The Pensions Regulator introduces the DC qualifying scheme tool

In June, The Pensions Regulator announced the availability of an online ‘DC qualifying scheme tool’ to help employers assess whether their existing DC scheme meets the minimum criteria for an automatic enrolment scheme, as set out in legislation.

The tool is accompanied by a downloadable leaflet ‘Selecting a good automatic enrolment scheme’ which sets out a number of questions for employers to consider when they are selecting a pension scheme for automatic enrolment, or assessing the quality of their existing scheme.

Under pensions reform legislation contained in the Pensions Acts 2008 and 2011, from July 2012 employers will start to incur a duty to auto-enrol all eligible employees into pension saving if they are not already an active member of a qualifying scheme.

Those employers who currently have, and/or are intending to use a qualifying Defined Credit (also known as ‘money purchase’) pension scheme to meet their auto-enrolment duties will be among the first employers to be staged in to pension auto-enrolment.

The question is, if an employer already has an existing DC occupational pension scheme will their scheme qualify for auto-enrolment purposes? That’s the purpose of the DC qualifying scheme tool to help employers come to a suitable conclusion.

HMRC consults on its RTI ‘stick’

On 14 June, HMRC published a consultation document which aims to make Real Time Information reporting as easy as possible for employers, whilst deterring those who deliberately try to avoid complying.The deadline for responses is 6 September 2012.

The consultation document ‘Securing Compliance with Real Time Information – Late Filing and Late Payment Penalties’, seeks views on how best to design late-filing and late payment penalties for RTI to deter the few who would deliberately not comply.

For example, should the RTI late return penalties be built on the current late filing penalties (forms P14/P35)? This charges a penalty based on a fixed amount multiplied by the number of employees in the employer’s PAYE scheme, and further multiplied by the number of months the return is outstanding.

Bearing in mind that the proposed penalties would apply each time an employer was late making an RTI return, should a penalty be charged immediately there’s a default, or should there be an amount of lee-way?

For example, an employer who has one PAYE scheme paying employees monthly would only be required to submit one *Full Payment Summary (FPS) return each month; whereas an employer with one PAYE scheme paying employees weekly would be required to submit four or five FPS returns each month.

Then there is the matter of incorrect returns, i.e. where there is a loss of tax/NICs revenue, not as a result of an “innocent error” but rather due to carelessness, negligence, or avoidance. Currently, the penalties applicable to an incorrect P14/P35 return are based on a percentage of the tax/NICs underpaid based on the employer’s “culpability”. Should the same penalty, or type of penalty, apply to incorrect RTI returns?

HMRC want to ensure that they do not need to issue a separate penalty notice for every RTI return that contains an error, as this would be unnecessarily burdensome for employers and for HMRC.

Finally, will the late payment penalties need revising as a result of RTI?

Currently, late payments of PAYE income tax and NICs are liable to a penalty based on a percentage of the amount of tax/NICs due. However, the extent of the penalty cannot be exactly assessed until tax year end when a P14/P35 return is made.

Under RTI, for example, and presuming the employer in question has submitted weekly or monthly FPS returns, HMRC will immediately know how much PAYE tax/NICs are due if the employer fails to pay their remittance on time and can pursue that sum as well as a late payment penalty.

For 2012/13 employers in the RTI pilot will not be charged a penalty in-year for inaccuracies on RTI returns submitted. Penalties will be charged after the end of the year for 2012/13 where appropriate. This will ensure employers in the RTI pilot are treated broadly in line with employers who have not yet joined RTI.

*A Full Payment Submission is the RTI return an employer must make each time employees are paid and will include details about the gross to net payment of wages for all employees paid for that particular pay period.

Delay to further consultation on PAYE tax/NICs integration

On 31 May, HM Treasury announced that it has decided that further consultation on the integration of PAYE income tax and National Insurance contributions will not be launched until after Summer 2012. However, the Government remains committed to exploring the potential for integration and will provide an update on this work in the autumn. As HM Treasury have already made clear, this is a long-term reform on which the Government will proceed with care.

