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Employing staff for the first time

There is a multitude of rules and regulations that you must be aware of when you start employing staff for the first time. A full examination of the rules is beyond the scope of this article. However, we wanted to list the following points from HMRC’s guidance which sets out some important issues to be aware of when becoming an employer.

  1. Decide how much to pay someone – you must pay your employee at least the National Minimum Wage.
  2. Check if someone has the legal right to work in the UK. You may have to do other employment checks as well.
  3. Check if you need to apply for a DBS check (formerly known as a CRB check) if you work in a field that requires one, e.g. with vulnerable people or security.
  4. Get employment insurance – you need employers’ liability insurance as soon as you become an employer.
  5. Send details of the job (including terms and conditions) in writing to your employee. You need to give your employee a written statement of employment if you’re employing someone for more than 1 month.
  6. Ensure that you register as an employer with HMRC. You can do this up to 4 weeks before you pay your new staff.  This process must also be completed by directors of a limited company who employ themselves to work in the company.
  7. Check if you need to automatically enrol your staff into a workplace pension scheme.

When it comes to paying staff, you generally have the choice between using a payroll provider or running your payroll yourself. If you decide to run your own payroll you must choose suitable payroll software. Setting up payroll for the first time can be an onerous and complex task. We can of course help advise you to ensure you meet the necessary requirements in the most efficient way possible.

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Employing someone to work in your home

When you employ someone to work in your home, it is your responsibility to meet the employee's rights and deduct the correct amount of tax from their salary. This can include employees such as a nanny, housekeeper, gardener or carer. The rules are different if the person is self-employed or paid through an agency.

If you employ anyone they must:

  • have an employment contract
  • be given payslips
  • work no more than the maximum hours allowed per week
  • be paid at least the National Minimum Wage.

Your employee is also entitled to standard employee rights such as statutory maternity pay, statutory sick pay, paid holiday, redundancy pay and a workplace pension – once they meet the standard eligibility requirements. An employee must also have minimum notice periods if their employment is to end. Note, that these rules apply even if the employee works on a part-time basis, although some payments depend on the level of earnings or may be adjusted pro-rata.

It is also your responsibility to register as an employer, check any employees are allowed to work in the UK and to have employer’s liability insurance. There are different rules if you have an au pair as they are not usually considered to be workers or employees.

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Pecuniary liability treated as income

A pecuniary liability can occur when a monetary obligation is fulfilled by an employer, when by law, the liability was that of an employee. One example of this is the case of an employer paying a debt that an employee owes to a third party. The employer’s payment in this case is of direct monetary value to the employee because he or she no longer has to pay that amount of money to the third party. This payment is therefore treated as earnings in the hands of the employee and is taxable.

It does not matter for tax purposes whether the employer makes the payment voluntarily or under a contract. HMRC provides the example of an employee who has signed the application form for the supply of electricity or gas to her home, the employee is the customer and she will be the person who is billed. If the employer pays the bills for the employee, the employer is discharging the employee’s debt.

This principle has been applied in a number of cases including those relating to an employee’s Income Tax, employee’s rates, lighting, heating, other costs and the cost of employee’s petrol.

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Changes to off-payroll working from April 2020

The rules for individuals providing services to the public sector via an intermediary such as a Personal Service Company (PSC), changed from April 2017. The new rules shifted the responsibility for deciding whether the intermediaries’ legislation applies, known as IR35, from the intermediary to the public sector receiving the service.

In the 2017 Autumn Budget, the Government announced plans to extend these rules to off-payroll working in the private sector. The new rules come into effect from 6 April 2020. The changes are expected to raise over £1.1bn for the public purse in 2020-21. From this date, all medium and large-sized clients will be responsible for deciding the employment status of workers.

The changes mainly apply to businesses with an annual turnover of more than £10.2 million (known as the simplified test). If the simplified test does not apply, then the rules still apply if the private sector client meets 2 or more of the following conditions:

  • an annual turnover of more than £10.2 million
  • a balance sheet total of more than £5.1 million
  • more than 50 employees

If you meet the conditions above, you must start applying the rules when the changes come into force on 6 April 2020.

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Shared parental leave and pay

The shared parental leave and pay rules offer working parents far greater choice as to how they share the care of their child and take time off work during the first year of their child’s life. The rules apply equally for children that have been adopted. There are various work and pay criteria that must be met in order to be eligible and the parents must share responsibility for the child.

Under the rules, mothers must take at least two compulsory weeks (four weeks if working in a factory) of maternity leave immediately after birth, but after that period, working couples can share up to 50 weeks of shared parental leave and up to 37 weeks of statutory shared parental pay. These rules, which were introduced in 2015, give families greater choice over how they arrange childcare in the first year of their child’s life by allowing working mothers the option to share leave and pay with their partner.

New parents can choose to be at home together or to work at different times and share the care of their child during the important first year after birth. This means that parents can take their leave simultaneously, so that they can spend time at home together with their child or they could opt to take leave in phases, for example, 20 weeks for the mother/adopter, followed by 20 weeks for the father/partner, followed by 10 weeks for the mother/adopter.

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Planning a Christmas party?

Now is the time that many businesses are planning a Christmas celebration for staff as well as possibly for partners/spouses, clients and prospective clients.

The cost of a staff party or other annual entertainment is generally allowed as a deduction for tax purposes. If you meet the various criteria outlined below, then there is no requirement to report anything to HMRC or pay tax and National Insurance. There will also be no taxable benefit charged to employees.

