A tale of two "Budgets"

November saw the Chancellor’s Autumn Statement, and December the Scottish Budget.

One of the main announcements in the Autumn Statement was purely administrative, in that the Government will move to a single major fiscal event each year. This means that following the spring 2017 Budget and Finance Bill, Budgets will be delivered in the autumn, with the first one in autumn 2017.

The UK is the only major advanced economy to make major changes to the tax system twice a year. The change will therefore mean that businesses and individuals face less frequent changes to the tax system, helping to promote certainty and stability at a time when the same cannot be of the political landscape. An autumn Budget also means tax changes should be announced well in advance of the start of the next tax year.

Employment tax issues

Some of the more interesting matters in the statement concerned employment taxes.

IR35 in the public sector

As first announced at Budget 2016 and following consultation over the summer, it was confirmed that the Finance Bill 2017 will reform the off-payroll rules (more commonly referred to as IR35) in the public sector. The effect will be that public sector engagers (rather than personal service companies) will be responsible for determining employment status and operating PAYE. The change will come into effect from 6 April 2017 and applies across the UK. This is likely to have a significant impact on public sector engagers, and indeed intermediaries which place their staff, not just in terms of increased national insurance contributions (NICs) costs but also the administration involved in changing systems and establishing what a worker’s status is likely to be.

Salary sacrifice limitation

The Government is proceeding with its proposal to remove the income tax and employer NICs advantages of salary sacrifice schemes. However, this may have a limited impact on many employers as the most popular benefits are protected (salary sacrifice for pensions, cycle to work, childcare and ultra-low emission cars will be unaffected). Employers with arrangements which are caught will be relieved that there will be an element of “grandfathering”. All arrangements in place before April 2017 are to be protected for “up to a year”, and arrangements in place for cars, accommodation and school fees will be protected for up to four years.

Termination payments

As expected, the Government is also going ahead with proposed changes to the tax treatment of termination payments, which will take effect from 6 April 2018. These include:

• making all contractual and non-contractual payments in lieu of notice taxable as earnings;
• requiring employers to tax the equivalent of an employee’s basic pay if notice is not worked;
• removing foreign service relief for employees who have spent time working outside of the UK.

Legislation will also be introduced in the NICs Bill 2017 to align the tax and employer NICs treatment of termination payments, so that employer NICs will be payable on the elements of the termination payment exceeding £30,000 on which income tax is due. The first £30,000 of a termination payment will remain exempt from income tax and NICs.

Following a technical consultation on draft legislation over last summer, a number of changes have been made to the proposed legislation to make the rules easier for employers to operate. These include a requirement for employers to calculate post-employment notice income on basic pay only, and not the rather complex proposals to take account of bonuses etc, which had concerned many respondents.

Employee shareholder status abolished

The much-criticised “employee shareholder status”, which allowed workers to give up some of their employment rights in exchange for shares in their employer, is being abolished on the basis that “it is primarily being used for tax planning purposes by high-earning individuals”.

Agreements entered into before 1 December 2016, or before 2 December 2016 where independent advice was received before 1.30pm on 23 November 2016, will retain their tax benefits.

Scottish Budget

The Scottish Draft Budget 2017-18, presented to Holyrood by Scottish Finance Secretary Derek Mackay, set out Scotland’s tax and spending plans for the upcoming year. It held few surprises, but saw the first, albeit modest, divergence between the income tax positions of Scottish and other UK taxpayers, with a proposal to increase the higher rate tax threshold in 2017 by inflation to £43,430 rather than follow the UK Government’s planned increase to £45,000.