Revised HMRC guidance for film, television, and production industry

HMRC have revised their Film, Television and Production Industry Guidance Notes with effect from August 2012.

The Notes explain HMRC’s view of the PAYE income tax employment status of certain grades of workers in the industry. And also the circumstances under which HMRC will issue special letters allowing employers to pay certain workers gross without having to account for PAYE income tax, although Class 1 NICs are still payable where relevant.

The revised Notes also alert the industry that HMRC is changing its system for allowing flat-rate expense allowances to be paid tax-free – from the current specially agreed rates to the use of standard country-wide subsistence rates from April 2013 onwards.

The revised Notes make no mention of how the need to submit Real Time Information online to HMRC will impact tax-free gross payments made to workers in the industry. For example, the Notes still mention the use of forms P14 and P38A, both of which will disappear when a Real Time Information employer starts submitting RTI data to HMRC.

It is to be hoped that further revised Guidance is published ahead of April 2013, from when all employers will be mandated into submitting RTI data online to HMRC.


NICs elections in electronic form

HMRC have decided that joint NIC elections can be made electronically as long the employee is able to see the full terms of the election approved by HMRC.

The National Insurance legislation allows employers and employees to jointly elect to transfer to the employee the secondary Class 1 NIC liability arising on earnings paid in the form of securities options, restricted securities, and convertible securities. These are often referred to as NIC Elections and are useful to cover an unknown future liability that’s only realised when the gain is realised, such as at the time of exercising a securities option.

Before an employer can enter into a NIC election with the employee, the form of the election and the arrangements for securing that the liability transferred by the election will be met require prior HMRC approval.

HMRC state they are often asked whether the NIC election can be made electronically between the employer and the employee?

In the HMRC’s latest Employment-Related Shares & Securities Bulletin, Number 3, August 2012, HMRC announced that joint NIC elections can be made electronically as long the employee is able to see the full terms of the election approved by HMRC. Additionally, the joint NIC election made between the employer and the employee must be available for inspection if requested by HMRC.

Making encumbent of a single job redundant

It would seem obvious that if one job in particular has to go and one employee is currently doing that job it is that employee the employer can fairly choose to make redundant. In theory yes, but there are some factors to be aware of. This was illustrated in the Court of Appeal judgement in Samuels v University of Creative Arts [2012] EWCA Civ 1152.

In this case, Mr Samuels was dismissed from his role by the University on the grounds of redundancy. Mr Samuels claimed that he had been unfairly selected for redundancy. In other words, the employer’s selection of the redundancy “pool” was unfair; it should have been more than just himself.  Could that be have been true?

The Court made clear that the identification of a pool is necessary in order that the employer should fairly identify the pool of employees who are at risk of redundancy. It is only if there is more than one employee in the pool that it is necessary to identify selection criteria which are used at the next stage to identify out of the pool who should be made redundant. The first stage, however, is to identify the pool of employees who are at risk.

There are no rules about how an employer defines the pool, says the Court. For example, the EAT judgement in  Taymech v Ryan [1994] stated: “There is no legal requirement that a pool should be limited to employees doing the same or similar work. The question of how the pool should be defined is primarily a matter for the employer to determine. It would be difficult for the employee to challenge it where the employer has genuinely applied his mind to the problem.”

As to considering which employees to include in a redundancy pool, the Court quoted from Harvey on Industrial Relations and Employment Law which states: “The pool should include all those employees carrying out work of that particular kind but may be widened to include other employees such as those whose jobs are similar to, or interchangeable with, those employees.”

However, at the end of the day, an Employment Tribunal had to consider whether the pool of one chosen by the employer fell within the range of reasonable responses from the employer.

In the current case, the view of the original Employment Tribunal was upheld by the Court: “Our finding of fact is that [Samuels] was the only person at [the employer's premises] occupying the role… He was alone in that category and was therefore in a pool of one.”

The question of whether there were persons carrying out similar tasks was simply a question of fact and had not been upheld.

Therefore, the selection of Samuels for redundancy was not unfair, but nevertheless this case illustrates the need for an employer not to quickly jump to conclusions about who should be made redundant.

