continues and remuneration policies develop further, share incentives schemes are introduced.

Most share schemes need to be registered with HMRC when they are introduced, and some tax approved schemes also require HMRC to be notified within a set time frame when shares are granted/awarded under the scheme. All schemes carry a requirement to file an annual “Employment Related Securities” (ERS) return (often referred to as form 42) even if there are no transactions during the tax year concerned. ERS returns are complex and many companies overlook their obligation to file these on an ongoing basis. Failure to file the annual return by the deadline of 6 July following the end the tax year carries statutory penalties which become progressively severe the longer a return remains unfiled.

The Off Payroll Working (OPW) legislation was introduced for private companies in April 2021 and has been the topic of many of our articles. For anyone not familiar with these rules, read this article for a detailed overview.

The OPW rules require companies who engage with contractors via the workers’ personal service company to fulfil certain obligations regarding the assessment of the contractors “Employment Status for tax”. Once the assessment is complete (which is far from straight forward at the best of times) it needs to be communicated to the contractor and any other intermediary involved in the chain of engagement with the contractor. If the Employment Status is assessed as to be one akin to an employment then the company is required to operate PAYE and are liable for the employer’s Class 1 NIC which will be due on payments to the contractor.

For companies that utilise a high number of contractors, the OPW rules can create significant amounts of administration in order to manage the risk. For companies that may only utilise contractors infrequently, an awareness of the rules and designating responsibility for what to do when a contractor is engaged is key. Many companies remain unaware of their obligations and therefore carry a compliance risk associated with this.

The company’s expansion of entities overseas has many tax implications, with Employment Tax often being overlooked.

As part of a now international organisation, visitors from related overseas companies begin visiting the UK for business purposes, and with this comes potential tax and PAYE issues that the UK company must navigate. Most business visitors to the UK will come from countries with whom the UK has a double tax agreement, which contains clauses to ensure the individual is not liable to UK income tax unless certain conditions are not met.

Despite the fact that the individual themselves may not ultimately be liable to UK income tax, the UK company remains liable for the operation of PAYE on any employee who visits the UK to conduct business activity. The PAYE obligation exists on even a single day worked in the UK and, without the following concession, would create an administrative nightmare for companies to remain compliant with.

HMRC recognise that operating PAYE withholding on individuals that ultimately are not liable to UK tax causes issues for both employers and the individual themselves (who would need to file a UK tax return to recover the tax withheld) and allow for a relaxation of these rules for employers who enter into a “Short Term Business Visitors Agreement (STBVA)”.

An STBVA allows an employer to forego the need to operate PAYE on visitors to the UK who come from countries with which the UK has a double tax agreement. The primary information required under a STBVA is the number of days each visitor to the UK worked in the UK. This therefore requires the UK company to have some means of tracking and recording visitors to the UK from overseas associated companies. There are many ways that this can be done, ranging from simply using the signatures in the office visitor book, to technology solutions that utilise GPS tracking of employees via an app.

In addition to the number of days each visitor works in the UK, further information is needed the more days that an employee is present in the UK with this escalating to a requirement to obtain residency certificates from the visitor’s home country if they exceed 120 days in the UK per tax year.

The STBVA does not apply to all visitors to the UK and visitors from a branch of a UK company, a country with which the UK does not have a double tax agreement or for anyone that the UK company bears some cost of the employees pay are excluded and tax will be due in respect of such employees. There are however some relaxed PAYE rules which may apply to such individuals but navigating these can be complex.

As organisation’s grow in size and increase their global footprint, managing the compliance obligations (in the UK and overseas) around international business travelers creates a significant administrative burden for companies to manage in order to mitigate the tax risks.

Companies and groups who employ 250+ employees are required to publish details of their Gender Pay Gap (GPG) within one year. Criteria for this is based on a snapshot of the number of employees at 5 April each year (31 March for public authorities).

GPG requires companies to calculate, report and publish figures for:

1. percentage of men and women in each hourly pay quarter
2. mean (average) gender pay gap using hourly pay
3. median gender pay gap using hourly pay
4. percentage of men and women receiving bonus pay
5. mean (average) gender pay gap using bonus pay
6. median gender pay gap using bonus pay

A written statement regarding the companies gender pay gap is also required and most companies use this to provide some commentary regarding what steps they are taking to narrow the pay gap.

Manipulating pay data in a way that provides the necessary information (and in ways that provides more explanation than the bare minimum for the GPG report) can be a time consuming and administratively heavy exercise. Whilst some companies put significant time and effort into this (with the view of creating a more positive public image), for others it is just another task that the company have to fulfil in order to satisfy the UK government and regulators.

By the time that a company grows to such a size that the Senior Accounting Officer (SAO) rules applies, the management of tax risk should (we would hope) be a board level agenda and already have significant resource devoted to it. The company should already have a published tax strategy and is likely to have a dedicated team who are responsible for managing the company’s tax affairs, obligations and relationships with tax authorities in the countries in which they operate.

The SAO regime impacts all taxes not just employment tax and requires a lot of work to fulfil the obligations compliantly on an ongoing basis. More details of the SAO rules can be found here.

Conclusion

As you can see, as our company grows it encounters relatively small increases in the amount it pays as a proportion of its staffing costs. This does however equate to significant increases in the administrative burden it must fulfil. With increasing administrative expectations comes increased risks for the company, all which require an increase in costs (more staff, external service providers) to manage, fulfil and ultimately maintain the company as a compliant employer in the eyes of HMRC.

For detailed information and advice on any issues raised, please contact Dan Kelly.