19 August 2024
Paras Shah, manager, and Caroline Harwood, partner, in the employment taxes team at BDO LLP, outline the challenges of navigating pay as you earn (PAYE) settlement agreements (PSAs)
Understanding the intricacies of the UK tax system can be a daunting task, especially when it comes to PSAs. While PSAs can be a valuable tool for employers, the technicalities and deadlines involved can often be challenging to navigate. This article aims to provide a comprehensive, practical guide to understanding PSAs, their benefits and how to effectively manage the associated deadlines.
Understanding PSAs
A PSA is an agreement which exists between an employer and HM Revenue and Customs (HMRC), allowing the employer to make a single annual payment to cover all the tax (on a grossed-up basis), along with a corresponding class 1B National Insurance contributions (NICs) charge that is due on (non-cash) benefits provided to employees that are:
l minor
l irregular
l impracticable or difficult to apportion the benefit per employee.
If one of the above conditions is met, then in theory, an item can be included on the PSA.
PSAs are enduring agreements unless they are revoked by HMRC or cancelled by the employer. A PSA can be amended to include additional qualifying benefits or exclude benefits that are no longer provided. Although, in the latter case, most employers tend to continue to include them and, if necessary, report a zero benefit.
For a tax year to be covered by a PSA, the application must be made to HMRC by 5 July following the end of the relevant tax year. Any amendments to a PSA must be made by 6 July following the end of the relevant tax year. HMRC now asks that applications and amendments are made online through its dedicated online service.
The form used for the agreement is officially known as Form P626. With new applications, it will be sent to the employer for signature, that then needs to send it to HMRC for it to be signed by them and returned to the employer. The amendment process used to be similarly cumbersome but now HMRC will send an updated letter with the amended PSA attached.
What items can a PSA cover?
A list of common items includes non-exempt, staff entertaining, staff gifts, long service awards, staff vouchers, relocation expenses, staff vouchers and non-trivial benefits. This list isn’t exhaustive and providing one of the three conditions (mentioned earlier) are met, then HMRC should be able to agree an item for inclusion within the PSA.
Cash payments and round sum allowances would not normally be covered and should be subject to PAYE and NIC through the payroll.
Regular and / or large benefits such as private medical insurance and company cars can’t be covered and would normally be reported on P11Ds.
So what are the deadlines?
PSAs will usually state that the PAYE settlement calculation must be provided
to HMRC by 31 July following the end of
the relevant tax year that it relates to. This
is where it can get quite confusing for
many employers.
While 31 July following the tax year end is a contractual deadline, it’s not a statutory one – because there is no statutory deadline. There is an effective deadline of 19 or 22 October following the end of the relevant tax year, which is the date by which payment of the PSA liability must be made. This is one of the many anomalies in the tax world. The government could easily implement a statutory deadline if it wanted to.
While technically, HMRC can revoke a PSA if the calculation has not been sent in by 31 July following the end of the relevant tax year, in practice, I haven’t seen this happen. Usually, HMRC is happy to accept PAYE settlement calculations up until the payment deadline, and it’s only after this that it consider sending what is called a “Regulation 110 Determination” to the employer. This is a calculation of HMRC’s best estimate of the grossed-up tax and class 1B NIC amount due. The employer then has 30 days to appeal the determination notice.
PAYE settlement calculation
The PAYE settlement calculation itself is simple but up to three calculations may be required; one that covers employees who are English and Northern Ireland taxpayers, another that covers Welsh taxpayers and one than covers Scottish taxpayers.
HMRC has thoughtfully produced a booklet under its Guidelines for Compliance series – Help with PAYE Settlement Agreement calculations (GfC1) that goes into further detail on the PAYE settlement calculation.
The calculation itself isn’t an exact science and HMRC is flexible on the approach used by employers, as it recognises that it can be difficult to apportion certain benefits. HMRC will accept a sensible approach used for benefit apportionment purposes.
The actual cost or the apportioned benefit cost is then grossed up at the relevant employees’ marginal rate of tax. If an employee doesn’t pay any tax, then it’s taxed under the PSA on its first marginal rate. For Scottish rate taxpayers, this would be at their Starter rate. For England, Wales and Northern Ireland taxpayers, this would be at the basic rate. The class 1B NIC liability is then calculated on the value of the benefit and the grossed-up tax.
Technical and other aspects
There is a technical aspect to PSAs, often overlooked by employers, in connection with the NIC position. Any benefits provided which are liable to class 1 (both the employer’s and the employee’s) NICs covered by the PSA from the year that it applies up to the point that the PSA has been signed by HMRC must have both class 1 employer’s and employee’s NIC operated. Any benefits covered by the PSA provided from the date it was signed by HMRC will be subject only to class 1B NIC.
In practice, I have rarely seen HMRC pick up on this point and it often accepts a PSA calculation with only class 1B NIC operated. However, from a technical standpoint, this does potentially give
rise to an underpayment of employee
class 1 NICs.
Penalties
There are no statutory penalties for sending HMRC late PAYE settlement calculations. However, as mentioned earlier, there is a risk that the PSA could be revoked by HMRC if it doesn’t receive the calculation by the payment date and a Regulation 110 Determination would be sent.
A late payment penalty of 5% of the outstanding amount could apply if the payment isn’t made within 30 days of the due date. Another 5% is incurred if there are amounts outstanding after six months. Finally, a further 5% penalty applies for amounts outstanding for more than 12 months from the due date.
Statutory interest will apply to overdue payments of the PSA liability.
Summary
The PSA process can be complex but
if operated correctly provides a useful
tool for employers to manage
unexpected or irregular tax liabilities
on employee benefits.
If you’re still not certain whether you should apply for a PSA, see our decision tree here: https://ow.ly/Sj8250SyBwX. n
This article feautured in the September 2024 issue of Professional.