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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 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 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.

New Apprenticeship Levy

14/12/2016 | Andrea London
As announced in the Summer 2015 budget, those companies with an annual UK pay bill of over £3m will be obliged to pay the government's new apprenticeship levy. The levy is a key element of the gover

As announced in the Summer 2015 budget, those companies with an annual UK pay bill of over £3m will be obliged to pay the government’s new apprenticeship levy. The levy is a key element of the government’s plan to fund three million new Apprenticeships in England by 2020.

The levy is due to come into force from 6 April 2017 and it will be mandatory and require employers to invest in apprenticeships. The size of such investment will be calculated in relation to the size of the company’s UK payroll bill.

How will levy contributions be calculated?

The levy will be required to be paid by all employers with a gross annual pay bill of more than £3m. A company’s levy contribution will be paid against the total gross bill at a rate of 0.5 per cent, minus an annual levy allowance of £15,000 to offset against this. In addition to the amount payable by the employer, the Government will apply a 10 per cent ‘top up’. Therefore, for every £1 paid in to the fund, the employer will have £1.10 to spend.

Levy payment will be collected by HMRC through the PAYE system. Employers will have to calculate, report and pay the levy to HMRC through the PAYE process, alongside any tax and NICs. Each month, the employer will have to inform HMRC whether it needs to pay the apprenticeship levy and if so, include it within the usual PAYE payment.


A company with an annual pay bill of £10m and will be obliged to contribute an annual levy payment of £35,000. This contribution is calculated as follows:

  • Annual gross pay bill of £10,000,000
  • Apprenticeship levy calculated at 0.5% of £10,000,000 = £50,000
  • Less the £15,000 apprenticeship levy allowance = £35,000 annual payment

What will happen to the money once the levy has been paid?

Once an employer in England has registered and paid the levy, it will then be able to access apprenticeship funding through a digital apprenticeship service account. The account will allow employers to effectively “reclaim” their levy contributions as digital vouchers, which can then be used to select and pay for Government approved training providers, post apprenticeship vacancies and to search for candidates. Companies will have up to 24 months to spend the vouchers, after which any unspent funds in the digital account will expire.

As apprenticeships are a devolved responsibility, Scotland, Wales and Northern Ireland have their own, separate arrangements in place.

What can the levy fund be spent on? 

The levy contributions can only be used for Government approved apprenticeships, which includes both the new approved standards and Trailblazer Apprenticeships. The levy fund must be spent on training and assessment with a recognised and registered apprenticeship training provider, those training providers with an inadequate Ofsted rating will not feature on the approved register.

Unless an organisation becomes its own training provider and draws down the funds, employers will also be unable to use the levy for internal training. In order to become a training provider, the company would be subject to the appropriate inspections and would need to officially register as a training organisation.

Digital funds and government funding cannot  be used for:

  • apprentice wages or expenses;
  • trainee or workplace programmes;
  • the costs of setting up an Apprentice programme.

Opportunities for smaller companies

Employers with a pay bill of less than £3m will not have to pay the levy, but will be able to benefit from the fund. When the new funding system begins, non-levy payers will be able to choose an approved training and assessment provider. In a scheme known as ‘co-investment’, the company will only be expected to contribute 10% of the cost of training, with the government paying the remaining 90%. For now, SMEs will pay the training provider directly and will not need to use the digital apprenticeship service account until at least 2018.

What next?

Given the mandatory nature of the levy, employers with a £3m+pay bill will need to ensure that their business is in a position to benefit from its own contributions. Rather than be disadvantaged by levy payments, companies should begin to consider either introducing apprenticeships or developing current programmes in order to recover the monies they have been required to pay in.

If you would like any further information, please contact the Employment Department on 0207 955 0880.

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

The challenge of BREXIT for the financial services industry

29/06/2016 | Bruno Fatier
Today we are starting a series of e-bulletins dedicated to considering the consequences of BREXIT on business in general, starting with the impact of BREXIT on the financial services industry. The

Today we are starting a series of e-bulletins dedicated to considering the consequences of BREXIT on business in general, starting with the impact of BREXIT on the financial services industry.

There is no denying that the financial services industry is now facing challenging times, where threats will be generally more visible than opportunities yet to be explored.

From a financial services regulatory perspective, one main threat ahead is the risk of losing EU passport rights whilst one main opportunity is deregulation, but both threat and opportunity are only potential at this stage, as the decision to leave the EU is not yet effective and nobody knows the extent to which gains and losses will effectively materialise.

