Importance of ensuring all payroll deductions are “lawful”

Although an employer may feel fully justified in deducting an amount from an employee’s wages, unless it is done “lawfully” the employer will find themselves having to repay the employee.

This was illustrated in the EAT judgement in Fahey v Plymouth Hospitals NHS Trust [2012] UKEAT 0391/11.

In this case, Ms Fahey was absent from work on the grounds of ill health from July 2009 until her employment came to an end at the end of July 2010. For much of the time Ms Fahey was on contractual sick pay – first at full rate, then at half rate. When she was given notice, her employer paid her notice period at her basic rate of pay.

Ms Fahey claimed her employer made an unlawful deduction from her notice period pay representing what the employer calculated was the Incapacity Benefit (actually the Employment and Support Allowance) she was receiving. Her employer argued they were entitled to make the deduction because otherwise she’d have been better off when sick than she would have been if she was working.

Sounds fair? But what did the EAT say?

Ms Fahey had never signified in writing her consent to the deduction; her terms and conditions of employment contained no provision requiring or authorising the deduction. Therefore, the employer was guilty of applying an unlawful deduction, and the £1,244 deducted in respect of social security benefits should be repaid Ms Fahey.

Section 13 of the Employment Rights Act 1996 makes clear that lawful deductions can only be those “required or authorised to be made by virtue of a statutory provision or a relevant provision of the worker’s contract”, or where “the worker has previously signified in writing [his/her] consent to the making of the deduction.”

HMRC sends out warning letters

Already HMRC is writing to employers across the country, warning them that penalties for missing the 19 May 2012 deadline for their 2011/12 Employer Annual Return (forms P14/P35) will increase if a late return is received after 19 June.

Penalties are charged at a rate of £100 per 50 employees, or part thereof, for each month, or part month, that a return is late. So, the longer employers delay, the more they’ll have to pay.

Last year there was a furore as HMRC delayed sending out letters to employers who HMRC did not view as having submitted a complete Employer Annual Return online. By the time letters were dropping through employer’s letter boxes it was already September and employers faced at least four months’ penalties, if not more if there was any further delay.

This year, HMRC are moving to alert employers who’ve missed the filing deadline within two weeks of the 19 May deadline. Coupled with their reminders approaching the filing deadline and HMRC’s very quick response after that deadline, employers have really only got themselves to blame if penalties go on mounting up. As long as ‘late’ employers get their returns in by 19 June, only the minimum penalty will apply.

HMRC’s Alternative Dispute Resolution Service goes nationwide

From now on, if a small or medium-sized employer (up to 250 employees in a PAYE scheme) gets bogged down in a dispute during an HMRC PAYE compliance audit, they will be able to use the Alternative Dispute Resolution Service (ADR). It is hoped the ADR will be able to find a fair and quick outcome for both HMRC and the employer.

Presently, if there’s a dispute, the HMRC compliance officer will just have decide what they think is the case and raise an assessment accordingly. The employer can appeal the assessment and hope for a more senior HMRC official to see things their way. The appeal could equally end up having to be decided by the First Tier Tax Tribunal.

Interposing the ADR service could help resolve the dispute more quickly and save both sides time and money, especially if the dispute can be resolved without going to Tribunal. The purpose behind the ADR service is similar to the Acas mediation service that employees/employers are encouraged to use as an alternative to going straight to an Employment Tribunal.

The ADR service uses facilitators who are HMRC members of staff, but especially trained in ADR techniques and have not been involved in any way with the dispute. The ADR service has been successfully trialled, since January 2012, in the North West, South West, Wales, and London, so HMRC knows the service works.

Jim Stevenson, HMRC Assistant Director, Local Compliance says: “The aim is to resolve the dispute, or, if not, as many issues as possible. HMRC facilitators help all parties reach a shared and full understanding of the disputed facts and arguments. Because there are often communications issues the facilitator will help explain what each side is trying to say to the other.”

But what about larger employers? Are they stuck with the old system of trying to resolve disputes? A nationwide pilot is already available for large and complex employers. There is online information available about the dispute resolution service for larger employers.

Where to send paper forms P11D/P11D(b)

Employers can submit forms P11D (and P9D) and P11D(b) either online or in paper format. This must be done before 7 July following the end of the tax year in question.

