Collaborations and mergers in the public sector

25 December 2018

This article was featured in the February 2019 issue of the magazine.

John Harling, principal employment taxes consultant at PSTAX, considers some of the main employment tax issues arising


In recent years there have been a number of changes within the public sector as relevant bodies strive to deliver services more efficiently to save money. These range from closer working arrangements between separate bodies to fully-fledged reorganisations/mergers. These changes present significant challenges in terms of administration and compliance with employment tax obligations 

The changes within the public sector can take a number of forms, including the following;

  • bodies working collaboratively in areas such as IT, payroll, human resources and finance

  •  reorganisation of local government with a reduction in the number of second tier authorities

  • mergers between different bodies within the emergency sector, especially fire and police bodies joining together. 


Payroll issues

Where changes in payroll administration are required – for example, moving employees to a new payroll or bringing different payrolls together – there are various issues that must be addressed to ensure that employers remain compliant with their statutory obligations. 

This is most challenging where there is a change in the legal employer following any restructuring, such as reorganisation of local government in a particular area and/or the merging of existing bodies into new legal entities. In such cases it will almost always be necessary for the new organisation to register a new pay as you earn (PAYE) scheme with HM Revenue & Customs (HMRC). These changes often involve what are known by HMRC as a ‘PAYE succession or merger’.

Broadly, a succession takes place where there is a change in the ‘ownership’ of an organisation meaning that employees from one legal entity are moved to another; whereas, a merger takes place where different PAYE schemes are brought together within the same legal entity. 

From a payroll and PAYE perspective it is often advantageous to obtain HMRC agreement that a succession or merger has taken place. This is because it usually means that employees may be moved from the old PAYE scheme to a new one without the bureaucratic need to issue forms P45 which otherwise can cause uncertainty for the employees concerned. 

If HMRC does not agree that a succession or merger has taken place, it may determine that a PAYE ‘cessation’ has occurred, in which case employees transferring to the new legal employer must be issued with forms P45 before they commence work with the new body.

It may be the case that bringing different payrolls and PAYE scheme references into one new scheme from the date that a new legal entity comes into being is not possible for practical purposes. In such cases, HMRC agreement must be sought where different schemes need to be operated whilst the systems are fully amalgamated.

These rules can be complex and there is no one-size-fits-all solution that works in every case where a change in the legal employer takes place. Therefore, it is recommended that advice be taken and HMRC must be consulted and agreement reached to ensure that the transition to the new entity is handled smoothly and compliantly.


Class 1 NICs

It is not unusual after any organisational change for a situation to arise where employees have more than one employment within a new legal entity. Where this is the case, due consideration must be given to the rules on aggregation of earnings for class 1 National Insurance contributions (NICs) purposes.

These rules generally require NICs to be calculated as if a single employment were held to prevent the employee and employer benefitting from the effects of the primary and secondary thresholds more than once respectively. This can prove problematic where different payrolls under different PAYE references continue to be operated. 

HMRC may allow NICs to be calculated separately if it is not reasonably practicable to aggregate the earnings, but this would only apply in limited circumstances and the presumption should generally be that aggregation must take place.



Where bodies work more collaboratively or are brought together into new legal entities, this can create problems regarding what business expenses employees may claim free of tax and NICs. Such changes often involve employees having to take on new responsibilities at more than one workplace.

Where an employee is required to attend more than one workplace on a regular and ongoing basis, both (or more) of those locations will become permanent workplaces so any expenses met by the employer in respect of journeys to those locations will be subject to tax/NICs. 

It is possible that an employee will be asked to attend a second workplace for a period of limited duration, which, under HMRC rules, is a period not exceeding 24 months. In such cases the expenses met in travelling to that second workplace may qualify as allowable for tax/NICs purposes. 

The rules can be complex so great care must be taken to ensure that they are followed correctly after organisational changes have taken place. Policies should be updated accordingly to reflect the changes in circumstances, so that employees understand what expenses may be claimed and in what circumstances.


Employee benefits

Organisational changes often result in employees from the bodies being brought together receiving different benefits, including salary sacrifice arrangements. 

A newly formed organisation is likely to want to be able to offer the same benefits to all its employees, but it is not always possible to do this from day one for reasons of cost and administration. This can be an issue where certain benefits have tax-favoured status (e.g. childcare vouchers and cycle to work), where the exemption from tax/NICs is predicated on the benefit being available to all employees. 

In such cases it is important to take advice and flag these issues with HMRC at the earliest opportunity to establish if it is acceptable to continue to provide the benefits on different terms for a limited period. Whilst it cannot be guaranteed that HMRC will agree to such a request, it is likely to be viewed a lot more sympathetically than not flagging the issue and it being discovered by HMRC at a later date.


Other areas

There are a number of other issues to consider from an employment taxes perspective which will need to be addressed where organisational change takes place including the following.

  • Consideration of the tax/NICs rules regarding termination payments where redundancies are required, including the new post-employment notice pay rules from April 2018. From April 2020, there will also be a charge to employer’s NICs on termination payments over £30,000 (where the relevant tax exemption applies).

  • Operation of the construction industry scheme, which may have to apply for the first time in some cases.

  • Responsibility for administration of the pension schemes.


Final observations

Organisational changes present many challenges and it is important to address these key employment tax issues to ensure that all HMRC requirements are fully met. This should be done as soon as possible in the process and advice should be taken where appropriate to avoid any unwelcome problems further down the line.