Policy paper

Income Tax: simplifying the PAYE Settlement Agreement process

Published 5 December 2016

Who is likely to be affected

Employers, who wish to make formal arrangements to pay Income Tax on certain benefits in kind and expenses payments on behalf of their employees via a single return and payment where it would be administratively burdensome to do so by conventional processes.

General description of the measure

The measure makes it simpler for both employers and HM Revenue and Customs (HMRC) to administer PAYE Settlement Agreements (PSAs) and provides greater clarity about what can and cannot be included in a PSA.

Policy objective

The measure seeks to remove the requirement for an employer to request and obtain agreement for items to be included in a PSA, in advance of their PAYE end of year reporting obligations. It will also introduce a new digital process for reporting PSAs to HMRC. The removal of the up-front agreement and the new digital process will be simpler and less time consuming for employers.

Guidance on the conditions for a PSA will be strengthened, reducing errors and providing certainty for employers.

This measure aligns with the principles of HMRC’s wider digital transformation strategy.

Background to the measure

PSAs are easements under which employers can settle, in a single payment, their employees’ income tax liabilities for certain (usually minor) benefits and expenses. This allows employers to simplify the reporting and settlement of tax for employee expenses and benefits and ‘sweep up’ any benefits or expenses which have been overlooked provided they meet the conditions for inclusion in a PSA.

The measure stems from a report by the Office of Tax Simplification (OTS). They reviewed PSAs as part of their 2014 review of employee benefits and expenses report and concluded that what started as an easement to reduce employer burdens, has now itself become an administrative burden. They also expressed concern that employers find the current rules difficult to apply and found inconsistency in what HMRC agrees can be included within a PSA. The government announced, in Budget 2016, its intent to consult on the simplification of the PSA process. HMRC published the consultation document on 8 August 2016, concluding the consultation on 18 October 2016.

Overall, respondents welcomed the proposals to remove the need for up-front agreements, provide a digital return and improve guidance. However, the proposal to remove the reference to ‘minor’ items from the conditions for a PSA was considered to be counter-intuitive to the policy intention of simplifying the PSA process and, in view of the concerns raised, this particular proposal will not be taken forward. The consultation document also asked for view from employers on the idea of aligning the submission date with that for P11D/P11D (b) but was seen as an unreasonable burden on employers so this idea will not be pursued further at this time.

Detailed proposal

Operative date

The measure will have effect in relation to agreements for the 2018 to 2019 tax year and subsequent tax years.

Current law

The current law in respect of Income Tax is included in Chapter 5, Part 11 of Income Tax (Earnings and Pensions) Act 2003. Secondary legislation is contained within Part 6 (regulations 105 to 119) of Income Tax (Pay As You Earn) Regulations 2003 (‘The PAYE Regulations’).

The current law in respect of Class 1B contributions is included in section 10A of Social Security Contributions and Benefits Act 1992.

Proposed revisions

Legislation will be introduced in Finance Bill 2017 to enable HMRC to accept a PSA without the need for a PSA to be agreed with an Officer of Revenue and Customs.

This will allow HMRC to design and implement a new automated process for employers to apply for a PSA.

Consequential changes will be made to the provisions in The PAYE Regulations covering the making, form and timing of a PSA.

Summary of impacts

Exchequer impact (£m)

2016 to 2017	2017 to 2018	2018 to 2019	2019 to 2020	2020 to 2021	2021 to 2022
-	-	nil	nil	nil	nil

This measure is not expected to have an Exchequer impact.

Economic impact

This measure is not expected to have any significant economic impacts.

Impact on individuals, households and families

The measure is not expected to impact on individuals, households, family formation, stability or breakdown.

Equalities impacts

This measure does not have an equalities impact.

Impact on business including civil society organisations

This measure is expected to create an on-going saving for businesses. Employers will incur a negligible one-off cost of familiarisation with the new rules. On-going savings include the removal of the requirement for an employer to request and obtain agreement for items to be included in a PSA. It is expected that, instead, this will be integrated into employers’ existing processes. On-going savings will also result from digitisation of the current process for submitting a new PSA agreement to HMRC.

Estimated one-off impact on administrative burden (£m)

One-off impact	(£m)
Costs	negligible
Savings	-

Estimated ongoing impact on administrative burden (£m)

Ongoing average annual impact	(£m)
Costs	negligible
Savings	1.1
Net impact on annual administrative burden	-1.1

Operational impact (£m) (HMRC or other)

It is anticipated that HMRC will have to make changes to IT systems which will cost in the region of £1 million. There are, however, expected to be operational savings in the region of £680,000.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

This measure will be monitored through information collected from tax returns and receipts.

Further advice

If you have any questions about this change, please contact Terence Brown on Telephone: 0300 586418 or email: paye.policy@hmrc.gsi.gov.uk.