Paper forms should be sent to:

HM Revenue & Customs (NIC&EO)
Room BP8019
Tynemouth House
Benton Park View
Newcastle Upon Tyne
NE98 1ZZ

Where an employer encloses an S336 Claim* on behalf of employees attached to a form P11D, HMRC will ensure they are kept together for processing.

Where an employee/employer submits a separate S336 Claim* on a form P87, P810 Tax Review Form (must be requested from taxpayer’s tax office), or in a letter, not attached to an original P11D, these should be sent to:

HM Revenue & Customs
PAYE & Self-assessment
PO Box 1970
L75 1WX

Claims sent separately and not attached to forms P11D should be clearly headed ‘S336 Claim’ so these can be easily identified when received by HMRC to make sure they are forwarded as quickly as possible to the correct processing office.

*An employee’s ‘S336 Claim’ is based on section 336 of the Income Tax (Earnings and Pensions) Act 2003 and might be worded as follows: “The following expenses [which should list the descriptions and amounts returned on the P11D] as returned on my form P11D for the tax year 2011/12 were incurred by me wholly, exclusively, and necessarily in the performance of my duties of employment; or were necessarily incurred on travelling in the performance of those duties.” [the claim should be dated and give the claimant's name, signature, and NI number]

HM Treasury identifies high-paid workers paid “off payroll”

On 23 May, HM Treasury published the results of a review of Government departments which shows there are over 2,400 key public sector appointees that have been engaged “off payroll”, and in some cases for more than ten years.

The over 2,400 individuals identified (possibly the “tip of the iceberg”?) are those who were engaged at an annual cost to the departments that engaged them of more than £58,200 – the minimum salary for Senior Civil Servants. The majority of those engaged off payroll are paid on a daily basis, with around 70% costing the appointing department more than £400 a day.

HM Treasury recognises that there are circumstances where it may be appropriate for an employer to appoint an individual off payroll and the fact that an individual is engaged in this way does not mean they are not paying the correct amount of income tax.

Regardless, as it is essential that Government employers are able to assure themselves that their long-term senior staff are meeting their tax obligations, the Government is proposing to tighten the rules associated with employing people off payroll.

  • The most senior staff must be on the payroll, unless there are exceptional temporary circumstances [emphasis added].
  • Departments will be able to seek formal assurance from contractors with off payroll arrangements lasting more than six months and costing over £220 per day that income tax and National Insurance obligations are being met. Departments should consider terminating the contract if that assurance is not provided.
  • This will be monitored carefully with financial sanctions for departments that do not comply.

It is expected that these proposals will be implemented within three months.

It is very likely that HMRC will become ever more critical of all those individuals paid “off payroll” in the private sector as well. Therefore, all employers should be reviewing their own “off payroll” arrangements.

One of the key question is whether, when an individual is carrying out services for the organisation that engaged them, are they employed or self-employed? Someone can be genuinely self-employed but also be an employee when they are working on a particular engagement.

Where someone is paid off payroll when they are really an employee, there will be a loss to the National Insurance Fund of the attendant primary and particularly secondary contributions. And this is a loss the Exchequer can ill afford to lose!

Who is a ‘Scottish’ taxpayer?

HMRC have published further clarification on who is a ‘Scottish’ taxpayer. This is important in deciding who could end up paying a Scottish rate of income tax, which could be more or less than the tax paid by everyone else in the UK.

The Scotland Act 2012 gives the Scottish Parliament the powers to introduce, from 6 April 2016, a Scottish rate of income tax to affect all Scottish taxpayers.

The HMRC Technical Note of May 2012Clarifying the Scope of the Scottish Rate of Income Tax – provides the following information under the heading ‘Definition of a Scottish Taxpayer’.

“Firstly, in order for an individual to be a Scottish taxpayer, they must be UK resident for tax purposes – an individual who is not UK tax resident cannot be a Scottish taxpayer.

The remaining parts of the definition are based on the location of an individual’s sole or main place of residence. If they have one place of residence and this is in Scotland, they are a Scottish taxpayer.

