Benefits During Maternity Leave – HMRC publishes further clarification of tax issuesSunday, April 26th, 2009
In May 2008, in a detailed and controversial document entitled “Statutory maternity leave – salary sacrifice and non-cash benefits”, HMRC provided guidance for employers on their statutory obligation to maintain contractual benefits while employees are on maternity leave. Some of the guidance provided was contentious, not simply because the Department for Business, Enterprise and Regulatory Reform (BERR) used HMRC to explain the employment law aspects of the maternity and adoption leave changes that were introduced in October 2008, matters that are outside of HMRC’s jurisdiction, but because it used tax and social security law definitions to support BERR’s interpretation of the employment law term “remuneration”.
HMRC has now published another guidance document to clarify a number of issues that have been raised by employers about the taxation of what the document calls “non-cash benefits”. Since October 2008, employees are entitled to the benefit of all of their “terms and conditions of employment”, with the exception of “terms and conditions about remuneration”, during the full period of leave. As “remuneration” is defined as “only sums payable to an employee by way of wages or salary”, all of the terms and conditions that continue to apply during maternity and adoption leave would be better called “non-wage benefits” in the context of employment law. In fact, the term “non-cash” does not appear anywhere in employment law. It is, rather, a tax term, used extensively in tax law to distinguish between “cash” and “non-cash” benefits for the purpose of PAYE tax and NICs. Nevertheless, BERR relies on the tax law distinction to argue that, for example, an employee is entitled to the contractual provision of a company car or company house during maternity or adoption leave, but not to the contractual provision of a car allowance or housing allowance.
HMRC’s new document continues to use the term “non-cash benefits”. Quoting from the May 2008 document, HMRC states that such benefits include:
- company cars, mobile phones, living accommodation or other assets provided to the employee for non-business use, without ownership being transferred to the employee;
- medical / dental / critical illness / travel / car insurance provided under company insurance policies; employer-provided health checks;
- non-cash vouchers, such as childcare vouchers which can only be used by the employee for qualifying childcare and are not transferable.”
Unlike the earlier document, the use of “non-cash benefits” to describe such benefits is appropriate in the new document because it confines itself to tax and NICs issues relating to benefits provided during maternity leave. Two specific issues are addressed, namely,
- the tax and NICs consequences and recording and reporting obligations when non-cash benefits chargeable to Class 1 NICs are provided but the employee has no cash earnings, and
- whether tax refunds can be made to employees who are receiving non-cash benefits but have no cash earnings.
The examples of “non-cash benefits” listed above are useful because they highlight the relative complexity of the tax and NICs rules that apply to benefits-in-kind. Some are taxed under the P11D and P9D reporting procedures, others under PAYE. They may variously be liable to Class 1, 1A or 1B NICs. Others may, in defined circumstances, be wholly or partially exempt from tax and NICs.
No cash earnings in the earnings period
Taking the first of the issues considered by HMRC, some non-cash benefits, which are reported in sections B, C, E and, in some cases M, on form P11D or their equivalent on form P9D, give rise to a Class 1 NICs liability which can only be met through the payroll. These include
- settlement by the employer of an employee’s personal liabilities,
- provision of non-cash vouchers,
- use of the employer’s credit card in circumstances where the contract is made between the employee and vendor,
- mileage allowance payments that exceed the permitted maximum,
- loans written off by the employer.
During normal paid employment and during paid maternity and adoption leave, employees have earnings to which the value of non-cash benefit can be added prior to calculating the Class 1 NICs. During unpaid leave, however, there are no cash wages from which primary Class 1 NICs can be deducted. The problem is likely to occur only rarely, for at least three reasons:
- most of the benefits that are liable for Class 1 NICs are unlikely to be provided during unpaid leave
- the most likely benefit to continue during unpaid leave is the provision of non-cash childcare vouchers under a contractual salary sacrifice scheme, but an NICs liability only arises if the exempt amount is exceeded, i.e. £55 weekly, £243 monthly
- the value of the benefit for NICs purposes would have to exceed the earnings threshold for the earnings period, i.e. £110 weekly, £476 monthly.
In such a situation, the liability must still be met and, even though the primary NICs cannot be deducted, the employer must
- pay both the primary and secondary NICs due to HMRC at the appropriate time, and
- include the figures on the employee’s P14.
