A PAYE Settlement Agreement (PSA) enables employers to make a single annual payment to HMRC to settle all tax and NIC due on certain expenses and benefits provided to employees. Should you have a PSA?
What is a PSA?
PSAs are an administrative arrangement allowing employers to pay the tax and NIC, on behalf of their employees, on certain taxable expenses or benefits eg staff entertaining and staff incentive awards, rather than return them as benefits in kind on forms P11D or include them in the payroll.
How does it work?
You need to agree with HMRC the type of expenses and benefits you want to be included in the PSA before the annual deadline. If HMRC accepts the application, you will then submit to HMRC a calculation of the tax and NIC due on a grossed up basis at the appropriate rate of tax and pay the amount due.
From April 2018, the annual agreement renewal process for PSAs was simplified, so there is no need for employers to agree a PSA in advance with HMRC each year if the categories remain the same. Once agreed, the PSA will remain in place until either the employer or HMRC cancel or change it.
What can be included?
The expenses or benefits to be included must be “minor”, “irregular” or “impracticable” to operate PAYE on the item:
- Minor – there is no pre-determined limit to the value but it might include items such as small gifts not covered by the trivial benefits rules.
- Irregular – this includes items not paid at regular intervals over the course of a tax year. It might include, for example, relocation expenses not covered by the £8,000 limit.
- Impracticable – items where it would be difficult to allocate a value to individual employees would fall into this category. This would typically include the costs of a staff entertaining event for a number of employees.
What can’t be included?
HMRC won’t include items such as cash payments, large benefits such as company cars, round sum allowances, etc.
Are there any deadlines?
The deadline for applying for a PSA is 5 July following the end of the tax year. So if you don’t already have a PSA in place, you must apply by 5 July 2019 for benefits and expenses provided in the 2018/19 tax year.
If you don’t already have a PSA in place and miss this deadline, it is possible to make a voluntary disclosure and settlement for items you would have otherwise included in a PSA. However, in certain circumstances HMRC may impose penalties and will charge interest on amounts settled in this way.
There is no statutory deadline for submitting computations of the tax and NIC due under a PSA to HMRC. You must pay the tax and NIC due under a PSA by 22 October following the end of the tax year (or 19 October if you do not pay electronically). If you miss this deadline, interest and penalties may be charged.
How do I calculate the amount due?
You will need the following details to calculate the tax/NIC due:
- The value of benefits/expenses provided for each PSA category agreed with HMRC
- Number of employees who received each benefit/expense
- The number of employees across each tax rate band (including Scottish rates where appropriate)
- The value of the benefits/expenses provided to employees in each different tax rate band.
What else should we consider?
A PSA is a very effective simplification of the expenses and benefits processes enabling you to reduce reporting requirements, ensure HMRC compliance is managed appropriately and help with employee reward, as they do not suffer any tax or NIC on items included in the PSA.
When you are considering items for inclusion in a PSA, don’t forget to identify any costs which may be potentially exempt from tax, including for example: trivial benefits, long service awards, annual events/staff parties, work related training, staff suggestion schemes, workplace meals, etc. There are of course a plethora of rules and regulations surrounding such potential exemptions, so they need to be considered in detail based on the specific circumstances.
BDO has extensive experience and knowledge in this area. If you have any questions, please get in touch with your usual BDO adviser or Stephanie Wilson or Mark Seaden.