The changing landscape over this year has forced many employers to seek new ways of engaging with their employees, manage their people-related costs, increase savings and reduce risks.
As an employer what should you be thinking about?
We recommend ten key people focus areas to help you adapt and grow.
1. Nurture your talent
For your business to thrive, you need to ensure you attract and retain the best and brightest talent.
Agile working helps employers to empower their employees to work globally where, when and how they choose.
But do you know where your employees are working? Is pressure mounting on HR to adopt an agile approach to working remotely? Do you want to hire the best and the brightest from anywhere in the world?
Remote working – globally
The changing workplace has forced many employers and employees to seek new ways of engaging in their work. Agile working is a way of working in which an employer empowers their employees to work globally where, when and how they choose.
Now more than ever, the world really is your Oyster. With advances in technology and communications, it has never been easier for employers to adopt a globally agile work culture. 2020 is a landmark year and many employees are now working effectively remotely – globally.
Examples of globally remote working arrangements:
- A UK employee working from home in the Netherlands.
- A German employee working from home in UK.
- A non-executive director of a UK company that lives overseas.
Globally remote working gives organisations a competitive advantage. It allows employers to quickly source global talent, hiring the best people from anywhere in the world. In turn, this helps develop greater diversity, plugs skills gaps between different regions and teams and removes geographical limitations.
It allows organisations to expand globally at a faster rate, while reducing the time your employees spend travelling as well as reducing their carbon footprint.
Mitigating tax risks from employees working remotely
For HR, a big part of the challenge will be getting compliance right. Make sure you understand the consequences for both your organisation and the employee before approving a request.
- Which country should the employment be in?
- Where do you pay the employee?
- What role will the employee perform, and where?
- What are the employer reporting obligations and costs?
- How can you reduce costs?
Be sure to take a holistic view – this is not just a payroll, tax or legal question – it may be all three. Seek out best practice from those who have real experience in this area.
2. Cash is king
Cash is king in the business world; especially when times are tough. Therefore, look for ways to improve cash flow.
Consider deferring cash compensation such as bonus payments, so they are paid when cash flow issues improve. You should also consider creating and developing a deferred compensation schedule with the objective of incentivising your key employees, while also helping cash flow for the business.
Replace cash with share-based incentives
To preserve cash you may consider cancelling or reducing cash bonuses and replace them with share-based payments. In the longer term this could be a win-win especially if the share price appreciates.
Consider Employee Share Option Plans
Where businesses are keen to retain or attract top talent, but don’t have the cashflow available to pay bonuses or increase salaries, share options can be an effective and affordable way to incentivise employees. There are qualifying plans that can provide share options to employees with no income tax on the grant or exercise of the options, and only Capital Gains Tax would apply to growth in the value of the shares on a future sale. The arrangements are relatively straight forward to implement but there are some bear traps to avoid.
Don’t forget cash flow issues for employees too. For instance, there are ways to reduce or stop UK PAYE payroll withholding in certain situations such as where they also have a tax or payroll obligation in another country as the same time as the UK. This might be relevant with traditional expatriate arrangements but also situations where employees are now working remotely as part of new agile working arrangements.
3. Go Green
Help the planet, save some tax and become a more attractive employer.
Employers can provide an electric car with a 0% benefit-in-kind charge. This is a considerable tax saving when compared to paying a cash-based car allowance or traditional company car.
Ultra-low emission cars
Offer a salary sacrifice car scheme to enable your employees to buy an ultra-low emission car. This will enable your employees to save tax and you to save National Insurance Contributions (NIC).
Install charge points
The ‘Workplace Charging Scheme’ grant helps fund the installation of charge points for electrical vehicles. An employer can provide charging facilities (including electricity) to employees to enable them to recharge all-electric or plug-in hybrid vehicles. This benefit is exempt from Income Tax and National Insurance Contributions if the facilities are made available to all employees.
4. Proactively manage your costs
Many organisations are facing a challenging financial environment with increased scrutiny and pressure to reduce costs. We recommend you focus on the following key areas.