Individuals who have more than one place of residence in the UK need to determine which of these has been their main place of residence for the longest period in a tax year – if this is in Scotland, they are a Scottish taxpayer. For example, if an individual with a single place of residence moves house into or out of Scotland part way through a tax year, whether they will be a Scottish taxpayer in that year will depend upon which house is their main place of residence for the longer amount of time.

Individuals who cannot identify a main place of residence will need to count the days they spend in Scotland and elsewhere in the UK – if they spend more days in Scotland, they will be a Scottish taxpayer.

An individual who meets the definition of a Scottish taxpayer will be a Scottish taxpayer for a whole tax year.

There are separate rules which apply to MSPs, MPs representing a constituency in Scotland and MEPs representing Scotland. Such individuals will automatically be treated as Scottish taxpayers, irrespective of where their sole or main residence is located or of where they spend the most days in the UK.

Guidance will be published prior to the introduction of the Scottish rate to assist taxpayers in identifying their main place of residence.”

Remember, it will not only be employers in Scotland who could end up dealing with different rates of income tax for PAYE purposes; the Scottish rate of income tax will also affect any UK employer, wherever they are based in the UK, who employees ‘Scottish’ taxpayers.

The Technical Note also provides some additional information on how HMRC see the Scottish rate of income tax affecting tax relief for pension contributions and charitable payroll-giving donations, as well as the income tax an employer will have to pay under a PAYE settlement agreement (PSA). The Scottish rate of income tax will also affect the withholding of income tax under the Construction Industry Scheme.

Bank launches innovative ‘Returning Talent’ program

Bank of America Merrill Lynch announced on 16 May a new initiative that supports women and men looking to return to work after time away to care for their family. Individuals who have been absent from the workplace for three or more years are being offered the opportunity to benefit from BofA Merrill’s ‘Returning Talent’ programme.

Michelle Fullerton, head of Diversity and Inclusion for Europe and Emerging Markets (ex-Asia) at BofA Merrill, who is spearheading the initiative, says, “As an employer of choice and recognised as one of The Times’ Top 50 Employers for Women, we are keen to ensure we attract, retain, and develop talented individuals. We recognise that choosing to have a family is a very important stage in a person’s life, and that some decide to take time away from work to focus completely on caring for their family.”

During the inaugural year of the programme, 20 places are available for individuals to participate in three, one day workshops (scheduled around childcare), executive coaching, and access to employees and experts from BofA Merrill. At the end of the programme, it is anticipated that participants will feel better prepared and confident to re-enter the world of work, either at BofA Merrill or at another organisation.

‘Returning Talent’ is being delivered in partnership with the Executive Coaching Consultancy – the company that currently delivers maternity coaching workshops and individual coaching sessions to the bank’s employees and their managers – and the Mumsnet Family Friendly programme which develops and promotes family-friendly practices in business. The workshops will take place in June 2012 at the bank’s London offices. Interested parties are asked to complete an application form which can be accessed online. Successful applicants will be notified by 6 June.

Fullerton concluded, “Above all, our company is about people. A philosophy of inclusion drives us every day and helps us all to succeed in a diverse, global marketplace. Through ‘Returning Talent’, we are demonstrating that Bank of America Merrill Lynch is an attractive organisation for prospective employees and clients – a place where people want to work.”

CJEU judgement on carrying forward untaken annual leave

The Court of Justice of the European Union reiterates that an employee who has been unable to take annual leave due to incapacity must be allowed to carry their untaken leave forward into a new leave year. However, employee’s do not have an unlimited time in which they can do this.

In this case (Neidel v Stadt Frankfurt Am Main (Case: C337-10)), Mr Neidel worked as a fireman. In June 2007, he went sick and didn’t return to work again before his retirement at the end of August 2009. Mr Neidel’s statutory holiday entitlement in each of the years from 2007 to 2009 was 26 days. In addition, firemen in Germany are entitled to compensatory leave for public holidays.

 Furthermore, according to the applicable German legislation, Mr Neidel had, as a general rule, to take his leave within the leave year. By arrangement untaken leave could be carried forward into the following leave year but was forfeited if it had not been commenced within a period of nine months after the end of the leave year.

At the time of his retirement, under the legislation applicable to a termination of employment, Mr Neidel claimed he was owed a payment in lieu covering 86 days’ untaken statutory leave.

