Optional Remuneration Arrangements (OpRAs): Guidance for SMEs
Salary sacrifice schemes have been popular among growing SMEs for many years, but the tax criteria has now significantly changed with the arrival of Optional Remuneration Arrangements (OpRAs). The impact of the OpRAs regime is that tax outcomes are potentially worse for SMEs, but more importantly, informed and diligent tax planning is needed more than ever before. Only by drilling into the detail of the legislation can employers be clear about which benefits provide tax and NIC advantage – and which benefits could be a detrimental tax liability.
A reminder of rules around OpRAs
OpRAs are where an employee gives up the right to an amount of earnings in return for a Benefit in Kind (BiK) and they include flexible benefit packages with a cash option, cash allowances and salary sacrifice. The OpRA rules have been in place since 6 April 2017, but we are finding that many businesses are still not up to speed on the rules.
The regulatory framework was changed because HMRC became increasingly concerned that salary sacrifice schemes were over-used and in circumstances where it was never intended that they should be used, such as payment of employee travel expenses.
OpRAs will be caught under the new rules if provided under arrangements where the employee:
- Gives up the right, or the future right, to receive salary (salary sacrifice). These fall into Type A arrangements.
- Agrees to be provided with the benefit rather than an amount of cash pay. These fall into Type B arrangements.
A simple way of looking at it is that in Type A arrangements, an employee gives up something, and in Type B arrangements, they choose something.
If a BiK is provided under OpRA rules, the taxable value is now the higher of the cash foregone or the taxable value under the normal BiK rules. This applies to all BiKs, including those that were previously exempt, such as workplace parking.
The upshot is that the income tax and employer (NICs) advantages of BiKs have mainly been withdrawn due to new rules, but there are a number of important exemptions that all SMEs should be aware of.
Some benefits are not currently affected and those exemptions include:
- Childcare vouchers, workplace nurseries, and directly contracted employer provided childcare.
- Payments by employers into registered pension schemes.
- Cycles and cyclists’ safety equipment (including Cycle to Work schemes);
- Ultra-Low Emission Cars (ULEVs) with CO2 emissions of no more than 75g per kilometre that are in the scope of the car benefit charge.
For many common benefits provided under salary sacrifice, such as gym membership, there will be no change as a result of the new rules, as the amount sacrificed typically is equal to the value of the benefit.
Salary sacrifice arrangements in place before 6 April 2017 come under the scope of the new rules with effect from 6 April 2018, except employer-provided accommodation, company cars and school fees for employees of a fee-paying school. These benefits will not be taxable until 6 April 2021. Arrangements covered by these transitional provisions will lose that protection if the arrangements are changed before 6 April 2021 and/or the benefit provided changes.
For school fees, the transitional provisions will apply, even if there is an increase in the salary sacrifice, provided that the employment is with the same employer and the salary sacrifice is in respect of the same child at the same school. Moving from Junior to Senior school within the same overall school is considered to be the same school for these purposes.
Guidance on effectively managing the impact of OpRAs
The new legislation does not mean that salary sacrifice is no longer effective and for pension contributions the tax/NIC advantages clearly remain. Other popular benefits such as cycle to work schemes and green cars will also be unaffected.
However, it is vital that all SMEs are fully up to speed on the new regime and there are a number of important action points I would recommend to achieve compliance and maximise tax efficiency:
- SMEs should carry out a comprehensive exercise to identify all benefits (including ‘Type B’ arrangements) which could fall within the OpRA rules. For affected benefits they should identify exactly when the OpRA rules will apply from. For arrangements entered into before 6 April 2017 the transitional rules have to be considered.
- Businesses will need to report all BiKs, including those under OpRAs, to HMRC on form P11D from 6 April 2018, unless they are registered to voluntarily payroll benefits. Employers should ensure they have all the information they need to accurately complete these forms, including all the details of cars and loans provided.
The closing date for employers to send P11Ds to HMRC is 6 July 2018 and employers should do their utmost to ensure it is submitted on time. For any P11D(b) or online submission made after this date, a penalty of £100 per 50 employees for each month the form remains outstanding will be incurred.
- Employers must carefully consider the pros and cons when providing benefits such as car parking and mobile phones.
- Employers offering OpRAs will need to be clear about which benefits provide tax and NIC advantages and which will not. Businesses will need to alert those employees who are impacted.
- Consider whether arrangements can and should be changed going forward in order to ensure tax efficiencies.
- Consider whether voluntary payrolling of benefits could reduce the administrative reporting burden on your business.
For an informal discussion around Optional Remuneration Arrangements (OpRAs), ensuring compliance and getting the most out of the new regime, please email me at Michaela.Johns@hwb-accountants.com or call 023 8046 1256.