Interestingly, some employers choose to “bump” another employee by making them redundant instead of the employee whose job is going. Presumably, they’d rather keep the employee at risk so as to redeploy them into the other job.

On “bumping” another employee, the Court commented: “it is not compulsory for an employer to consider whether he should bump an employee…. if an employer takes the route of bumping another employee, it can be very detrimental to employee relations.”



Dealing with a worker no longer entitled to work in UK

How does an employer deal with the situation where a worker originally had the right to work in the UK for a limited period, but now it seems to the employer they no longer have that right? Is an employer entitled to dismiss the worker? Would it be a fair dismissal?

Under section 98(2)(d) of the Employment Rights Act 1996 it can be a fair reason for dismissal if the ‘employee cannot continue to work in the position they held without contravention (either on the part of the employee or the employer) of a legal duty or restriction’.

An employer is breaking the law if they employ a person who does not have the right to work in the UK. They can be fined up to £10,000 for each illegal worker or face criminal prosecution. The only defense against a charge of employing an illegal worker is the employer’s ability to show they have carried out all the necessary documentary checks to confirm if a person has the right to work in the UK.

The Borders Agency has published its ‘Full Guide for Employers on Preventing Illegal Working in the UK‘, May 2012. It is a must have guide for all employers, not only to fully understanding their legal obligations but also how to go about the necessary documentary checks and how to recognise the correct documents.

Where a potential employee is unable to provide a document showing they have a permanent right to work in the UK, only a document showing a temporary right to work here, the employer has a problem. In this case, in order for the employer to know they are not employing the employee illegally, they must carry out repeat document checks at least once every 12 months. If, when an employer carries out a check, the individual’s documentation shows that their right to work in the UK expires within 12 months, then an employer is recommended to carry out a repeat check at point of expiry.

Once an employee is able to provide documentation that shows they have a permanent right to live and work in the UK, no further checking is required.

If the employee fails to co-operate by producing any documents for repeat checking,the employer lays themselves open to a charge of employing an employee illegally if they continue to employ that individual.

But what if, at the time of a repeat check, the individual maintains that their right to remain in the UK is currently under appeal? What should the employer do? The Borders Agency recommend the employer contact the Employer Checking Service. The Service will confirm if the individual has, or continues to have, the right to work in the UK. The Service will provide written notification of the outcome. The above Guide details how to go about requesting information on an individual’s right to work in the UK.

Therefore, surely, if the employee has failed to co-operate in providing documentation for a repeat check, or the Employer Checking Service has confirmed the individual does not have a right to continue to work in the UK, the employer is within their right to dismiss the employee?

In principle yes, but even though it is illegal to employ someone who no longer has a right to work in the UK, the above Guide states: “If you are considering the potential dismissal of an employee, you may wish to seek independent legal advice.”

The need for an employer to be careful in dismissing such an employee was illustrated in the EAT judgement in Kings Castle Church v Okukusie [2012] UKEAT 0472/11. In this case, Mr Okukusie was dismissed when his continued right to be in the UK expired. The Employment Tribunal found that Okukusie had been unfairly dismissed for two reasons.

Firstly, the employer had ‘jumped the gun’ and dismissed the employee whilst his leave to remain in the UK was still under appeal, and that appeal had not been exhausted. This would indicate that the employer had not obtained a written notification from the Employer Checking Service as to Okukusie’s status. Any ‘reasonable’ employer would have made absolutely sure of their grounds before dismissing the employee.

Secondly, the Employment Tribunal came to the conclusion that that “no reasonable employer would have failed to give the claimant a clear warning that without this presentation of his immigration documents, he would be dismissed.”

So yes, although not having a continued right to work in the UK may be a fair reason for dismissal, the employer should first have included in terms and conditions that the employee’s continued employment is only based on their continuing to provide documentary evidence of their right to work in the UK. Also, the Employer Checking Service is the best source of information if an employer is unsure in any way about an individual’s continuing right to work in the UK.

Is HMRC’s ‘official rate of interest’ fair?

