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ICAEW REPRESENTATION 119/17 TAX REPRESENTATION

TERMINATION PAYMENTS: FOREIGN SERVICE RELIEF

ICAEW welcomes the opportunity to comment on the draft Finance Bill legislation on termination payments: removal of foreign service relief published by HM Treasury and HM Revenue & Customs on 13 September 2017. This response of 25 October 2017 has been prepared on behalf of ICAEW by the Tax Faculty. Internationally recognised as a source of expertise, the Faculty is a leading authority on taxation. It is responsible for making submissions to tax authorities on behalf of ICAEW and does this with support from over 130 volunteers, many of whom are well-known names in the tax world. Appendix 1 sets out the ICAEW Tax Faculty’s Ten Tenets for a Better Tax System, by which we benchmark proposals for changes to the tax system. We should be happy to discuss any aspect of our comments and to take part in all further consultations on this area.

Contents Paragraphs Summary of the measure

1-7

Scope of our comments

8

Foreign service relief

9-14

National insurance contributions

15-18

Apprenticeship levy

19-21

Payroll software and commencement date

22-29

Ten Tenets for a Better Tax System

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Appendix 1

T F E

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ICAEW tax representation: termination payments: removal of foreign service relief

TERMINATION PAYMENTS: FOREIGN SERVICE RELIEF SUMMARY OF THE MEASURE 1.

As announced at Budget 2016 and confirmed at Autumn Statement 2016 and Budget 2017, the government is legislating to tighten the tax treatment of termination payments.

2.

Clause 5 of Finance Bill 2017-19 currently being debated in Parliament provides, inter alia, that contractual and non-contractual payments in lieu of notice are being made taxable as earnings, and employers will be required to tax the equivalent of an employee’s basic pay if notice is not worked.

3.

The draft legislation published on 13 September, which is the subject of this consultation and will be in Finance (No.2) Bill 2017-19, will abolish foreign service relief (FSR) for non-seafarer employees who have worked abroad but are resident in the UK in the tax year in which their employment is terminated.

4.

Under current rules, FSR allows termination payments for certain qualifying individuals to be completely exempt from income tax. For example employees who receive termination payments while working in the UK but who have worked for their employer outside the UK for more than 75% of the last 20 years do not have to pay any income tax. If an employee has worked abroad but does not meet one of the qualifying criteria for a 100% deduction, they may be able to receive a smaller relief which is proportionate to their time worked outside the UK for that employer.

5.

Legislation will also be introduced in a National Insurance Contributions (NIC) Bill so that employer NIC will be payable on the elements of the termination payment exceeding £30,000 on which income tax is due.

6.

The first £30,000 of a termination payment will remain exempt from income tax and NIC.

7.

The changes, including to FSR, will take effect from 6 April 2018.

SCOPE OF OUR COMMENTS 8.

In this memorandum, we comment on the new rules on FSR in the draft Finance Bill legislation, the national insurance charge, the potential impact on apprenticeship levy, and the commencement date in the context of software development.

FOREIGN SERVICE RELIEF Comment 9. The original consultation cited several objectives including that “the rules should provide certainty for employees and employers; the rules should be simple”. Regrettably, the new rules will be more complicated than those they replace, which is contrary to the second, third and fourth of our Ten Tenets for Better Tax System, namely ‘Certain’, ‘Simple’ and ‘Easy to collect and to calculate’ (summarized in Appendix 1). 10. Withdrawing foreign service relief for employees resident at the time their employment is terminated seems at odds with the government's tax fairness agenda. We acknowledge that many employers do not give relief for FSR via payroll, instead preferring to leave it to terminated employees to claim it themselves via self-assessment. This arises for several reasons, eg because the individuals would have more complete records of periods spent working in and outside the UK, and the relief cannot be accurately calculated and claimed by the payroll deadline. The proposed revision will be even more difficult in many cases because claiming foreign tax credits (FTC) is far more difficult under payroll and cannot be 100% accurate – to be able to give an estimated amount of relief an employer has to have an Appendix 5 scheme and 3


if they do not have such a scheme, relief would have to be given by a coding adjustment and it is difficult to see how this can be achieved in time for the payroll run. 11. For payments made in the period January to 5 April an initial estimate of the FTC will in many cases need to be made and then the relief corrected when the foreign tax return is filed. This arises because most countries have a calendar tax year and consequently the amount of relief due cannot be calculated until after the end of the calendar year and in fact this may not be possible until after the filing deadline of the tax return. This is again more complicated than the system it replaces. 12. Globally mobile employees are the type of individuals who would claim FSR. Some of these employees will not know whether or not they are resident at the time of payment, or, when they realise the difference between being resident or non-resident, may delay becoming resident. In many cases the employee will not know their residence status because this can be affected by actions after the time of payment. In any event, the employer has no control over the actions of their ex-employee. 13. The new residence test produces more uncertainty than the regime it is replacing. For example, an individual who has no connection with the UK may decide after having their employment terminated that the UK is the best place to become employed once more. If they then come to the UK say four months after termination and become resident, then, because the split year rules do not apply in respect of termination payments and the individual is considered resident for the year, the payment will become taxable when in reality there is no nexus with the UK. Recommendation 14. We would suggest a simpler way to tax termination payments through payroll would be to timeapportion the compensation between UK and non-UK periods spent working for the same employer (and any associated companies) and charge tax and NIC on the UK-source element, possibly with a parallel time-apportioned £30,000 rule. NATIONAL INSURANCE CONTRIBUTIONS Comment 15. We question the wisdom of calling the employer-only NIC on termination payments “Class 1A” because we anticipate that using the same nomenclature as NIC on employer-provided benefits-in-kind (BiK) for NIC on termination payments that will have different reporting processes (ie via payroll rather than form P11D(b)) and, possibly, payment date as well (see next para) will cause confusion for employers and most likely HMRC too. 16. It is not clear whether the employer-only NIC on the taxable element of termination payments which is not subject to Class 1 NIC will be payable:  in-year along with employers’ PAYE income tax, Class 1 NIC, apprenticeship levy, student loan repayments, etc, as suggested in the policy document published on 5 December 2016 at https://www.gov.uk/government/publications/income-tax-and-national-insurancecontributions-treatment-of-termination-payments/income-tax-and-national-insurancecontributions-treatment-of-termination-payments, or  annually along with Class 1A NIC on employer-provided benefits-in-kind as suggested by its nomenclature in the draft NIC legislation published on 5 December 2016 at https://www.gov.uk/government/publications/draft-legislation-termination-awards. Recommendation 17. We recommend that the employer-only NIC on termination payments be allocated a new class name, say Class 1C, to distinguish it from NIC on BiK. 18. We should welcome clarification of whether the employer-only NIC on the taxable element of termination payments which is not subject to Class 1 NIC will be payable monthly in-year at the same time as employers’ PAYE, or annually at the same time as Class 1A NIC on employerprovided benefits-in-kind. 4


