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Archive for February, 2018

Incoming costs for employers – 6 April 2018 and beyond

26/02/2018 | Noel Deans & Sean Field-Walton
The new financial year will bring with it several areas of increased cost for employers. We set out a number of key changes relating to termination payments which employers need to be aware of, below

The new financial year will bring with it several areas of increased cost for employers. We set out a number of key changes relating to termination payments which employers need to be aware of, below.

Payments In Lieu of Notice (a “PILON”)

Whether a PILON is subject to tax and NIC currently depends on the terms of an employee’s contract. If there is a contractual right to make a PILON, any such payment is usually treated as taxable earnings and subject to income tax and NIC. Contrastingly, non-contractual PILONs benefit from a £30,000 tax exemption derived from the current section 403(1) of the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”).

From 6 April 2018 this position is changing. Through the insertion of new sections 402A – 402D to ITEPA employers will now be required to calculate the employee’s total basic pay including in respect of notice (whether or not served), and deduct from that sum income tax and both class 1 and 2 NIC. This means that both contractual and non-contractual PILONs will be subject to the usual tax and NIC deductions. HMRC have however confirmed that this change will not be retrospective.

Tax exemption for payments in respect of injured feelings?

Remaining unchanged despite the Government’s updates to the termination payments regime, is section 406B of ITEPA’s general exemption from tax for payments in respect of “injury to, or disability of, an employee”.

Nonetheless, through the insertion of new section 404B(7) to ITEPA payments by employers in respect of mere injury to feelings will not benefit from this tax exemption from 6 April 2018. Although employers will see this as another source of increased expense this change incorporates what has been the case law position since K Moorthy v HMRC [2016] which ended this debate and held that a payment in respect of injured feelings was taxable.

Mounting auto-enrolment obligations

From 6 April 2018, the mandatory contributions to be made by both employee and employer in respect of the auto-enrolment scheme will begin to increase.

The minimum employee contribution will rise from 1% to 3% and the corresponding minimum employer contribution will rise to 2%. These figures will further increase to 5% and 3% respectively from 6 April 2019.

Much commentary has focused on the potential increased cost to employers of complying with their auto-enrolment obligations. We agree that employers are likely to see balance sheets dented more by pension liabilities than at present, but this impact may be softer than anticipated. This is owing to current inflationary pressures which we expect to lead to an increasing number of employees choosing to opt out.

Foreign Service Relief (“FSR”)

6 April 2018 also sees an end to the application of FSR in relation to termination payments made to employees who had worked overseas but received a termination payment during a tax year when they were resident in the UK.  This is despite some trepidation displayed from influential lobbies, including but not limited to the Chartered Institute of Taxation.[1]

As currently drafted, even where an employee (except if exempted) has served the majority of their employment abroad but receive a termination payment during a tax year when they are resident in the UK no FSR would apply and the total sum would be treated as taxable earnings and subject to tax and NIC. Here we see the potential for significant and unexpected liabilities to occur. As a result, it is possible that employers may be expected to increase or “gross up” termination payments to employees now tax resident in the UK but who have previously worked overseas.

Concluding Thoughts

Employers considering dismissals may wish to expedite these processes especially if they want to offer a tax free inducement as a settlement term.

Potential increased tax liabilities for employers may ultimately be minimal. Yet, given the financial and reputational cost of a dispute with HMRC for contravention of these provisions would probably be significantly more costly, employers should actively take steps to prepare for implementation. This should include making sure that the internal payroll and HR functions are fully abreast and trained in respect of these changes.

The proposed changes to FSR in 2019 are an area we will be proactively monitoring. If the Government does not amend the draft legislation as it relates to FSR, employers, particularly those with an international base will need to plan their human resources and dismissal considerations more carefully to avoid unexpected liabilities falling due.

[1] Termination payments: removal of Foreign Service Relief (FSR) for UK Residents Response by the Chartered Institute of Taxation, 25 October 2017

Our employment department has experience and expertise in all of the above areas.