The current discussions surrounding integration were first announced in Budget 2011. A call for evidence was then issued to help the Government understand the current problems concerning the different operation of PAYE income tax and NICs and what benefits integration would bring to employers. In November 2011, HM Treasury announced the results of that call for evidence, together with their proposals about moving the discussions forward.

For example, Government established a number of technical working groups with stakeholders to identify and explore options for reform.  These groups included a range of employers, including representatives of small business.  These groups each met four times between December 2011 and March 2012, and minutes are available.

As a result of these working meetings, many stakeholders have recognised that integration is a complex issue with potentially significant implications for employers’ payroll operations.

In parallel, the Government is also looking in more detail at the interplays between options for integration and reforms to the welfare system. This includes the proposal announced at Budget to reform the State Pension into a single tier pension, details of which will be set out in a forthcoming White Paper.

Finally, the Government also respects that some stakeholders have asked that HM Treasury avoid consulting on this major issue over the summer months, particularly given the London Olympics.

Preventing illegal working in the UK

The UK Border Agency has launched updated guidance for employers on preventing illegal working to help them in carrying out right to work checks.

The updated guidance provides information on which documents are acceptable when proving a right to work and help in understanding what is expected of them in making the checks. The structure and language used in the updated guidance has also been completely revised to make it simpler and easier to read.

Employers who do not carry out these checks and are found employing workers illegally could be fined £10,000 for each illegal worker or face up to two years in prison.

The updated guidance encompasses the following changes:

  • More information relating to Biometric Residence Permits, specifically with regards to those that show a holder has indefinite leave to stay in the UK.
  • Information on the various work restrictions placed on students from outside the EEA.
  • The impact of civil penalties when applying for a sponsor licence or on licensed sponsors.
  • Best practice recommendations when carrying out document checks.

This guidance also sees information relating to A8 nationals moved to the guidance on employing EEA nationals, as restrictions to nationals of those countries no longer apply. It also contains more comprehensive information on employing A2 (Bulgarian and Romanian) nationals.

Further information and important updates on preventing illegal working can be found on The Border Agency website.

If you’re thinking of joining the RTI pilot

You may be considering joining the (Real Time Information) RTI pilot ahead of April 2013. If so, you may well be interested in the information HMRC is providing for employers who are joining the pilot in July 2012. The following is the text of HMRC’s letter.

“Thank you for joining the HMRC PAYE Real Time Information (RTI) pilot. Your experience in running the new RTI software and routines will be invaluable in helping us to refine the system and finalise our approach to the migration to RTI.

You are required to start sending PAYE information to HMRC in real time from the first payday on or after 6 July 2012. This means that:

  • If you are required to send us an (Employer Alignment Submission) EAS you should send this at least 24 hours before you send us your first Full Payment Submission (FPS). If your first FPS is due on 6 July please contact the RTI Customer Advice Team on 0845 3021418 or email  with email heading “first payday 6th July”.
  • If you are not required to send us an EAS please send us your first FPS on or after 6 July. It must be sent on or before the time you make your payments to your employees.

In the meantime we have attached a Business Readiness Checklist (see below) to help you to make sure you are ready for your first submission. This has been compiled using the experience of employers who are already submitting RTI, and we strongly recommend that you use it as a guide to preparing for your first submissions. You do not need to complete it or send it back to us.

Please note that the arrangements for RTI are set out in legislation. Once you have filed either an EAS or your first FPS you will become an ‘RTI employer’ and cannot then revert to submitting PAYE returns using the current processes. We will treat that submission as your agreement to comply with the legislation.

We are operating a dedicated helpline for employers in the pilot between 8am and 8pm Monday to Friday and from 8am to 2pm on Saturday. This is to provide assistance to pilot employers and deal with any issues arising that cannot be resolved from the internet guidance.  You can find out more about RTI at

We have designed web guidance to support you in all PAYE tasks in real time not just the changes in reporting.  You can also contact us at or our RTI Customer Advice team on the number above if you have any additional questions. Please note the attached P38S update* for those of you who employ students.