APPRENTICESHIP LEVY Comment 19. Apprenticeship levy (AL) is payable based on the total amount of earnings on which an employer is liable to pay secondary Class 1 NIC, known as the ‘pay bill’. 20. Some commentators have suggested that termination payments on which employer-only NIC is payable will be included in the ‘pay bill’ for AL purposes, which does not appear correct but if true would further increase costs to employers when they pay termination payments that are not covered by the £30,000 exemption. Recommendation 21. We should welcome confirmation that termination payments subject to employer-only NIC will not be included within the ‘pay bill’ for AL purposes, ie will not also be subject to AL. PAYROLL SOFTWARE AND COMMENCEMENT DATE Comment 22. We understand that software developers have still not been given by HMRC full IT specifications for calculating the Class 1A NIC charge nor told by when the NIC will be payable. Two new fields are given in the FPS specification but not the amounts that are to be entered in those fields. Developers also need to be told how to treat roundings. 23. Payroll software designers need to have software signed off by Christmas but they presently have no final legislation or guidance let alone full HMRC IT specifications. The ongoing deficiencies of PAYE in real time (duplicate employments, wrong liability and payment records and an earlier year update process that is not fit for purpose) and apprentice levy calculation mistakes in some payroll software is evidence of what can happen with new processes that are not properly communicated. 24. Software developers need final law and guidance and IT specifications at least eighteen months before go-live to enable them correctly to design and build robust software. Lord Carter of Coles’ report of March 2006 on HMRC’s online services recommended that software should be tested and any mistakes rectified well before go-live, and, if necessary, go-live delayed until the software works properly. 25. Whilst we acknowledge the original good intentions of government in specifying a delayed commencement date of April 2018 for the new termination payments regime, this was predicated on most of the legislation being enacted in July 2017 with a summer 2017 consultation on the withdrawal of foreign service relief ensuring that a known outcome would be enacted in March 2018. However, neither of these have happened and, six months before golive, software developers are left guessing what to do. Recommendation 26. We recommend that the commencement date be deferred until April 2019. Failing which, that HMRC produces complete and detailed IT specifications without delay including the date of payment of the NIC and how to treat roundings. 27. We should also welcome clarification of how termination payments will be displayed when businesses access their business tax accounts, and how agents will access these details. Suggested amendments 28. In clause 1, in subsection (5)(a), after “April” replace “2018 with “2019”. 29. In clause 1, insert after subsection (5): ‘(6) In Finance (No.2) Act 2017, section 5, replace “2018-19” with “2019-20”. ‘

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APPENDIX 1 ICAEW TAX FACULTY’S TEN TENETS FOR A BETTER TAX SYSTEM The tax system should be: 1.

Statutory: tax legislation should be enacted by statute and subject to proper democratic scrutiny by Parliament.

2.

Certain: in virtually all circumstances the application of the tax rules should be certain. It should not normally be necessary for anyone to resort to the courts in order to resolve how the rules operate in relation to his or her tax affairs.

3.

Simple: the tax rules should aim to be simple, understandable and clear in their objectives.

4.

Easy to collect and to calculate: a person’s tax liability should be easy to calculate and straightforward and cheap to collect.

5.

Properly targeted: when anti-avoidance legislation is passed, due regard should be had to maintaining the simplicity and certainty of the tax system by targeting it to close specific loopholes.

6.

Constant: Changes to the underlying rules should be kept to a minimum. There should be a justifiable economic and/or social basis for any change to the tax rules and this justification should be made public and the underlying policy made clear.

7.

Subject to proper consultation: other than in exceptional circumstances, the Government should allow adequate time for both the drafting of tax legislation and full consultation on it.

8.

Regularly reviewed: the tax rules should be subject to a regular public review to determine their continuing relevance and whether their original justification has been realised. If a tax rule is no longer relevant, then it should be repealed.

9.

Fair and reasonable: the revenue authorities have a duty to exercise their powers reasonably. There should be a right of appeal to an independent tribunal against all their decisions.

10.

Competitive: tax rules and rates should be framed so as to encourage investment, capital and trade in and with the UK.

These are explained in more detail in our discussion document published in October 1999 as TAXGUIDE 4/99 (see http://www.icaew.com/-/media/corporate/files/technical/tax/taxnews/taxguides/taxguide-0499.ashx).

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