From a purely EU passport perspective, the later the decision to leave the EU enters into force the better, as more time will be given not only to enjoy the passporting regime but also to prepare for facing all possible BREXIT scenarios including the least comfortable one where no immediately available equivalent of the EU passport rights will be made available from or towards the UK.

The question of timing is therefore important. In this respect, Article 50 of the European Union Treaty provides for a 2-year notice for exit unless a withdrawal agreement has been reached earlier or “unless the European Council, in agreement with the Member State concerned, unanimously decides to extend [the two-year] period”.  The 2-year notice starts from the date on which the leaving Member State notifies the European Council of its intention (this has not yet been given). From a purely EU passport perspective, as explained above, rushing things would not be the best option.

It is also worth noting that Article 50 (not drafted to be actually enforced but rather to frighten prospective leavers) only says that the “framework” of the future relationships should be taken into account when negotiating and concluding a withdrawal agreement. However, there is no denying that it does make sense that both issues be agreed at the same time as part of the same deal, in order to avoid a black hole in between.

Whether the risk of not relying on a satisfactory equivalent of the EU passporting regime to and from the UK will materialise is uncertain. All depends on the outcome of the negotiations between the UK government and the EU.

If the risk materialises, financial services firms from both sides have a lot to lose, i.e. not only UK financial services firms passporting to the rest of the EU but also EU financial services firms passporting to the UK.

Over the last decade or so, banks, investment firms, asset managers and payment services providers licensed in the UK have been relying a lot on the EU Freedom to Provide Services (“FPS”). Doing business directly out of London has been a dominant trend, with fewer and fewer firms deciding to set up or maintain branches in other EU countries under the EU Right of Establishment (“RE”). Cost, convenience and efficiency have been the key driving factors.

By being stripped of the EU passport to do business across the entire EU market, UK licensed financial services firms would have to rely on locally licensed subsidiaries set up in the EU. The likes of Barclays have already such subsidiaries and would “only” be working on relocating staff and activities on an intra-group basis, subject to seizing sale opportunities. As a general rule, EU branches of UK licensed financial services firms would either have to be closed down or converted into branches of the EU subsidiary chosen to provide services all across the EU (subject to exploring sale opportunities). Smaller firms are likely to be those who will most suffer, as setting up a licensed subsidiary is time consuming, uncertain and costly, as is trying to buy one of the few existing EU licensed businesses available for sale on the market.

EU financial services firms holding a passport to do business in the UK would face similar issues, save that the scale of the reshuffling will be narrowed down to the UK and to London in particular.

The risk of not being granted an immediately available and satisfactory equivalent of the FPS and the RE is only the tip of the iceberg. Below the surface, restructuring of credit syndication or euro trading activities currently centralised in London would need to be carried out. Incidentally but noticeably, one would expect EU supervisory bodies based in London to relocate to a country which will still be part of the EU when the UK effectively leaves it. The EBA is the most visible example of the move ahead.

One should also note that UK licensed banks will no longer be part of the European guarantee deposit scheme once BREXIT becomes effective, which leads to the question whether the UK government will decide to provide better, equivalent or lower protection than that available in the EU.

Whilst losses are still hypothetical and one should not panic at the thought of them materialising, one should also coolly think about the alternative opportunities brought about by BREXIT, including that of deregulation. One should not forget that the financial services industry itself has for years vehemently complained about overregulation in many areas such as regulatory capital, remuneration or investor/customer protection.

However, deregulation does not mean that financial service firms licensed in the UK should stop preparing themselves for complying with EU directives adopted at EU level but yet to be implemented nationally (e.g. MiFID2, AMLD 4 or PSD 2), as the risk of having to comply with them or with equivalent rules when providing services towards EU markets, as part of a possible BREXIT deal, may materialise.

Having said that, opportunities for growing a financial services industry more lightly regulated, turned towards non-EU markets, should indeed be explored as much as the potentiality of losses should be assessed. The current burden of EU regulation on activities turned towards outside the EU should not be overestimated, as EU law does not generally regulate services provided towards non-EU countries as much as it regulates services provided towards the EU. But gaining market shares outside the EU will be challenging as there is no readily available equivalent of the FPS or RE outside the EU and local regulations will continue to apply after BREXIT.

