When a member of staff is on a temporary assignment, they are allowed to receive travel and subsistence payments (within certain limits) free of Income Tax (IT) and National Insurance Contributions (NICs) for up to 24 months.
Similarly, where a salary sacrifice scheme is properly set up, it is also possible for employees to elect to receive certain benefits instead of salary and that also achieves a saving of NICs.
However, when a firm created a salary sacrifice scheme whereby salary was foregone and replaced by subsistence and travel allowances, HM Revenue and Customs (HMRC) challenged the arrangement. More than £160 million in IT and NICs is said to be at stake.
The employees concerned routinely worked in different places and had to incur travel costs. The necessary contractual changes were put in place to give effect to the scheme.
HMRC claimed that the scheme did not involve a sacrifice of salary at all, but simply the replacement of salary with ‘expenses’ that were not taxable. The salary sacrifice was not for a non-cash benefit but the receipt of salary by a different name.
The main benefit of the scheme was for the employer, not the employee, in the form of employer’s NICs not being payable on the ‘sacrificed’ salary.
Lastly, and crucially, an employee could opt out of the scheme at any time. HMRC’s guidance is that employees can only opt out of a salary sacrifice scheme on the annual review date.
The First-Tier Tribunal accepted HMRC’s arguments that the arrangement was not a true salary sacrifice scheme. However, given the amount of money involved, an appeal seems inevitable.
HMRC are seeking to attack tax avoidance schemes whenever they can. For such schemes to be successful, keeping everything ‘within the rules’ is essential.