Implement a cost management programme
Understand how you take out costs without risking the business. ‘Cost optimisation’? This is a buzzword often used. However, don’t place too much emphasis on operational efficiencies as they are often only a small proportion of total costs.
Tax planning and savings
Tax can be a large expense for both employer and employee. Therefore, build a tax strategy and look for ways to save tax and maximise the tax reliefs available.
Manage and understand your costs
It is critical that you understand what your costs are so you can actively manage them and avoid surprises later on. Cost modelling can help you select more cost-effective methods while still maintain effective outcomes – look for ways to get that balance right. Then carefully manage budgets.
Ensure you have financial discipline
You don’t need to be obsessed with managing costs as long as you have good financial discipline. The following are important principles of a well thought through cost programme:
- Set clear objectives and understand what the return on your investment will be.
- Agree your plan. Get advice on the best tax planning, prepare calculations and cost modelling and agree the right approach.
- Manage your investment. What are the actual costs versus planned costs? Are you achieving the return on investment you were expecting?
- Review and adjust if necessary. For instance, undertake new cost modelling and adjust when there is a material change.
Don’t forget cash flow
Look at cash flows, in addition to managing costs. You can avoid negative cash flow by, for instance, getting payroll withholding right. Review what available options there are to manage cash flow.
5. Planning for different scenarios
What is the right HR strategy right now? How will that change as you move from response to recovery for example?
Build a strategy that is sufficiently flexible to accommodate the many changes that evolve in the short- and medium-term; it is also critical that you continue to plan for the long-term.
Try to have a long-term strategy, and end goal, even if you have to make some tough short-term decisions. Brighter days are coming – those organisations that are best prepared will not only survive but also flourish.
Different organisations and sectors experience different pressures at different times. For instance, the hospitality and leisure sector have endured a lot of pain, while some sectors may not have been significantly hit early on but may experience the pain later on. Your HR strategy needs to be sufficiently flexible and robust to accommodate these dynamic circumstances.
Each approach needs to be considered carefully. The Government schemes can involve some complex rules and calculations to accurately make correct claims. If you are confused or not confident then get help. Don’t always assume job restructuring is a negative – some employees actually see reduced hours and increased flexibility as a positive as it is more in tune with their lifestyle choices.
The tax rules around layoffs are complex. There are several tax reliefs for the employer and employee, but problems occur if the correct procedures are not followed.
6. Identify opportunities during changes
With change comes opportunities. The key is to manage change in a way that brings a benefit not a threat.
For instance, the Government wants to bring in private sector reforms to ‘off-payroll working’. The off-payroll working rules can apply if a worker (or contractor) provides their services through their own limited company or another type of intermediary to your organisation. The new rules were due to go live in April 2020, however, due to the pandemic, the Government has deferred the changes until April 2021, which is just around the corner.
The rules make sure that workers, who would have been an employee if they were providing their services directly to the client, pay broadly the same tax and National Insurance contributions as employees. These rules are sometimes known as ‘IR35’.
What steps can you take now?
You could wait before making any changes or perhaps now may be a good time to review, make any necessary changes and re-review existing employment / contractor arrangements.
With the current distress in the UK and global economy, it might be a good time to negotiate with a contractor and make them an employee. With mass unemployment predicted, and with potentially extra security from employment rather than self-employment, now may be a good time to carry out these negotiations with your contractors.
7. Stay focused on the fundamentals
In difficult times, stay focused on the fundamentals.
For instance, many employees are now working from home. Despite this, employment related expenses will have still been incurred – some in paper format and many in the less structured home office environment. However, the rules on how most of these expenses are treated for tax and National Insurance Contributions have not changed. Interest and penalties are still due where they have not been reported correctly.
It is very important that employers stay focused on these fundamentals. You must apply the same discipline to the lockdown period as before when approving and reporting these expenses.
If working from home for many employees will continue for a prolonged period, or just starts to become the new norm, then we recommend you design and implement new process and policies to manage these new agile ways of working.