The employer now has the remainder of the tax year to deduct the primary NICs from the employee’s later earnings. When the employee next has cash earnings, some or all of the NICs can be deducted, the amount being limited to the maximum of the primary NICs that are otherwise deductible in that earnings period. Such deductions can continue until the end of the current tax year if necessary but, if the NICs have not all been recovered in this way by that time, the employer must bear the cost of the remainder. Deductions cannot continue into the following tax year as that special provision only applies to the recovery of NICs where the under-deduction is due to an error made by the employer in good faith and this is not such a situation.
Payment by the employer of the primary NICs in this situation without having deducted them initially from the employee’s earnings does not constitute the provision of a benefit or the payment of the employee’s pecuniary liability, although it would do if the employer deliberately failed to recover the NICs in later periods in order to provide a benefit.
An employee on maternity or adoption leave with a cumulative tax code may receive a tax refund when SMP or SAP starts to be paid at a lower rate than the employee’s normal rate or the six week higher SMP rate. That is a normal situation and the refunds should be paid as generated.
However, when entitlement to SMP or SAP ends and the employee continues on unpaid leave, whether or not any non-cash benefits are being provided, the employee may continue to be entitled to tax refunds. The PAYE regulations make specific provision for the payment of tax refunds during periods of unpaid leave. There is no requirement for the employer to make a tax refund unless the employee, or the employee’s representative, specifically requests it. If such a request is made, the employer must operate PAYE on a normal payday, even though there is no payment to process, and pay the generated refund to the employee. Otherwise, there is no statutory requirement to run the payroll for any employee on unpaid leave. (No refunds may be made to an employee who is involved in a trade dispute.)
HMRC’s original document included discussion of a number of common misunderstandings about the provision of benefits during statutory leave. Two more misunderstandings are included in the new document:
- Misunderstanding: An employee on statutory maternity or adoption leave is not actually working for the employer and, as a result, there is no liability for tax or NICs on any non-cash benefits during the leave period.No. Employees on statutory leave are still employees and liable for tax and NICs. SMP and SAP and liable for PAYE tax and NICs while the employee is not working and so is the provision of any non-cash benefits.
- Misunderstanding: When an employee receives approved childcare vouchers, the chargeable value of that benefit to the employee is the sum of the tax and NICs they saved through the tax and NICs exemption.No. The tax and NICs charges on childcare vouchers are based on the value of the childcare that can be obtained by means of the vouchers. If the statutory conditions are met, the first £55 per week or £243 per month and any administration costs incurred in providing the vouchers are exempt from both tax and NICs. These rules do not change during statutory leave or if the vouchers are provided under a salary sacrifice scheme.
Two other comments need to be made about HMRC’s new document.
Firstly, the sample list of non-cash benefits refers to “non-cash vouchers, such as childcare vouchers which can only be used by the employee for qualifying childcare and are not transferable.” A significant part of HMRC’s earlier document tackled issues relating to the continuing provision of childcare vouchers under a salary sacrifice scheme during statutory leave. Mention of childcare vouchers in the new document must be understood in that context. Childcare vouchers are just one kind of non-cash vouchers and, whether they are provided during regular employment or during statutory leave, they are handled for both tax and NICs in exactly the same way.
There are, however, other rules for other kinds of vouchers, such as cash vouchers, which are always treated as cash for both PAYE and NICs, and vouchers that may be used to obtain readily-convertible assets, which must always be handled according to the notional payments rules, even if that situation occurs during statutory leave.
Secondly, the document makes reference to the P11D and P9D reporting requirements in relation to non-cash benefits provided during maternity or adoption leave. The non-cash benefits provided to an employee with earnings, including benefits, valued at £8,500 or more for tax purposes are reported on form P11D. However, if the same employee receives SMP or SAP for 39 weeks, plus some non-cash benefits, and the total annual value for tax purposes is now less than £8,500, the employee is now a “lower-paid employee” and any reportable benefits must be submitted on form P9D. However, except for non-cash vouchers, living accommodation, goods that are money’s worth and payments made on the employee’s behalf, all benefits otherwise reportable on form P11D are not reportable on form P9D. For example, the provision of private medical insurance is a taxable benefit for employees with an earnings rate of £8,500 or more, but not those with an earnings rate of less than £8,500. If a woman is entitled to private medical insurance during maternity leave, the benefit may not be taxable for that tax year.
Employers: providing non-cash benefits during statutory maternity and adoption leave
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