PAYE Settlement Agreement (PSA) process to be simplified

HMRC last week issued a consultation document sharing its proposals to update and simplify the PAYE Settlement Agreement (PSA) process.

PSAs are a valuable mechanism used by employers to settle tax and NIC on behalf of its employees for certain benefits. Typically included in a PSA arrangement are those benefits that are meant to be “free of tax” to the recipient (e.g. entertaining, gifts and away days for staff).

Under the current system, a PSA must generally be agreed with HMRC by no later than 6th July after the end of the tax year. The process for obtaining a PSA involves formally requesting it from HMRC, followed by the signing and HMRC counter-signing of PSA contracts (forms P626).

Once in place, calculations of the grossed-up tax and NIC on the PSA items must then be submitted to HMRC by typically 31st July, with the resulting tax/NIC liability payable by 19th October.

If a PAYE Settlement Agreement calculation includes any items that had not been formally included in the PSA contracts, HMRC will remove the item from the calculation and ask the employer to enter into a separate compliance settlement. Whilst this achieves largely the same result as the PAYE Settlement Agreement, HMRC comment they recognise this causes unnecessary delay and unwanted bureaucracy for employers.

Among the proposals in the consultation document are the following key points:

Defining what can be included in a PAYE Settlement Agreement

Under the current system, benefits can be included if they meet certain criteria – i.e. they must be one of the following:

  • Minor – for example a small gift
  • Irregular – one off items, such as long service awards
  • impracticable – difficult to work out the value of or divide up between individual employees, such as staff entertaining events where there are many attendees

The document comments that the interpretation of the ‘minor’ criteria has changed over the years. And with the introduction of the new trivial benefits rules from April 2016, HMRC believes many minor benefits should now fall into this exemption. It also comments that most PSA items tend to fall into the other two categories, so the proposal is to remove the ‘minor’ test to simplify matters.

The government proposes to keep both ‘irregular’ and ‘impracticable’ as PSA criteria, but to provide stronger guidance to help employers determine whether items meet either of these two criteria.

Remove the need for upfront agreement

HMRC propose to remove the requirement to agree PSAs in advance, which it believes would make the process simpler for employers. This would also remove some of the complexities where non-cash vouchers are provided, as currently the PSA must be entered into before any vouchers are provided (which can often mean arranging the PSA before the start of the tax year).

Consider a digital solution

In line with wider government moves to digitise processes, HMRC intends to explore options to digitise the PSA return. Currently, every PSA calculation is checked by HMRC, which can lead to manual or processing errors. No further details have been given yet, but HMRC believe that a digital return would eliminate errors and make the process simpler for employers.

Changing the PSA calculation and tax dates

HMRC are considering changing the PSA calculation submission date and tax/NIC payment date in line with the P11D deadlines. Under the current system, the PSA contracts typically state that the calculations should be submitted by 31st July, but this is not a deadline that carries a penalty. As long as the calculations are submitted and the tax paid ultimately by 19th October, no penalties result. But HMRC do not like receiving calculations later in August or September and would clearly prefer their PSA teams to have more time to handle returns and payments.

Aligning with P11D dates would mean the PSA calculations need to be submitted by 6th July and the tax/NIC paid by 19th July.

The consultation period closes on 18th October, and the document does not suggest any implementation date of the new process. So it remains to be seen whether these proposals carry though intact, or see any changes as interested parties make their comments.

If you have any queries regarding PAYE Settlement Agreements, please contact Richard Whitelock, or fill in our contact form below. 

Personal Tax Accountants York and Leeds