How charities should deal with employment taxes

Unlike other taxes, such as corporation tax and VAT, employment taxes affect charities in exactly the same way as any other type of employer. There are, therefore, no particular issues that are charity-specific, but there are several issues which charities, in their capacity as employers, should bear in mind.

Volunteer and trustee expenses

Any reimbursed expenses to volunteers and trustees are not liable to tax and National Insurance Contributions (NIC), as long as no-profit element arises. The types of expenses that can be reimbursed tax-/NICfree include subsistence (eg, meals) and travelling expenses, including expenses reimbursed for ordinary commuting costs.

However, care should be taken if round sum allowances are paid, as these are liable to tax and NIC unless specific agreement is reached in advance with HM Revenue & Customs (HMRC). In addition, any expenses paid to a volunteer or trustee are not normally included in any calculation of working family tax credit (WFTC).

Construction Industry Scheme (CIS)

The CIS scheme is an additional responsibility for certain organisations who incur costs on construction operations. Under the scheme, the organisation (the contractor) has to ensure that the subcontractor carrying out the work, whether an individual or a multi-national Plc, is registered with HMRC as a subcontractor, and in addition, must make certain monthly and end-of-year returns to HMRC, including potentially the deduction of tax.

Under current legislation, charities are treated as a ‘deemed’ contractor, and are required to operate the scheme where expenditure on construction operations exceeds an average of £1m per annum. However, if there is a limited company associated with the charity that carries out such construction operations, then that company will probably have to operate the scheme irrespective of the level of annual costs on construction operations.

New legislation comes into force on 6 April 2007 in respect of CIS. This legislation includes an exemption from operating the scheme where “the person or persons making the payment have been established for charitable purposes only”. It is as yet unclear how this legislation will apply to any associated limited company, but at this stage it appears that these companies will have to continue to operate the new scheme.

Employment status

As most finance people are aware, employers are required to deduct tax and NIC from salary/wages paid to employees via the PAYE scheme, whereas self-employed workers normally receive their money free of tax, and pay tax and NIC separately under self-assessment. However, nowhere in legislation is the term ‘employee’ defined.

It is the charity’s responsibility to operate PAYE where necessary, and this means that the employment status of workers must be considered. If PAYE is not accounted for, and HMRC successfully challenge that the worker should have been treated as an employee, HMRC may seek the appropriate amount of tax, employee’s NIC and employer’s NIC from the charity, irrespective of the amounts of tax and NIC paid by the worker. In addition, interest and penalties may well be sought.

There are several factors to take into account when considering a worker’s employment status. These include:

• Contractual agreements
• Control exercised by the charity
• .Whether the individual is in business on his/her own account. Personal service and substitution.
• Whether the individual provides any major equipment.
• Whether the worker takes any financial risk.
• Whether the worker holds him/herself out as being part and parcel of the organisation.

The above factors are by no means exhaustive, and the overall picture should be looked at when considering a worker’s status. HMRC have recently launched an online ‘status checker’, although, given the complexity of the law in this area, any results obtained, at least in the initial period, should be regarded with caution.

Home working

Charities, like many organisations, now take advantage of technological advancements that make home working more feasible. HMRC has recognised the fact that many employees now work at home, and allow employers to contribute up to £2 per week tax-/NIC-free to employees who work at home under certain circumstances.The allowance of £2 per week is intended to cover the cost of additional heating, lighting, etc.

An element of the costs incurred due to working at home is also the provision of high speed internet access, eg, Broadband. Again, HMRC has recognised the fact that employers will want to provide employees with this facility, and has provided guidance on when such provision will not be treated as a taxable benefit. These are that its sole purpose is to enable the employee to perform the duties of the employee’s employment and that the employee must require access to the internet in order to carry out a significant part of their duties at home, the computer equipment must be provided by the employer, and any private use must not be significant.

There is also one word of warning under this section in respect of travel expenses. Merely because an employee is deemed to be a ‘home worker’, even if their contract states this, does not necessarily mean that any business travel from home will be classed as a genuine business journey. This issue needs to be considered separately.