A First Tier Tax Tribunal has found that although the application of HMRC’s official rate of interest may be “unattractive”, nevertheless it’s “technically correct”.

Where an employee receives the benefit of an employment-related loan that costs the employee in interest less than the HMRC’s official rate of interest, there is a taxable benefit. The cash equivalent benefit is based on the difference between interest on the loan at the official rate and the amount of interest actually paid by the employee.

Over the last three years the official rate of interest has been 4 percent whilst the bank base lending rate has been 0.5 per cent.

In Flanagan v Revenue & Customs [2012] UKFTT 484, Mr Flanagan as a bank employee obtained a mortgage advance (available to employees of the bank only) in connection with his purchase of a dwelling. The rate paid by Flanagan was less than the official rate so he was taxed accordingly. However, Flanagan maintained that during the relevant tax years he could have obtained a commercially available mortgage that although costing more in interest than his preferential mortgage still charged an “interest rate much below the ‘official rate’ applied” to his employment-related loan.

In fairness, Flanagan felt his taxable benefit should have been calculated on the difference between the interest charged on his preferential mortgage and the interest rate charged on the equivalent commercial mortgage.

“In other words”, he said “the benefit in kind calculation does not necessarily bear any relationship to interest rates in the commercial market; the extent of the benefit is calculated by reference to an artificially set ‘official rate’ that is capable of causing unfairness; as in this case.”

The Tribunal judge agreed with Flanagan that the legislative provision related to employment-related loans can “work unfairness” upon the employee. However, that perceived unfairness “is not a matter that can influence” the outcome of Flanagan’s appeal.

In other words, Flanagan had been correctly taxed, even if not necessarily fairly taxed, and that was that!


No changes to PAYE Pooling ahead of RTI

On 9 August HMRC announced that ahead of RTI (Real Time Information) no further work will be undertaken to introduce a legislative change that would allow closely connected employers the option of being treated as a single entity for PAYE purposes (PAYE Pooling).

The subject of PAYE Pooling was raised by HMRC in an informal discussion paper (published between October and December 2011).

As a concession, HMRC state they will allow employers who currently have an informal agreement to pool their payrolls (formal agreements cannot be introduced without a legislative change) to continue with those arrangements until further notice. No new applications to pool payrolls will be accepted.

HMRC say they will continue to monitor the issues arising with PAYE Pooling with a view to reconsidering the benefits of a regulatory change after RTI has been introduced.

Necessary steps in terminating an under-performing employee

Just because an employee isn’t performing in their job as expected does not give an employer carte blanche to terminate their employment. This was illustrated in the EAT judgement in Masson v Meggitt Avionics Ltd [2012] UKEAT 0265/11.

In this case, Mr Masson was dismissed on the ground of his capability to do the job that was expected of him. Section 98 of the Employment Rights Act 1996, allows that it is fair to dismiss an employee if the employer can show that the reason for dismissal relates to the “capability” of the employee, i.e. meaning the employee’s capability assessed by reference to their skill, aptitude, health, or any other physical or mental quality of the employee. The employer must also be able to show that it acted reasonably in treating the employee’s lack of capability as a reason for dismissal.

Was this true in the present case? Masson was invited to a meeting as his employer stated his “performance was not to the level expected by the Company”. At the meeting Masson was informed of  “the process for reviewing and monitoring [his] progress against performance objectives”. It was also discussed as to the date by which Masson “[would] be expected to reach the required standard of performance”. Masson was also warned “that should [his] performance continue to not meet the standard required then it could ultimately lead to redeployment to an alternative position or if this is not possible, termination of [his] contract.”

Masson’s employer then went through a procedure of holding progress meeting with Masson, informing him that he still hadn’t reached the expected level of performance, and finally dismissing him. Masson complained that his employer had just gone through an automatically unfair dismissal procedure.

The Employment Tribunal maintained that Masson’s employer genuinely believed in his lack of capability to be able to perform properly his employment duties following a thorough investigation which had given Masson many opportunities to identify and appreciate what was required of him in order to meet the standard sought. The Tribunal held Masson had been given every opportunity to demonstrate he could meet his employer’s requirements and the Tribunal was satisfied the employer genuinely believed Masson did not and was unable to meet these requirements. Masson was given an opportunity to appeal at each stage, and the Tribunal was satisfied those appeals were conducted properly and fairly. The Tribunal, therefore, concluded the procedure was fair and that the employer’s decision to dismiss Masson fell within a “band of reasonable responses by a reasonable employer”.