The possibility of enjoying the “best of both worlds” is likely to require restructuring business models to segregate deregulated activities turned towards non-EU jurisdictions from activities turned towards the EU.  As many EU regulations apply on a group basis, businesses structured as groups of companies will need to be revisited.

The FIN TECH sector can be partially protected from, and can even continue growing despite the loss of EU passporting rights from and to the UK, but only to the extent of those technology services the provision of which towards the EU does not require holding such rights. However, one example where EU regulation will be soon regulating a significant number of FIN TECH firms is PSD2 (due to enter into force before the 2-year Article 50 deadline), under which licensing requirements will be extended further to reach payment aggregators, initiators and the like. And one cannot rule out that the EU will threaten, and even seek to further extend the scope of what it is subjecting to licensing requirements in order to protect the EU market from outsiders.



Brexit – What happens next?

27/06/2016 | Lucy Hamilton-James
Following the outcome of the EU Referendum, this article deals briefly with the formal process of the UK to withdraw from the EU.  The decision of the electorate for the UK to leave the EU is the st

Following the outcome of the EU Referendum, this article deals briefly with the formal process of the UK to withdraw from the EU.  The decision of the electorate for the UK to leave the EU is the start of what could be a long divorce process.  Until that process is complete, the UK will remain part of the EU.

The formal process for an EU member state to withdraw from the EU is contained in a so far unused exit clause – Article 50 – within the Lisbon Treaty.  Article 50 contains 5 short paragraphs which provide guidance as to the steps which must be taken by the withdrawing state and the remaining states to facilitate a withdrawal.

In brief; the first formal step is for the UK to formally notify the EU Council of its intention to withdraw from the EU.  This has been referred to in the press as the “Article 50 Notice”.  The service of the Article 50 Notice will be followed (and quite possibly preceded) by a negotiation period during which the remaining EU states and the UK take steps to reach an agreed form of Withdrawal Agreement.   During this negotiation period, EU laws still apply to the UK which would also continue to participate generally in EU business.  The UK would not however participate in internal negotiations within the remaining EU states regarding their discussions and decisions on the Withdrawal Agreement.  The negotiations themselves will take place between the EU Council and the UK but it is the EU which has the final say on its terms.

The disapplication of the EU Treaties, and thus the actual departure of the UK from the EU, occurs at the earlier of the date of entry into force of the Withdrawal Agreement or 2 years after Article 50 is invoked by the UK having notified the EU Council of its intention to withdraw.  However, Article 50 provides for the extension of that 2 year period should there be unanimous agreement between the EU Council and the withdrawing state for it to be so extended.

Considering the pretty significant function for which the provisions in Article 50 were designed to manage, it is striking how vague it is.  This is likely to be because its actual use was never considered a possibility.  That said, in view of the involvement of 28 countries, including the withdrawing state, and the EU institutions themselves, in the negotiations, the lack of detail could be a distinct advantage in that it will also allow for a degree of flexibility and will likely make the negotiation process easier to manage.  In addition, and from the EU’s internal side of the negotiations the Withdrawal Agreement need only have a qualified majority of the remaining states’ agreement for it to be concluded.

So, where does that leave the UK?  Despite calls by EU representatives over the weekend, only the UK can invoke Article 50 and the timing of that is solely in its gift.  The Prime Minister has indicated that the formal process will not commence until his successor is appointed (the 1922 Committee has today announced that the new leader of the Conservative Party will be chosen by 2 September 2016).  In a speech on 27 June 2016, The Chancellor, George Osborne, sought to provide reassurance by confirming that “In the meantime, and during the negotiations that will follow, there will be no change to people’s rights to travel and work, and to the way our goods and services are traded, or to the way our economy and financial system is regulated.”

While the result of the EU referendum continues to sink in, the posturing and strongly worded rhetoric from the EU has begun but is unlikely to last.  The UK and the EU are perfectly capable of working together and indeed need each other so the threats of punishment on the UK and calls for immediate disengagement being made by certain EU state ministers can be seen for what they are.  It is notable that the Heads of State, including those from outside the EU are quite rightly remaining calm and measured in their responses to the referendum result, however shocking,  which can only help to reassure the public and the markets and ensure that stability is returned sooner rather than later.  Whatever side of the fence they are on, the powers that be are well aware of the unilateral damage that prolonging uncertainty can cause and no one wants that.

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