  1. An annual Christmas party or other annual event offered to staff generally, is not taxable on those attending provided that the average cost per head of the function does not exceed £150.
  2. The event must be open to all employees. If a business has multiple locations, then a party open to all staff at one of the locations is allowable. You can also have separate parties for separate departments, but employees must be able to attend one of the events.
  3. There can be more than one annual event. If the total cost of these parties is under £150 per head, then there is no chargeable benefit. However, if the total cost per head goes over £150 then whichever functions best utilise the £150 are exempt and the others taxable. Note, the £150 is not an allowance and any costs over £150 per head are taxable on the full cost per head.
  4. It is not necessary to keep a running total by employee but a cost per head per function. All costs including VAT must be considered. This includes the costs of transport to and from the event, food and drink and any accommodation provided.

VAT incurred on Christmas parties for your staff can be recovered subject to the usual rules. If staff partners/spouses or clients are also invited to the event, the input tax has to be apportioned as the VAT applicable to non-staff is not recoverable. However, if non-staff attendees make a contribution to the event, all the VAT can be reclaimed and of course output tax should be accounted for on the amount of the contribution.

It is important to pay attention to the nuanced tax rules to ensure that your party is tax exempt.

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Reporting employee changes

There are rules that businesses must follow when they are reporting employee changes. These changes must be sent to HMRC using a Full Payment Submission (FPS). The FPS is a submission that you need to make to HMRC every time you pay your employees and must be submitted on or before the usual date you pay your employees. The information provided on an FPS helps HMRC ensure that they have the up-to-date information on your employees.

Additional information is required on your FPS if:

  • it includes a new employee
  • an employee leaves
  • you start paying someone a workplace pension
  • it’s the last report of the tax year
  • an employee changes their address

You may also need to tell HMRC if an employee:

  • becomes a director
  • reaches State Pension age
  • goes to work abroad
  • goes on jury service
  • dies
  • joins or leaves a contracted-out company pension
  • turns 16
  • is called up as a reservist
  • changes gender
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New advisory fuel rates published

Advisory fuel rates are intended to reflect actual average fuel costs and are updated quarterly. The rates can be used by employers who reimburse employees for business travel in their company cars or where employees are required to repay the cost of fuel used for private travel. HMRC accepts there is no taxable profit and no Class 1A National Insurance on reimbursed travel expenses where employers pay a rate per mile for business travel no higher than the published advisory fuel rates.

Employees can also use the advisory fuel rates to repay the cost of fuel used for private travel. In this case, HMRC will accept there’s no fuel benefit charge. The advisory rates are not binding if you the employer can demonstrate that employees cover the full cost of private fuel by repaying at a lower rate per mile.

The latest advisory fuel rates became effective on 1 September 2019. Fuel rates are reviewed four times a year with changes taking effect on 1 March, 1 June, 1 September and 1 December. You can use the previous rates for up to 1 month from the date the new rates apply.

The new rates are as follows:

 

Engine size Petrol – amount per mile LPG – amount per mile
1400cc or less   12p 8p
1401cc to 2000cc    14p 10p
Over 2000cc    21p  14p

 

 

Engine size   Diesel – amount per mile
1600cc or smaller       10p
1601cc to 2000cc    11p
Over 2000cc       14p

 

Hybrid cars are treated as either petrol or diesel cars for this purpose.

Advisory Electricity Rate

HMRC accepts that if you pay up to 4p per mile when reimbursing your employees for business travel in a fully electric company car there is no profit. While electricity is not considered a fuel for tax and NICs purposes, the Advisory Electricity Rate is now published quarterly alongside the other advisory fuel rates.

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HMRC employment status service

HMRC’s employment status service can be used to help ascertain if a worker should be classified as employed or self-employed for tax purposes in both the private and public sector.

The service provides HMRC’s view as to whether IR35 legislation applies to a particular engagement and whether a worker should pay tax through PAYE as well as helping to determine if the off-payroll working in the public sector rules apply to a public sector engagement.

The software can be used to check the employment status of:

  • a worker providing services;
  • a person or organisation hiring a worker; or
  • an agency placing a worker.

HMRC has said that it will stand by the result given unless a compliance check finds the information provided was not accurate. HMRC will not stand by the results of contrived arrangements and those designed to get a particular outcome from the service. HMRC are clear that this would be treated as evidence of deliberate non-compliance and could result in higher penalties.

The service is anonymous, and the results are not stored online. However, the results can be printed and held for your own records. If any changes take place to the worker's role their status should be reassessed.

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The tax consequences of social events

The cost of a staff party or other annual entertainment is generally allowed as a deduction for tax purposes. If you meet the various criteria outlined below there is no requirement to report anything to HMRC or pay tax and National Insurance. There will also be no taxable benefit charged to employees.

  1. An annual Christmas party or other annual event offered to staff generally, is not taxable on those attending provided that the average cost per head of the function does not exceed £150.
  2. The event must be open to all employees. If a business has multiple locations, then a party open to all staff at one of the locations is allowable. You can also have separate parties for separate departments, but employees must be able to attend one of the events.
  3. There can be more than one annual event. If the total cost of these parties is under £150 per head, then there is no chargeable benefit. However, if the total cost per head goes over £150 then whichever functions best utilise the £150 are exempt and the others taxable. Note, the £150 is not an allowance and any costs over £150 per head are taxable on the full cost per head.
  4. It is not necessary to keep a running total by employee but a cost per head per function. All costs including VAT must be taken into account. This includes the costs of transport to and from the event, food and drink and any accommodation provided.

It is highly recommended when planning a staff party or other annual event to try and stick to the tax rules above. This should ensure that your party does not have an extra tax cost for you or your employees. If you need help in crunching the numbers to make sure you do not exceed the allowable limits, please call.