Finally I would like to thank you again for taking part in the RTI Pilot. Your participation will help us to further test our IT systems and to understand the way in which employers will submit RTI, helping us ensure that the system meets the needs of employers as well as HMRC.”

The ‘Business Readiness Checklist’ mentioned above sets out the following check points:

  • I have the RTI Software from my Software Developer and know how to use it.
  • I have discussed the RTI pilot with my agent / bookkeeper / payroll bureaux and the person responsible for making my RTI submissions has all the appropriate information.
  • I will provide my RTI submission (EAS / FPS) on this date [give date].
  • I have read the HMRC guidance to filing in real time and understand what information I will be required to provide.
  • I have checked the following entries for all of my employees are correct: Name, Date of Birth, Gender, Address, valid National Insurance number.
  • I understand where I go for advice if I have difficulties filing in Real Time.
  • I confirm that my first submission (EAS / First FPS payroll alignment) will have all my employees included – Monthly, Weekly, Daily paid, Starters and Leavers [for the tax year to date].
  • My Software supports Test-in-live and I confirm that I have sent a test file for my first EAS / First FPS and FPS.
  • I have contingency plans for fallback.
  • I confirm that I have the contact details for the RTI Customer Advice Team and the RTI mailbox address.

*Once an employer becomes an ‘Real Time Information employer’ they can no longer use the form P38S procedure for students who come to work for the employer in term vacation periods only. All such employees must be treated as any other employee and the P45/P46 procedures followed as normal.

Contractual pay in lieu of notice provisions

A recent First Tier Tax Tribunal case reminds employers that where an employee’s contractual terms expressly allow for the employer to pay in lieu of notice, any payment under this term falls to be taxed as employment income rather than as tax relievable liquidated damages for the employer breaching the employee’s contract.

In Goldman v Revenue & Customs [2012] UKFTT 313 (TC), before Mr Goldman took up employment with the Company in question, he’d agreed a contractual term to ensure a level of protection should either party decide to bring the employment to an end. The Agreement stated that in the event of Mr Goldman’s termination of his contract for any reason other than performance or conduct related issues, the Company would within 14 calendar days of the date of termination pay him a payment in lieu of notice equal to a 12-month notice period.

As it turned out Mr Goldman’s relations with the company CEO, Ms Domecq, broke down and Ms Domecq decided to summarily terminate Mr Goldman’s employment after just six months.

The Company did not honour its side of the Agreement to pay in lieu of notice within 14 days and Mr Goldman instructed his solicitors to threaten legal action. Eventually a compromise agreement was reached in return for Goldman dropping any legal action, although the amount of £123,750 in settlement was less than Mr Goldman was entitled to under the Agreement.

The Company paid the settlement and deducted PAYE income tax from the whole. Mr Goldman claimed tax relief on the first £30,000 through his self-assessment tax return. HMRC refused any tax relief.

Mr Goldman argued that the £123,750 was a payment of damages for the Company’s breach in not honouring the original Agreement. Therefore, he was entitled to tax relief on the first £30,000.

HMRC claimed that the £123,750 was not a termination lump sum payment but was the payment of employment income under Mr Goldman’s original contract of employment. The payment was not one of damages but rather a payment in settlement of the original Agreement that promised a payment in lieu.

HMRC referred to the Court of Appeal decision in EMI Group Electronics Ltd v Coldicott (HMIT) [1999] which held that a payment in lieu of notice made in pursuance of a contractual provision, agreed at the outset of employment, which enables the employer to terminate the employment on making that payment, is properly to be regarded as an emolument from that employment.

The Tribunal Judge made an interesting comment about Mr Goldman’s claim that the payment he received was damages for the Company’s breach: “If Mr Goldman’s argument were correct, it would be open to anyone entitled to a contractual payment in lieu of notice to accept less, in settlement of his claim to enforce the contractual entitlement, and thus achieve exemption from tax [on the first £30,000]. This would not be a sensible result consistent with a purportive interpretation of the legislation.”

