Lora Murphy ACIPP, CIPP policy and research officer, provides a reminder of the rules
PAYE (pay as you earn) settlement agreements (PSAs) can be used by organisations to submit one annual payment comprising all the tax and National Insurance contributions (NICs) relating to minor, irregular or impracticable expenses and benefits that have been provided to employees.
Where a PSA has been granted by HM Revenue & Customs (HMRC) for such items, there is no requirement to process them through the payroll for the purposes of income tax and class 1 NICs, or to include them in P11D returns, or to pay class 1A NICs on them at tax year end. Instead, class 1B NICs will be payable as part of the PSA.
What can be included
Expenses or benefits included in a PSA must be minor, irregular, or impracticable.
A common-sense approach should be applied when determining which expenses and benefits fall within these categories. An example of a minor benefit or expense could be a small gift or voucher or a telephone bill.
Irregular benefits and expenses are things that employees have no contractual right to, which are not paid at expected intervals throughout the tax year. Where benefits and expenses are paid at regular intervals, this could mean that they become ‘custom and practice’, potentially meaning that they could no longer be classed as irregular. One example of irregular benefits or expenses includes expenses incurred by a spouse when accompanying an employee abroad.
Impracticable expenses and benefits are those that are difficult to assign a cost to, or to fairly share out between employees, e.g. tea and coffee, or staff entertainment that is not exempt from tax or NICs.
What is excluded?
Whilst the focus here has been on what can be included in a PSA, it is particularly important for employers to be equally mindful of the items that are excluded.
Wages and cash payments, such as bonuses, round sum allowances and beneficial loans cannot be included. Nor can benefits of a high value, such as company cars.
There is no requirement to include trivial benefits in a PSA.
The associated deadlines
Organisations must apply for a PSA by 5 July following the first tax year to which the arrangement relates.
Payments of tax and class 1B NICs owed under a PSA must be made by 22 October latest if paying electronically (or 19 October, otherwise) following the tax year to which the PSA relates. It is important for organisations to be aware of these dates and to arrange timely payment as they could potentially be fined or charged interest where the payment deadline is missed.
If a PSA is first approved prior to the start of a tax year, any expenses and benefits contained in the agreement can be included.
Expenses and benefits provided prior to the agreement date and which have already been included in the employees’ tax codes or in PAYE tax and NICs calculations must be reported in the P11D return.
Similarly, if a PSA is approved between 6 April and 5 July, expenses and benefits that were provided during the tax year and already included in the employee’s tax codes or in PAYE tax and NICs calculations must be included in the P11D return.
Obtaining a PSA
There are several steps that an organisation must take to get a PSA.
The first step involves contacting HMRC in writing detailing the expenses and benefits that the PSA is to cover. When HMRC has agreed which items can be included, it will send the organisation two draft copies of form P626. Both copies need to be signed and returned. At this point, HMRC will authorise the request and provide the organisation with another form, which is the organisation’s PSA.
Anything that cannot be included must be reported using P11D returns unless the expenses or benefits are being processed via payroll.
Form PSA1 will assist organisations in calculating the full amount owed. Employees need to be recorded separately in the form based on the tax bracket they fall under. This form should be sent to HMRC as soon as possible following the end of the tax year, at which point HMRC will confirm how much income tax and class 1B NICs are owed.
The address for contacting HMRC in relation to PSAs is available online, here: http://ow.ly/WN6A30rMf3T.
A PSA remains in place until the organisation or HMRC cancels it, or until the organisation needs to amend it. There is no requirement for the PSA to be renewed annually.
Changes, or cancellation
Details of changes to the items covered by a PSA must be sent to the HMRC office that issued the original PSA. HMRC will then send a revised P626 form which the organisation must review, sign and return.
To completely cancel a PSA, the return slip section of the P226 must be completed and sent to HMRC. The PSA will be cancelled from the date in the return slip.