Out-Law News

Pandemic pay cuts – employers warned to steer clear of PAYE trap seen in first wave

Ed Goodwyn tells HRNews that employers need contract variations agreed with employees to safeguard against potential tax liabilities   
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    As you will know, last week the Chancellor Rishi Sunak extended the furlough scheme across the UK for a period of 5 months to the end of March with employees receiving 80% of their current salary for hours not worked. The Job Support Scheme which had been due to start has been delayed indefinitely and, we think, that might be the last we see of it. As for the furlough scheme, it started on 1 November and, good news for employers, it can be backdated. So it all feels very much like where we were back in March at the start of the first wave and, indeed, many companies are turning to the tactics that helped them during the first wave, notably furloughing staff and cutting pay. On cutting pay, back in August, during the first wave, the FT ran the story “UK bosses take pay cuts ahead of pandemic” reporting how pay for CEOs at the UK’s 30 largest companies fell almost a tenth last year as boards kept stricter watch on remuneration to make sure that executives were not insulated from the impact of Covid-19. The FT reported how, across the FTSE 100, many business leaders voluntarily accepted pay cuts to show solidarity with staff and shareholders. Pay cuts were not limited to senior staff – in many cases employees generally were willing to take a temporary pay cut to avoid redundancy, particularly if senior figures in the business were lead by example. That picture is, we think, likely to be repeated by a number of employers during wave 2, and the reason we have highlighted it now is to flag a problem that emerged, during the first wave, concerning a potential tax liability. It is an issue that reported by the FT back in May as “tax experts warned of unintended consequences of reducing or giving away pay and bonuses”. The point is that if the tax rules are not followed correctly it could lead to companies and individuals being pursued by HMRC for income tax and NICs. The article describes it as a trap for employers – so what is the trap exactly? On the line of explain, Ed Goodwyn:

    Ed Goodwyn: “The trap is that the employer has to have made the contract variation properly so it can be said that the employee's correct and reduce salary applies before date of payment because it's PAYE latches on to the employee's entitlement for payment and if one hasn't quite done the contract variation properly then you can unwittingly still have the employee entitled, on payday, to the higher salary and you could therefore unfortunately, get hit with an unexpected PAYE tax hit. A contract variation in 99 out of 100 contracts needs to be done by consent because employers simply can't unilaterally change such a fundamental term of the relationship. So the issue is the employer has to get the employee's consent. That issue of consent has also touched into some confusion that's now been resolved in the Furlough Scheme. So consent is generally obtained in either one of two ways, either through express agreement, normally indicated by the employee counter-signing the amended contract, or through acceptance being deemed. By reason of the furlough guidance there was confusion as to whether or not deemed acceptance would suffice but on the latest iteration of the guidance it has been confirmed that deemed acceptance is good enough for furlough. However, if employers have the time, and can achieve it practically, it is much better, for certainty sake, to get express consent. So we would always say that we're the employer can, they should get express consent from the employees that the contract variation, the salary reduction, has been agreed. Now because of the lockdown situation that does create practical issues. Before lockdown we would normally ask the employee to counter-sign a variation letter or the new contract but that's not practical these days. All we need, though, is to have evidence of that agreement. So it can be evidenced simply by any employee replying on a WhatsApp, or a text, or an email just saying that I agree - I've seen the new contract or I've seen the mending side letter and I agree. So the watch-word for the employer is to get that agreement, ideally through that express agreement methodology, but also ensure that the contract variation makes it clear when the change in salary applies so everybody knows when the employee's right to the lower salary kicks in for PAYE purposes."

    Joe Glavina: “So if we did see some employers fall into this trap, Ed, so they failed to take that step of getting a contract variation, do you really think, with everything that's going on the Revenue would pick up on it?

    Ed Goodwyn: "It's a really good question and, I have to say, it's moot. HMRC are working their socks off to do various things, not least the Furlough Scheme itself - they're working 24/7 and, by and large, the scheme has been very well received and has been successful, where large amounts of money being paid out by the Treasury through HMRC. So it's a really good question as to whether this relatively technical and legal issue would be picked up. Certainly my view at the moment is no, nobody would be interested in the current situation, everybody is far more focused on survival and trying their best to keep business going. However, unfortunately, one never knows what happens in the next 2, 3, 4 years when things settle, we come out of this lockdown period and HMRC go back to where they normally are, if you like., and you could get a zealous HMRC audit and this could then be picked up. It still, hopefully, won't happen but why risk it? Get your agreement express in the right way and avoid the issue ever arising."

    If you would like to know more on that particular issue you can – Ed has written about it in some detail along with tax specialist Chris Thomas – it is called “Coronavirus: PAYE trap for employers introducing pay cuts” and you can find that article on the Outlaw website.

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