It is also interesting to note that in this case the Company made the right decision to apply PAYE income tax (and NICs) to the whole of the payment of £123,750. If an employer is in any doubt whatsoever about the tax liabilities of any termination payments, they should always go down the safe route of taxing the payment. It will then be up to the taxpayer, as in this case, to argue whether they are entitled to any tax relief and a refund of income tax paid.

HMRC updates its advisory fuel rates from 1 June

On 30 May, HMRC published updated advisory fuel rates that can be paid tax-free to employees driving employer provided vehicles to cover just their business mileage. The same rates can be used to charge employees for private mileage costs paid by their employer. The new rates apply to all business journeys on or after 1 June 2012, although until the end of June employers can continue to use the previous advisory fuel rates, applicable from 1 March 2012.

The new rates per mile are as follows (the changed rates are shown in red; the figure in parenthesis is the amount between 1 March 2012 and 31 May 2012):

+ Petrol engine cars: 1400cc or less – 15p; 1401-2000cc – 18p; over 2000cc – 26p; based on 135.8p/litre (135.2p/litre from 1 March).

+ Diesel fuelled cars: 1600cc or less – 12p (13p); 1601-2000cc – 15p; over 2000cc – 18p (19p); based on 141.7p/litre (143.2p/litre from 1 March).

+ LPG fuelled cars: 1400cc or less – 11p (10p); 1401-2000cc – 13p (12p); over 2000cc – 19p (18p); based on 78.7p/litre (74.1p/litre from 1 March).

The above changes are part of HMRC’s quarterly review of their advisory fuel rates.

When does ‘frustration’ of a contract of employment occur?

Would an employee being sentenced to a term of imprisonment ‘frustrate’ any contract of employment with that individual?

‘Frustration’ is a common law expression to describe what happens where a contract has been made but for whatever reason, through no fault of either party, it later becomes impossible for one or both parties to perform their obligations under the contract. The situation bringing about the frustration would normally be one beyond the control of either party; unforeseeable by both parties.

For example, a contract is frustrated when there is a change in the law that makes the fulfilment of the contract illegal; a contract for the sale of a house would be frustrated where the house burns down before the sale can be completed.

But what about the situation where an employee is sentenced to a term of imprisonment? Would the contract of employment be frustrated? If the contract is frustrated it automatically comes to an end; both parties are released from their obligations under the contract and neither party has any claim for a breach of contract.

Just because an employee is sentenced to a term of imprisonment does not automatically frustrate and put an end to the contract of employment from the date the employee is sentenced, although it could do. Whether the contract of employment is frustrated by a period of imprisonment will depend on how long is the sentence.

For example, in Prior v City Plumbing Supplies Ltd [2012] UKEAT 0535/11, Mr Prior was convicted in May 2008 of an offence of homophobic behaviour towards a neighbour and given a community sentence and made the subject of a restraining order. In December 2008, he was again convicted of the same offence; and this time he was sentenced to 12 weeks in prision, suspended for 12 months. In June 2009, Mr Prior was arrested at work for breaking the restraining order. In May 2010, he was sentenced to six weeks in prison, plus the suspended sentence of 12 weeks, making a total of 18 weeks, of which he would have to serve at least half before being released. The employer maintained Mr Prior’s contract of employment had been ‘frustrated’ and his contract was ended.

However, the Employment Tribunal concluded that Mr Prior’s sentence was not long enough to create a frustration, even if he ended up serving the full 18 weeks.

Therefore, what factors should an employer take into account before claiming an employee’s contract has been frustrated by a lengthy prison sentence?

The employee’s notice period for one. For example, if due to length of service an employee would either statutorily or contractually be due a period of notice approximately as long as their prison sentence, their contract would not necessarily be frustrated if they were imprisoned for a similar period.

