Simplifying the PAYE Settlement Agreement (PSA) process

12 October 2016

12 October 2016

The process involved for both employer and HMRC in agreeing and administering a PSA is lengthy, manual, and has been identified by the Office of Tax Simplification as a perfect candidate for administrative improvement (aka simplification).

The paper details proposals that aim to simplify the process used for agreeing and reporting items in a PSA and asks how the process can be simplified and how guidance can be strengthened to provide clarity for both employers and HMRC.

There is no proposal to broaden the scope of PSAs.

Currently employers have to apply in writing for a PSA each year, with a paper agreement that must be signed and dated (in duplicate) by both HMRC and the employer, with each retaining a copy for their records.

HMRC has identified that the majority of PSA applications are identical each year and often agreed on the same terms.  Items commonly seen in a PSA include Christmas parties, working lunches, team building exercises and staff incentive awards.

At what time the PSA is agreed also impacts on whether Class 1 NIC becomes payable, in some instances, and this has been recognised as leading to practical difficulties for employees and is an area which will benefit significantly from simplification.

Proposals

Remove the need for upfront agreement

  • Removing the need for annual agreement will make the process simpler particularly for employers who apply for the same items year on year.
  • It will also remove the anomaly that exists where Class NICs become payable on non-cash vouchers where agreement isn’t achieved before the non-cash vouchers are provided.

Replace the paper return with a digital return

  • Which in turn should reduce the risk of frequent errors made by employers when entering data in the PSA returns.

Handling differences of opinion

  • Where upfront agreement is removed there is a risk of disagreement at a later date by HMRC as to its inclusion. The Government  is open to hearing views during consultation but is proposing that a pragmatic approach should be adopted where the employer acts in ‘Good Faith’ with action only being taken where the employer does not act in good faith or where they continue to include items within the PSA when they have been warned by HMRC not to.

Removing the requirement for items to be ‘Minor’

  • Since the introduction of the Trivial Benefit exemption, many items have been removed from a PSA agreement. It is proposed that simplification and additional certainty could be achieved by removing this criteria.

‘Irregular’

  • Irregular should be considered in the context of a tax year and not be repeated within any pattern and additionally not be anything that an employee has a contractual right to.

'Impracticable'

  • The 'Impracticable’ test cannot simply occur as result of limitations within an employer’s software or due to presentational awkwardness.

There are many questions posed within the consultation paper, ranging widely from:

  • Do you agree that removing the requirement to agree the items in a PSA will provide simplification for employers? - through to;
  • What other safeguards could/should be considered to guard against possible abuse of PSAs and are there any compelling reasons/scenarios which do not fit into the rules as set out above that employers feel the PSA process should be amended to include?

Responses to the consultation can be submitted directly to PAYE.policy@hmrc.gsi.gov.uk by 18 October 2016.

Alternatively, you may prefer to share your thoughts, experience of processing PSAs and comments with the CIPP Policy team to feed in to the written response that will be submitted. If so, please contact Samantha Mann, CIPP Senior policy & research officer via policy by 17 October 2016. In advance of your email - Thank you.