Mobile phones and computers

It was announced in the 2006 Budget that the current exemption for employer-provided computers for private use would be withdrawn from 6 April 2006. Broadly speaking, under previous rules, an employer could provide employees with home computer equipment up to the value of £2,500 without creating a taxable benefit.

In addition, employers are now restricted to the provision of one mobile phone that is available for private use without a tax charge, where previously the number of mobile phones had been unrestricted. Though it is clear that any equipment provided before 6 April will continue to enjoy these exemptions, there are several issues to consider going forward.

Provision of equipment

Many businesses provide a variety of equipment to ensure their employees are operational outside of their normal place of work. This can range from mobile phones, laptops and personal digital assistants (PDAs), such as the Blackberry, which can be used as a mobile phone, electronic diary and email device. The modern multi-function devices have recently been classified as computer equipment by HMRC, so will also need to be considered under these rules rather than the mobile phone rules which apply to earlier devices.

Organisations will need to consider the tax implications of the devices offered to their employees in order to work effectively.

Renewal of existing provision

Computer equipment or mobile phones that have been provided for private use before 6 April will continue to fall within the exemptions. Where these items are replaced under warranty, eg, due to loss or damage, it is not clear that the replacement will continue to fall within the exemption. Otherwise, however, provision of a new or replacement would attract a tax charge if the computer, PDA, or a second mobile phone, is provided for private use.

A growing number of businesses may find that there is an administrative cost to monitoring which employees have equipment within and outside the exemptions under the old and new rules.

How equipment is provided

Where computers or mobile phones are provided to employees for business purposes, and any private use is ‘insignificant’, a tax charge does not arise. Where employees have both mobile phones and multi-function PDAs, you may wish to consider restricting the private use of the PDA.

Cost to employer as well as employee

There are several tax and administrative considerations for all of these options. In particular, where items do not fall within the exemptions and are available for private use, the full taxable value of that equipment should be reported on forms P11D. The employee is then entitled to claim relief for any element of business use. This could increase the administrative burden for the employee as well as the NIC cost to the employer.

Agreeing to report these benefits through a PAYE settlement agreement could prove more costly for tax and NIC, though may reduce the administration involved each year. It may be worth considering agreeing a method with HMRC to establish the value of the private element.

Expenses payments

The handling of expenses claims is an issue for all employers. Every employer should ensure that they have adequate procedures and processes in place to ensure the following:

• that employees claim reimbursement of expenses only within the terms of the employer’s expenses policy;
• that the expenses are accurately recorded in the organisation’s accounting records in such a way that they can be easily identified for reporting purposes; and
• that complete and correct returns are made to HMRC, including the correct reporting of any taxable items.

Part of this process may well involve updating the expenses claim form in use, as in our experience very few forms in existence are suitable. Poor forms mean that accurate processing of expenses claims is difficult, and increase the chances of incorrect returns, such as forms P11D or the PAYE settlement agreement.

Employers should also ensure that they are not reporting excessive amounts of taxable benefits. Trivial benefits are not to be reported to HMRC. Trivial benefits may include items such as flowers on the occasions of birthdays, weddings, sickness, etc, or Christmas gifts, depending on the type and expense of the gift.

Benefits packages

For some time employers have offered employees the option of entering into flexible benefits arrangements – the opportunity to choose the make-up of their remuneration package to suit their own lifestyle needs subject to certain parameters set by the employer. Many flexible benefits arrangements incorporate the concept of salary sacrifice, which is used to bring tax and NIC efficiencies to the arrangement in addition to those achieved through corporate discounts.

Such arrangements can generate ongoing cost savings for both employees and the employer, make employees feel more appreciated, assist with the retention of staff, and improved access for employees to higher quality benefits, along with a clearer understanding of the total value of their total reward package.

Tax-/NIC-efficient benefits that are typically found in such arrangements include the provision of childcare vouchers and bikes for work, as well as restructuring employees’ contributions to their pension scheme.