Again, does the employer have a policy of allowing generous periods of paid (or partially paid) sick leave? If an employee is sentenced for a period equating to the length of time an employer would allow an employee to be off on sick leave before taking action to bring their contract to an end, an employee’s imprisonment would not automatically frustrate their contract of employment.

Another factor, along with the length of the prison sentence would be the importance and cost of replacing the imprisoned employee. An employer cannot be expected to incur substantial costs keeping a job open if it would be reasonable of them to stop employing an employee by reason of frustration.

Of course, an employer may envisage the possibility of an employee being imprisoned, for any or for a specific reason, and expressly include in terms and conditions exactly what would happen under those circumstances. In such a case, there would no longer be a frustration of the employee’s contract of employment because the fact that an employee is imprisoned was foreseen and provided for under their contract.

What is an employee’s ‘normal pay day’?

For statutory payment purposes, what is an employee’s ‘normal pay day’? This was nicely illustrated in a First Tier Tax Tribunal case (Dahal v Revenue & Customs & Anor [2012] UKFTT 311 (TC)).

In this case, Ms Dahal worked for McDonald’s and was fortnightly paid. Every fortnight she received a payslip clearly showing her “Pay Date” as falling on a Saturday. Using the payslip figures of her earnings over the reference period used to calculate her average weekly earnings, based on the Saturday “Pay Dates”, her average earnings were just over the lower earnings limit for Class 1 NICs. This meant she was entitled to SMP.

However, McDonald’s maintained that the dates to take into account were the dates she was actually paid her earnings via Bacs, i.e. on a Thursday each fortnight. If you used the Thursday pay dates in calculating her average weekly earnings, Ms Dahl earned just under the lower earnings limit and McDonald’s was not liable to pay her SMP.

Therefore, which was Ms Dahl’s “normal pay day” – the Saturday “Pay Dates”, or the Thursdays when her wages were credited to her bank account?

Under section 164(2)(b) of the Social Security Contributions and Benefits Act 1992, a woman’s average weekly earnings are based on her “normal weekly earnings” during the reference period in question. The Statutory Maternity Pay (General) Regulations 1986 states that “normal weekly earnings” are calculated according to a woman’s earnings payable in respect of a “normal pay day”. This pay day is defined as “a day on which the terms of a woman’s contract of service require her to be paid, or the practice in her employment is for her to be paid, if any payment is due to her.” In a case where a woman does not have an identifiable normal pay day, then the actual “day of payment” of her earnings becomes the “normal pay day”.

Both the employer and HMRC took the view that Ms Dahl’s ‘normal pay day’ and ‘day of payment’ was the Thursday when net pay was credited to her account, rather than the previous Saturday, which was the “Pay Date” stated on her payslip.

The Tax Tribunal rejected this assumption. The Tribunal stated: “Where, as in this case, there is a difference between the date on which an employer pays its employee and the date when the employee receives payment, in our judgement the ‘normal pay day’ and the ‘date of payment’ is the date when the employer pays rather than the (different) date when the employee receives. The definitions [cited above] refer exclusively to payment, and not at all to receipt… The best evidence we have of the date(s) of payment of Ms Dahl’s earnings is the payslips which show that her pay date was the Saturday.”

Therefore, using the Saturday dates in calculating Ms Dahl’s average weekly earnings during the reference period in questions meant her relevant earnings were above the lower earnings limit and McDonald’s is liable to pay her SMP.

I have a feeling that HMRC and McDonald’s may well appeal this decision by the First Tier Tax Tribunal. After all, in 2011 it was reported that McDonald’s have over 85 thousand employees in the UK; and a significant number of those will be women.

I know that there’d normally be no problem at all which date you took – the Saturday “Pay Date” or the following Thursday date of payment – where a woman clearly has average earnings in excess of the lower earnings limit regardless of which day was used. Nevertheless, identifying the specific dates to use when calculating a woman’s average weekly earnings is important, as this could affect how much SMP she receives during the first six weeks of her maternity pay period.


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.”