Sound as if the employer’s dismissal of Masson on ground of capability was fair and reasonable? Only possibly.

The EAT in its judgement made clear that the focus of the Tribunal’s original decision had been ‘centred on the process that was adopted by Masson’s employer in dismissing him. The Tribunal’s decision didn’t set out the factual background or explain why Masson’s performance was not to the level expected by his employer so as to justify why capability procedures were started in the first place.’

In other words, how could the Tribunal decide whether Masson’s employer had acted reasonably if the Tribunal didn’t know in what way(s) his performance didn’t meet expectations? The employer could have been just going through an automatic process leading to his dismissal without there being any genuine grounds for such action.

The case was remitted back to the Employment Tribunal, the EAT stating: “In the absence of material findings of fact by the Tribunal as to why [Masson's] performance entitled [his employer] to invoke its formal procedure in the first place, or as to the need to proceed to [contemplation of his dismissal], we cannot be satisfied that the Tribunal did find that the grounds for the [employer's] belief in [Masson's] lack of capability were reasonable, nor can we be satisfied that the Tribunal would have been entitled so to find.”

So, yes, in capability dismissals an employer must be able to show that it took all reasonable steps to fairly review an employee’s performance; and to set goals by which their performance needed to improve; and to spell out for the employee the consequences of their continuing lack of performance. However, this case well illustrates that just following procedures is not good enough; the employer must be able to document the reasons for each step they take, and be prepared to demonstrate the reasonableness of each of these steps before an Employment Tribunal.

End of the Simplified PAYE Deduction Scheme from April 2013

Since 6 April 2012, no new new employers have been allowed to join the Simplified PAYE Deduction Scheme (SPDS). Those employers who were registered to use the scheme prior to 6 April 2012, will no longer be able to go on using the scheme from 6 April 2013 onwards.

SPDS was introduced to help non-business employers who engage domestic employees, and (often) elderly/disabled individuals who engage carers within their own home. The latter are often known as ‘care and support’ employers.

From 6 April 2013, all the above (HMRC estimates this will affect 13,500 individuals in the UK) will be required to operate PAYE as any other employer. Such employers will also come within the new requirements for all employers to send HMRC pay data in Real Time.

This means that all these employers will need to either:

  • Engage the services of an agent to operate PAYE on their behalf and send online Real Time Information pay data to HMRC each time an employee is paid; or
  • Use the HMRC’s free Basic PAYE Tools, which can be downloaded from HMRC’s website. The Tools will enable care and support employers to operate PAYE and send online RTI data to HMRC; or
  • Operate PAYE manually, as per any other employer, and send RTI data to HMRC manually once a month (details of any manual RTI return yet to be published).

It will be important for all care and support employers to come under RTI, using one of the above three methods, as the individuals engaged by these employers will be just as likely to benefit from the new Universal Credit (replacing all current in and out of work benefits with one monthly payment), as will any other employee.


Does the end of a fixed term contract end in redundancy?

Whether the end of a fixed term contract ends in a redundancy or a dismissal for some other substantial reason  will very much depend on the nature of the employer’s business at the end of the contract. This was well illustrated in the discussion surrounding the relevant circumstances in the EAT judgement in Greater Glasgow Health Board v Lamont [2012] UKEAT 0019/12.

In this case, Ms Lamont was given a two year fixed-term contract to cover for a Ms Hamilton who was going on a two-year secondment but who would return to the job when her secondment ended.

At the end of the fixed-term contract, when Ms Hamilton returned and Ms Lamont was dismissed, the question was raised as to was whether Ms Lamont had been dismissed by reason of redundancy, or for some other substantial reason?

It is possible for the end of a fixed-term contract to end in redundancy.

