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Busy Practitioner by Mark McLaughlin ATII TEP

Important deadlines and changes affecting employment income are discussed in this article from 'Busy Practitioner' (June 2003) by Mark McLaughlin ATII ATT TEP.The Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) came into force on 6 April 2003, replacing the old ‘Schedule E’ rules. Related pay as you earn (PAYE) deadlines and practical points on employment income are outlined below.

5 July 2003

Employers wishing to account to the Inland Revenue for income tax (and Class 1B National Insurance contributions (NICs)) on ‘general earnings’ provided to employees (i.e. certain expenses or taxable benefits, such as those of a minor or irregular nature) must make a PAYE settlement agreement (a ‘PSA’) for 2002/03 with the Revenue no later than 5 July 2003 (Statutory Instrument 1993 no 744, regulation 80C).

6 July 2003

Returns of benefits and expenses (forms P11D and P9D) for 2002/03 must reach the Inland Revenue by 6 July 2003 (SI 1993 No 744, regulation 46). This is also the date by which employers must supply relevant employees with P11D or P9D information for that year. Returns of Class 1A NICs (forms P11D(b)) for 2002/03 must reach the Inland Revenue by 6 July 2003, with penalties being imposed if returns are not received by 19 July 2003.

Employment Income

Following the introduction of ITEPA 2003, some old extra statutory concessions (ESCs) dealing with ‘employment income’ (ie the new legislative definition of earnings, incorporating benefits and expenses) have been written into the new provisions, and further changes are introduced in Finance Act 2003. Some of these changes are highlighted below.

• From 6 April 2003, payments by employers to cover reasonable additional household expenses incurred by employees since that date in carrying out their regular employment duties at home are exempt from income tax (and NICs) (ITEPA 2003, s 316A). Employers can pay up to £2 per week without supporting evidence of the costs incurred. Above that level, the exemption is still available, but the employer must provide supporting evidence of the relevant additional household expenses incurred.

• Long service awards by an employer, such as watches or clocks (but not cash), can be made tax-free to employees with at least 20 years’ service, up to a maximum of £20 for each of those years (ITEPA 2003, s 323 (previously ESC A22)). New regulations are to be introduced increasing this limit to £50 for each year of service.

• Annual parties (for example, Christmas parties) or similar functions paid for by employers and generally open to employees are exempt if the total cost per head does not exceed £75 per tax year (ITEPA 2003, s 264 (previously ESC A70)). This limit is also set to increase, to £150 per year.

• Employees can receive tax-free gifts (but not cash) from third parties, if the total value does not exceed £150 (ITEPA 2003, ss 270, 324 (previously ESC A70)). The intended new upper limit for such gifts is £250.

In addition, there is a tax-free limit of six breakfasts per tax year, if provided by employers to employees cycling to work on designated ‘cycle to work’ days (SI 2002 No 205, regulation 3). This limit is also to be removed by regulations to be introduced.

Practitioners who were previously familiar with the old Schedule E provisions will now need to become acquainted with ITEPA 2003, if they have not already done so. For example, the ‘wholly, exclusively and necessarily’ rule in TA 1988, s 198 for expenses is now contained in ITEPA 2003, s 336 as a general rule, with additional provisions allowing deductions for specific categories of expenses.