 If you would like any further information, please contact Noel Deans at noeld@rosenblatt-law.co.uk or on 0207 955 1413.

This article should not be taken as definitive legal advice on any of the subject matter covered. If you do require legal advice, please contact Rosenblatt as above.

Update on Taylor Review and Employee Status in 2018

12/02/2018 | Noel Deans & Sean Field-Walton
In 2017, the “gig economy” evolved into more than a mere buzzword. Numerous discussions and several legal cases grappled with worker status generally and across various contexts which is indicati

In 2017, the “gig economy” evolved into more than a mere buzzword. Numerous discussions and several legal cases grappled with worker status generally and across various contexts which is indicative of the lack of clarity in the area. As it stands, determining employee status turns on questions of mutuality of obligation, personal service and control. All of these, unsurprisingly, have their own epilogue of related case law attempting to reach an understanding of what exactly each of those phrases means for businesses and employees.

Significant decisions in the area have seen what may on the face of it be divergent outcomes. Uber drivers have been held to be “workers” under the Employment Rights Act 1996 (the “ERA”), Deliveroo drivers were considered not to be “workers” for the purposes of a Union’s application for compulsory recognition under Schedule A1 of the Trade Union and Labour Relations (Consolidation) Act 1992 (the “TULRC”) and plumbers have been held to be “workers” for the purposes of the ERA and the Working Time Regulations 1998 as well as an employee within the extended meaning of that term in the Equality Act 2010. Other decisions such as King v Sash Window Workshop Ltd and another have extended, or arguably just confirmed how existing rights apply. In this case, Mr King’s contract described itself as a “self-employed commission-only contract”. Under that contract, Mr King was paid on a commission-only basis. The Court of Justice of the European Union held that Mr King, despite having been described as self-employed and led to believe he could not take paid leave was actually a “worker” and was therefore entitled to carry over or be paid for the entire sum of that unpaid holiday. This clarified that the right to carry over is not only limited to cases involving sickness or maternity leave. Taken together with the decisions conferring “worker” status on new sections of workers, potentially large retrospective liabilities could be created and businesses may be concerned to understand what are their actual and/or likely exposures are.

As such, it is with perhaps renewed force that we can reflect on the Taylor Review of Modern Working Practices (the “Taylor Review”) published in 2017 and one of its central recommendations which was to codify the case law principles governing “employee” status into primary legislation.

On 7 February 2018 the Government published their response to the Taylor Review which acknowledged the lack of clarity and certainty over employment status (the “Response”). Therefore, this is an area we will closely monitor as 2018 develops.

One thing is for certain; the prevailing wind is in favour of extending or granting new rights to workers who previously would have been considered “casual”. Albeit they may seem minor adjustments, simple proposals accepted by the Response that would among other things oblige employers to provide written particulars and payslips to workers, are new compliance burdens should not be underestimated. Seeing as the general thrust for recognition of workers’ rights seems only to be increasing this may be an area where companies, especially those offering shares on public markets, should be particularly attuned to the risk of reputational damage and consider seeking specialist legal advice in this regard.

Employers may be relieved, however, that in the Response the Government has confirmed it will not (at least for now) be reversing the burden of proof where employment status is in dispute. It will remain the employee’s duty to prove their alleged status. Similarly, the Government has confirmed that despite some rumbles in the area of non-compete restrictions it does not propose to take any action in this area seeing as such restrictions were considered valuable by most respondents to consultations.

Seeing as the advent of both the GDPR and implementation of the extended Senior Managers & Certification Regime are not far off the horizon and given the ripeness and appetite for change in the area of employment status businesses may be prudent to seek specialist legal advice in these areas.

Our employment department has experience and expertise in all of the above areas.

If you would like any further information, please contact Noel Deans at noeld@rosenblatt-law.co.uk or on 0207 955 1413.

This article should not be taken as definitive legal advice on any of the subject matter covered. If you do require legal advice, please contact Rosenblatt as above.

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