PAYE Settlement Agreements: a solution to unwanted employee tax liabilities?
Read time: 4 mins
A nudge letter from HMRC about your tax affairs may feel like an irritant, but acting on it is in your best interest. We explain the frequent misunderstandings and how a PAYE Settlement Agreement (PSA) could be the solution.
HMRC regularly issues nudge letters with the aim of encouraging employers to review their tax affairs and take remedial action if needed. Although there’s no requirement to respond to a nudge letter, it’s unwise to ignore it as this could prompt a full enquiry by HMRC.
Nudge letters are issued to taxpayers covering areas which HMRC considers to be a risk. In recent years, the reporting of staff entertaining has been an area of particular concern.
Many employers are unaware that ad hoc staff entertaining provided through the year may be a taxable benefit in kind for their employees. Occasions such as department lunches and drinks at the local pub may all be reportable benefits.
We have seen nudge letters issued to businesses where HMRC has identified staff entertaining costs included in the accounts and where:
- there is no PSA in place
- staff entertaining has not been reported on forms P11D, or
- if a PSA is in place, annual calculations have not been filed.
For employers who don’t want employees to incur the income tax and NICs on this benefit, there’s an option to report the staff entertaining costs to HMRC via a PSA.
What is a PSA?
A PSA is an arrangement between an employer and HMRC that allows the employer to pay tax and NICs on behalf of its employees on certain taxable benefits and expenses. This offers an alternative to reporting the amounts on their employees’ form P11Ds or payroll, where the employee incurs the income tax.
The benefits and expenses that can be included in a PSA must be minor, irregular or impractical to deduct PAYE income tax from. The most common benefits and expenses we see on PSAs include:
- staff entertaining
- taxable travel expenses
- staff gifts
- incentives
- long service awards.
Why should employers consider a PSA?
PSAs offer a way for employers to fulfil their employment tax obligations and remain compliant, without employees incurring additional expense. They are more expensive for employers than P11D reporting, as they must agree to settle the employee’s income tax liabilities on the reported benefits or expenses. This in itself counts as a taxable benefit. But the additional costs payable by the company mean the employee will not incur any tax or NICs on their benefits or expenses.
This helps create a strong employee/employer relationship, rather than risk surprising employees with unexpected tax bills.
But it’s important that employers are aware of the potential pitfalls when reporting benefits and expenses on their PSAs.
Where does it go wrong with PSAs?
Despite the benefits, there are hurdles for employers to be aware of with the PSA route.
Lack of knowledge about which benefits and expenses are taxable
Many employers will have a PSA in place with HMRC but are not well versed in the legislation to correctly identify what is taxable.
- An example we see often is employers paying for home office equipment.
If an employer buys home office equipment and allows the employee to use it whilst employed by them, no taxable benefit arises.
During 2020/21 and 2021/22, HMRC agreed that employees could purchase home office equipment and their employer could reimburse them without any tax or NIC implications. The idea was to facilitate the shift to home working during Covid. But this concession was discontinued from 6 April 2022.
Since that date, if an employee buys home office equipment and their employer reimburses them, the amount should be subject to PAYE tax and NICs. This is an example of a minor and irregular expense that can be included on an employer’s PSA. - What’s more, employers may not know how to apply the available exemptions correctly. Examples of these exemptions are:
- £150 annual event threshold
Staff entertaining is normally taxable, but may be exempted where employers hold annual functions.
An annual event or party is not taxable if the VAT inclusive costs does not exceed £150 per attendee and the invite is open to all staff generally.
- £150 annual event threshold
- Trivial benefits exemption
Staff gifts are also normally taxable. But a gift could be considered a ‘trivial benefit’, and therefore exempt, if it costs less than £50 (including VAT) and is not cash or a cash voucher. It must not be provided under salary sacrifice arrangements or any other contractual obligation, nor as a reward for services.
- Trivial benefits exemption
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Poor records
Often there is a lack of clarity within an employer’s ledger accounts to determine what expenses relate to. This makes it difficult for them to remain compliant by accurately reporting to HMRC the necessary benefits they’ve provided to employees.
Another challenge is the category options on employee expense claims and the comments left by employees, which often don’t clearly describe the expense. Again, this makes it difficult for employers to accurately determine the tax treatment of expenses.
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Failure to file a nil return to HMRC if no taxable expenses occur in a tax year
If employers have a PSA in place with HMRC, this rolls over each year. But for a tax year where there are no taxable benefits or expenses to report, HMRC still expects a nil return to be filed.
If one isn’t filed, HMRC may send out a notice of tax determination. This is a formal calculation that estimates the tax and NICs due. There is no way for an employer to appeal this determination. The request for payment stands unless a PSA calculation is submitted for the previous tax year which can supersede the determination made by HMRC.
Overall, there is much to consider for employers to fulfil their employment tax obligations. If you require any help with making a PSA application. Completing your PSA calculation accurately, understanding a notice of tax determination, or dealing with a nudge letter, please contact Shaun McGown at smcgown@pkf-l.com.