Section 139(1) of the Employment Rights Act 1996, states that “an employee who is dismissed shall be taken to be dismissed by reason of redundancy if the dismissal is wholly or mainly attributable to – … (b)  the fact that the requirements of that business – (i) for employees to carry out work of a particular kind, or (ii) for employees to carry out work of a particular kind in the place where the employee was employed by the employer, have ceased or diminished or are expected to cease or diminish.”

In the Court of Appeal judgement in Nottinghamshire County Council v Lee [1980] it was established that when a fixed-term contract comes to an end and is not renewed, it is necessary to ask, “Why was the employee’s contract not renewed?”  If the answer is, as was the case in the Nottinghamshire County Council judgement, that there was no more work for Mr Lee to do and the requirements of the school or college for teachers or lecturers had diminished and were expected to be diminished, there was a dismissal for redundancy.

But was that the same situation in the Greater Glasgow Health Board case? No; Ms Lamont was perfectly aware that she was only going to be carrying out her duties until Ms Hamilton returned from secondment and took back her old job.

In conclusion the EAT judge stated that there was: “…no basis in the facts on which it could be said that the [Hospital's] requirement for employees to carry out work [for which Ms Lamont was hired to do] had ceased or diminished or was expected to cease or diminish.  One employee was required to carry out that work before [Ms Lamont] was dismissed and one employee was required to carry out that work after she was dismissed.  There was, manifestly, no question of it being able to be concluded that [Ms Lamont] was dismissed by reason of redundancy.”

However, where a fixed-term contract does end by way of redundancy there will be important factors to take into account. The first will be the employer’s duty to try and offer suitable alternative employment to an employee who is being made redundant.

The other important consideration is the employee’s entitlement to a statutory redundancy payment. This will only apply if, at the date of termination by reason of redundancy, they have completed at least two full year’s service under their fixed-term contract, including any contract(s) that links to that contract.



New short form P46 available to use

HMRC has produced a single page form P46 called ‘P46 (Short)’ which can be used by the majority of employers to gather information from new employees who don’t have a form P45. Section 2 (employer information) has been removed.

The form is available to download on the HMRC website and can be filled in on-screen. If an employer wants to print out a copy of this form, a black and white version will be printed.

Pre-Real Time Information (RTI), paper copies of form P46 MUST NOT be sent to HMRC. Instead the form is submitted online. Therefore, since April 2009, employers have been allowed to gather the necessary P46 information by any means from a new employee who does not produce a form P45 before their first pay day. This can include employees completing a form P46, with the information contained on the form being kept for the employer’s record purposes before being transmitted online to HMRC.

A Real Time Information employer will no longer be required to send online forms P46 to HMRC. Instead, the new starter information will be included on the first Full Payment Submission (FPS) an employer submits online to HMRC covering their first payment of the new employee’s wages.

Under RTI, when any new employee starts, they should be asked to check which one of the following statements applies to them:

  • A. This is their first job since last 6 April and they have not been receiving taxable Jobseeker’s Allowance, Employment and Support Allowance, taxable Incapacity Benefit, state pension or occupational pension.
  • B. This is their only job, but since last 6 April they have had another job, or have received taxable Jobseeker’s Allowance, Employment and Support Allowance or  taxable Incapacity Benefit. They do not receive a state or occupational pension.
  • C. They have another job or receive a state or occupational pension.

The employer should safely keep a record of their new employee’s statement. When the employer submits its first FPS return covering the employee’s first payment of wages, the employer will be required to give the employee’s Start Date, as well as make an ‘A’, ‘B’, or ‘C’ Starting Declaration, as above. Where a new employee doesn’t provide any information, as above, the letter to use in the Starting Declaration is ‘C’.

On the first FPS, the employer is also required to provide employee identification information, including the employee’s:

  • full name
  • gender
  • date of birth
  • full address (including postcode)
  • National Insurance number (if the employee knows it)

In many cases, an employer will find this information on the new employee’s P45          that they will have been given by their previous employer.

Where the employee does not produce a P45 before their first pay day, the above information needs to be gathered by some other means. A form P46 (whether it is the old 2-page version, or the new short one-page version, can be used for this purpose.