OpRA – the sting in the tale

25 September 2018

This article was featured in the October 2018 issue of the magazine.

Justine Riccomini ChFCIPP, head of taxation (Scottish Taxes, Employment and ICAS Tax Community) for ICAS, looks at how the new regime is bedding in

Salary sacrifice has been around for a long time – certainly since I began my career in taxation thirty years ago – but it became especially popular in the 1990s and has stayed in vogue ever since. Though ‘sacrifice’ implies that pay is given up, with nothing in return, it is more about salary exchange. In other words, an employee could exchange part of their gross salary and get something else in return, such as a benefit in kind, to an equivalent or lesser value. 

With the increasing popularity of the total reward statement and flexible benefits plans, employers and tax advisers realised the potential savings where a portion of gross salary could be exchanged for a benefit in kind free of income tax and/or National Insurance contributions (NICs). Employers were able to enhance the employee value proposition by introducing a suite of benefits and rewards through salary exchange schemes. The tax- and NICs-free items did not need to be payrolled or included in a P11D return, and those which still carried a tax liability could be declared in the return, to the extent the employee had not fully extinguished the benefit.

...reduction in the tax and NICs flowing in to the Exchequer

 

The main reason for HMRC’s drive to change the salary sacrifice regime was because it perceived abuse was taking place and items were being exchanged which were outside the spirit of the regime – the main one being travel and subsistence expenses. This was seen to be a form of exploitation of employee and worker rights as well as a reduction in the tax and NICs flowing in to the Exchequer. 

According to HMRC, so many salary sacrifice schemes had been set up that substantial revenue losses were accruing. The problem was that there was no legislation in place defining what a salary sacrifice scheme should represent, what the government was prepared to allow and how it should be reported, as employers were simply making use of available exemptions and reliefs legislation. Therefore, as a result of Finance Act 2017, provisions were inserted into the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) to create the optional remuneration arrangements (OpRA) legislation. The main aim was to restrict tax efficient OpRAs to pensions, cycle to work and ultra-low-emission vehicles (ULEVs) to encourage pensions saving and greener travel arrangements. Consequently, the government expects to raise an additional £260 million by 2021/22 through OpRA.    

An item is now an OpRA if it falls into either type A or B arrangements as outlined at section 69A of ITEPA: 

  • Type A is where the employee gives up the right or the future right to receive salary (giving up pay, such as in a pension salary sacrifice arrangement). 

  • Type B is where the employee agrees to be provided with the benefit rather than the equivalent amount of cash remuneration (choosing something from a menu of flexible reward options).

The value of the benefit being provided is deemed to be the greater of: the amount of pay given up; and the value of the benefit (using the usual valuation methods) ignoring any amount made good (https://bit.ly/2nG1hQG).

Note that Type B arrangements extend the previous salary sacrifice regime and the valuation rule above is particularly punitive in terms of the tax due. Consequently, the employer NICs due on type B arrangements and the new valuation regime catches items which were previously thought to be paid away, reduced to nil or exempt – so care must be taken when calculating these benefits in future. 

Under the new rules any scheme involving salary sacrifice will transition into an OpRA where a salary exchange arrangement begins for the first time or reaches a renewal or modification point (‘the trigger point’). Where there are no changes or modifications, there is an automatic transition to OpRA for any arrangements in place on 6 April 2018. It should be noted that the three types of salary exchange that are carried through the transitional arrangements to 2021 are: living accommodation benefit; school fees (special arrangements apply); and cars with emissions more than 75g/km of CO2. The diagram explains how the transition from salary sacrifice to OpRA works between 2017 and 2021:

Note that all benefits in kind provided under normal conditions (i.e. in addition to pay), are not affected by OpRA and should be declared via a P11D return in the usual way. Even exempt benefits, such as health screening, need to be considered because if they are paid under a type B arrangement, the amount foregone by the employee may well need to be declared via P11D, with a corresponding class 1A NICs charge. 

...hard to distinguish between type A and B arrangements

 

All OpRA benefits are liable to class 1A NICs so that the NICs rules continue to mirror the income tax rules as with other areas of employment taxation, including for valuation and exemption purposes. 

A year on, it is interesting to see how the payroll industry has reacted to the changes. All those providing benefits which now fall under the OpRA regime will have submitted their first set of P11D returns with the benefits reported on them – or they may have chosen to payroll the benefits. According to HMRC, in a July 2018 report which provides only provisional figures for 2016/17 (https://bit.ly/2wzl6eT), the tax and NICs generated from payrolling benefits is estimated at around 11% of all benefits-in-kind related income. This percentage is generally thought by the tax profession to be as low as it is because payrolling is still unattractive to employers due to restrictions on what can be payrolled, and the fact that anything which cannot be payrolled must still be returned via the P11D. Therefore, it is thought to be only those employers providing benefits capable of being payrolled and no more that pursue the payrolling option.

Various reports suggest that issues around the added complexity in the legislation and the treatment of cash and non-cash allowances is confusing for employers as they find it hard to distinguish between type A and B arrangements. Issues around employees who are on the cusp of a tax band mean that some employees will find themselves in a higher tax bracket because of the measures – in Scotland there are now five bands to consider – which adds to the complexity and the interaction with other issues such as universal credit, tax credits and pensions. 

 

Conclusion

It is important that employers understand the new arrangements and make moves to realign their offerings to achieve optimum tax efficiency for themselves and their employees. Staff handbooks, policies and procedures, remuneration committee decisions and employment contracts will need to be amended accordingly – all with the agreement of employees, to avoid dissatisfaction and loss of engagement, morale and productivity.

Identification of all relevant benefits and tracking of key trigger dates are essential requirements.

Fleet managers, living accommodation managers and anyone else involved in the provision of benefits need to understand the new rules and comply. HMRC’s employer compliance officers will be very interested in those who are not. It would be helpful for all employees in the business to be informed and educated by a suitable communications programme so that they fully understand and trust what is happening to their pay.

Finance departments, directors and senior accounting officers in large businesses will also need to understand the new reporting requirements and have systems in place to ensure the new calculations are correct.

OpRA is here to stay. Time will tell as to whether the measures have resulted in higher revenue receipts for the Exchequer – although measuring success may be tricky as pinning the receipts down to specific areas of remuneration planning will be challenging. The data kept by HMRC on salary sacrifice is somewhat patchy due to the lack of information in this regard on employer returns. It would be difficult to compare this data to any future regime because employers do not have to ‘sign up’ to OpRA – they just transition from one regime to the other. n

 

Changes to rules for taxable cars and vans

Proposed measures in the next Finance Bill will address two anomalies in the OpRA rules, by introducing legislation to:

  • ensure that when a taxable car or van is provided through OpRA, the amount foregone, which is taken into account in working out the amount reportable for tax and NICs purposes, includes costs (e.g. insurance) connected with the vehicle which are regarded as part of the benefit in kind under normal rules

  • adjust the value of any capital contribution towards a taxable car when the car is made available for only part of the tax year.