Optional Remuneration Arrangements (OpRA)
27 March 2018
Written in March 2017 by Samantha Mann, senior policy and research officer, originally for Miracle Dynamics.
How an employer chooses to pay, or reward, an employee in return for their work is very much a matter of contractual agreement between the employee and the employer. Disputes that may arise between them are dealt with thought the Tribunal and Court service, assuming mediation with ACAS fails. And in some cases, such as working hours, recourse may even see the employer or employee heading for the European Courts to challenge (or defend) an element arising from a European directive.
In a nutshell, it is a matter of employment law – not tax law.
However, the details of the remuneration package i.e. how the employer rewards the employee either in the form of cash salary or cash allowances or indeed benefits in kind, and how that agreement is reached does need to be assessed to identify whether there will be a liability for income tax – to the employee, whether through the Pay As You Earn (PAYE) system or under the benefits code via P11D reporting or voluntary payrolling.
Further, there may be a liability for the employer and employee to pay class 1 national insurance contributions (NICs) or for the employer to instead pay Class 1A NICs. I won’t continue to confuse the issue further with mention of Class1B NICs and PSAs, suffice to say this is a complex area which from the moment PAYE was launched in 1944 began to be even more complex as inventive ways were found to reduce the burden of tax on the taxpaying community.
Salary Sacrifice
Salary sacrifice is one of the many terms used to describe a situation where the employer and employee agree to enter in to a contract whereby the cash salary is reduced in exchange for the provision of a Benefit in Kind (BIK) – I don’t believe I would be too far wrong to estimate that the main BIKs provided under this arrangement are childcare vouchers, pensions and bicycles or cycling equipment that enables an employee to travel to work using a more environmentally friendly resource.
Employees who are paid only the National Minimum Wage (NMW) or the National Living Wage (NLW) are prevented from entering into this type of contractual arrangement as BIKs do not count towards the calculation of NMW/NLW. Accommodation can be included but only through a daily or weekly limit (£6.40/£44.80).
Whilst the three most popular BIKs would result in the reduction to employee income tax and primary and secondary NICs, they are by no means the only BIKs that are provided under this type of arrangement, or similar. And in recent years there has been an increase in the use of such a scheme, or similar schemes, by employers and their employees.
After warning ‘shots across the bow’ in previous Budget announcements and Autumn Statement reports, that government were concerned about the increased use of salary sacrifice schemes. A paper was published in 2016 Consultation on salary sacrifice for the provision of benefits in kind that made clear that HMRC were keen to narrow down their focus to schemes that were offering such flexibility
The government, at Budget 2016, had previously stated its intention to exclude a number of Benefits in Kind (BiKs) from a new policy because it wished to encourage employers to provide these to employees. Following consultation, this list of excluded items i.e. those that would not fall under the new rules being introduced as of 6 April 2017 included:
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Pension contributions and advice
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Employer-supported childcare
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Cycle to Work
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Ultra-low emission vehicles (ULEVs) - cars with emissions between 0 and 75 g CO2 per kilometre
Optional Remuneration Arrangements
The Finance Bill 2017 (and subsequent Finance Act 2017) brought in new rules that will result in a revaluation of the benefits code being used where benefits or facilities are provided through optional remuneration arrangements. HMRC draft Employment Income Manual (EIM) makes it clear that a benefit or facility means anything which constitutes employment income or anything which is treated as arising to the employee regardless of the manner or provision or form.
Well, that seems to pretty much capture anything and everything – does it not?
So what does the term Optional Remuneration Arrangements really mean? Essentially the legislation looks to ensure that where benefits are provided under optional remuneration arrangements that there is no longer a gain from income tax and NICs advantages in the same way that they once did.
Salary sacrifice arrangements can still exist but the amount that becomes subject to Income tax or NICs will change.
As you would expect new policy results in new rules and new rules results in new jargon – and who doesn’t love some extra exclusive language to get our heads around.
On this occasion what we are looking at are two key terms which for the purposes of this article I’m going to take in their entirety from the draft EIM, they are:
Type A arrangements – type A arrangements are arrangements under which the employee gives up the right, or the future right, to receive an amount of earnings (for example salary) which would be chargeable to tax under Section 62 ITEPA 2003 in return for the benefit.
So here we are largely talking about salary sacrifice/salary exchange.
Type B arrangements - type B arrangements are arrangements, other than type A arrangements under which the employee agrees to be provided with a benefit rather than an amount of earnings (for example the option of a cash allowance).
So here there is a choice between a benefit in kind or taking a cash allowance a popular example would be the provision of a company car v a cash allowance.
Where a benefit is chosen instead of some form of cash pay, the taxable value of the benefit is the greater of the amount of cash pay given up and the taxable value under the normal benefit in kind rules. Where the two are the same, then apply the normal benefit valuation rules.
Where an allowance is paid as part of remuneration but no company car (or BIK) is offered then this wouldn’t be captured under the new rules. Equally, where the cash allowance is taken in preference to the benefit in kind it is then not impacted by the new rules but instead subject to tax and NICs as usual through PAYE.
Transitional protection (Grandfathering)
Whilst disappointingly the response to the consultation included confirmation of an extremely tight rollout deadline – 6 April 2017 – it did also confirm that for contractual agreements that were in place (under their normal processes) as at 6 April 2017, they would be subject to protection until April 2018. This would allow for preparation by employers, employees and HMRC.
Further, for some BIKs that traditionally would see long-term contractual arrangements such as living accommodation, cars and school fees they would be protected until April 2021.
Protection relies on there being no change or renewal to the contract – where there is change or renewal then the new rules brought in on 6 April 2017 will apply.
Guidance and forms
Employers who are captured by the new rules will need to continue to use the old style P46 (car) because time ran out last year to enable the change to be made in time for 6 April 2017. The P11D will also be re-designed to enable employers to report the correct values by 6 July 2018. Calls have been made for the re-design to be published earlier to enable software developers to ensure they have ample time to make all amendments as required in a timely fashion.
Draft EIM guidance has been published which will be finalised after the Finance Bill 2017 receives Royal Assent, which a significantly reduced version did before Parliament closed for General Election Purdah.
Booklet 480 will also be updated and the timetable for publishing this was due to be May – we haven’t yet heard whether Election Purdah had interfered with this timetable – let us hope not.
Employers who have taken up voluntary payrolling will be impacted by the delay in guidance coming through however the current rules for voluntary payrolling do allow for adjustments to be made as values are revised (if needed).
Further administrative burden or the creation of a fairer tax system?
Debate continues as to the whether these new rules will add fairness or simply heap more burden (and confusion) on an already burdened employer. Certainly, for some employers who have dipped their toes into slightly more imaginative reward packages for their employees it has been enough to see them revert to ending salary sacrifice schemes, but for many, business continues as normal.