The EC Working Time Directive requires that Member States must provide for workers to take a minimum period of four weeks’ annual statutory leave. This equates to 20 days for someone working a five-day week. The German leave provisions provided for a more generous period of statutory leave. The Directive also states that, under normal circumstances, any untaken leave cannot be carried forward to a following leave year. Also untaken leave can never be paid in lieu except at the time of termination.

But what has the Court decided in the case of someone who is long-term sick and cannot take all the leave they are entitled to during a particular leave year? In this case, the employee is allowed to carry forward untaken statutory leave into a following leave year and to be paid in lieu of that untaken leave if they do not return to work before any of that untaken leave can be taken.

However, there are two important principles: (1) An employer cannot limit an employee’s right to an entitlement to four weeks’ annual leave being carried forward in the case of sickness, or paid in lieu at the time of termination. (2) An employer does not have to allow the same provisions in relation to any additional statutory leave over and above that required by the Directive. It will be a matter for domestic legislation to decide.

When it comes to the time limit over which untaken statutory leave, as per the Directive, can be carried forward, “the Court takes the view that any carry-over period must ensure that the worker can have, if need be, rest periods that may be staggered, planned in advance, and available in the longer term, and must be substantially longer than the reference period in respect of which it is granted. In the proceedings in question, the carry-over period laid down is nine months, that is to say a period shorter than the reference period (in this case, one year).”

In other words, in the Court’s view a nine-month carry over period was inadequate under the circumstances of the case in question. However, the Court did not go as far as saying what would have been an adequate carry over period, although all the indications are that this would seem to be longer than a leave year.

Therefore, it remains to be seen whether, for example, it would be acceptable that untaken leave for a leave year ending 31 December 2012 must be commenced by 31 March 2014. The key question is: “Would a carry over period of 15 months be acceptable as being ‘substantially longer’ than a leave year? Or would an even longer carry over period be required, perhaps as long as 18 months?”

The UK Government have promised, in due course, to amend UK law implementing the Working Time Directive to deal with issues such as untaken leave due to ill-health.


New link for downloading handbook on Attachment Orders

The Chartered Institute of Payroll Professionals (CIPP) has made its members aware of a new online web address* for employers wishing to refer to, or download, the handbook Attachment Orders – A guide for employers, published by HM Courts Services.

Dealing with the various types of attachment of orders (‘arrestments’ in Scotland) and deduction from earnings orders is not a straightforward task. It’s not a matter that all employers regularly have to deal with. So it’s useful to know there’s an official source of guidance if you get faced with dealing with an Order for the first time.

*Link modified 25 July 2012.

Expensive company cars which are security enhanced

HMRC have decided that, from 6 April 2011 onwards, certain security enhancements fitted to cars made available for private use will not be treated as accessories bumping up the car’s list price for taxation purposes.

Why are HMRC making this change? Because this new measure “supports the Government’s objective of a fair tax system by ensuring that individuals who are provided with security enhanced cars due to the nature of their employment are not unfairly impacted by the abolition [since 6 April 2011] of the £80,000 cap on the cash equivalent of the benefit.” Gives you a nice, warm, fuzzy feeling inside to think HMRC is so caring of the wealthy and their company cars. Although, they admit that this new measure will only affect up to 100 company car drivers in the UK.

Anyway pushing all jealous thoughts to one side, what will the change mean for those chosen few?

The cash equivalent value of a car made available for private use is based on the car’s list price which includes all the car’s qualifying accessories. So, not only might the list price be high to begin with, but by the time you load it with the value of the accessories fitted to the car, it bumps up the value even more. Before the change announced above, a car’s security enhancements increased its list price.

From 6 April 2011, where an individual can demonstrate that the nature of their employment creates a threat to their personal security, then the following security enhancements will not be treated as part of the car’s list price:

  • armour designed to protect the car’s occupants from explosions or gunfire;
  • bullet-resistant glass;
  • any modifications to the car’s fuel tank designed to protect the tank’s contents from explosions or gunfire (including by making the tank self-sealing); and,
  • any modification made to the car in consequence of anything which is a relevant security feature by virtue of the proceeding three examples.