Home working expenses – an exception – temporary changes
Last May, the Treasury announced a new measure to help those working from home who acquired new office equipment and received a reimbursement for the costs from their employer. This temporary measure removed unwelcome potential tax charges but do you understand how they apply to your employees?
With the speed at which people were asked to change working practices during lockdown, it is likely that many employees simply acquired the necessary equipment themselves and asked their employer to reimburse the costs afterwards. Under the usual rules, these reimbursements are usually taxable on the employee.
8. Recognise the value of your people
People are your most important asset. Now, more than ever, you must carefully nurture them.
It is critical that you recognise the value they provide and find ways to motivate them. You need them to drive your organisation forward in these difficult times.
The last few months have seen big falls in the share prices of many companies. Some have rebounded but some are still subdued. Share awards made in previous years may now be underwater (worth less than when awarded). New awards when the share price is low could lead to a windfall gain if the share price then recovers. Nonetheless, share-based incentives remain a key way to reward and incentivise employees. Some key considerations follow.
Waive or vary performance conditions
It may be tempting for companies and remuneration committees to vary the performance conditions for bonus and incentive plans because of the ‘exceptional’ impact of the global lockdowns and impact of share price, etc. Many commentators are warning against this for being short sighted. Alternatively, companies might consider deferring the awards for a short period of time to allow for ‘normal’ times to return.
Maintain the same level of awards but use more shares
Where the share price has fallen, and awards are expressed as a percentage – for example 30% of salary – then this could lead to a windfall gain if the share price then recovers.
Specific issues with SAYE option schemes and Share incentive plans
Employees may want either to withdraw their savings, or to take a contribution holiday. This can have adverse tax, National Insurance and accounting implications. Companies could consider whether they reset the option price by launching a new offer and giving participants the ability to cancel their participation in a prior offer.
There are risks with all of the approaches so we recommend companies review the appropriateness before making any changes.
Revisit EMI qualifying status and claim relief for share options exercised by employees
Some businesses that previously exceeded the qualifying limits for Enterprise Management Incentive (EMI) may now find themselves within those limits if employee numbers have dropped below 250 employees and gross assets are less than £30m. Business owners should therefore review if they can now access this generous employee share incentive arrangement. It may also be a good time to revisit previously granted options and ‘re-set’ these if they are underwater (i.e. the current share price is less than the exercise price previously set).
Businesses already using shares and options to incentivise their employees should review whether they have claimed Corporation Tax relief when the options were exercised by employees. The Corporation Tax deduction is based on the value of the shares on the date of exercise, minus the amount the employee paid for the shares. The deduction is also available even where the share options were granted under an EMI share option plan, where no Income Tax liability would arise to the employee on exercise. A huge number of businesses are not aware that they can claim Corporation Tax relief and, if options were exercised in the prior period and this relief was not claimed, you can amend the prior year return and claim relief now.
9. Look for tax savings
Flexible benefits or salary sacrifice – time to reconsider?
Flexible benefits or salary sacrifice schemes have been around for years. You may have considered these previously and decided it wasn’t right for your organisation at that time and the tax rules have been tightened by HM Revenue & Customs (HMRC), but now it may be time to reconsider.
The main reason for introducing a flexible benefits scheme still exists – tax savings for you and your employee. Other benefits exist too, such as improved employee engagement – helping an employee feel cared for and importantly valued by their employer.
Salary sacrifice enables the employee to exchange part of their salary for a non-cash benefit such as increased pension contributions. Salary sacrifice is commonly used to boost pensions, but you can also give up salary in return for benefits such as bikes, mobile phones and bus passes.
This decreases the amount of Income Tax and National Insurance they pay and the employer National Insurance Contributions you pay.
The following are still tax efficient salary sacrifice schemes:
- payments into pension schemes
- workplace nurseries
- childcare vouchers and directly contracted employer provided childcare that started on or before 4 October 2018
- bicycles and cycling safety equipment (including cycle to work)
- ultra-low emission vehicles
10. Focus on what matters – take a closer look
The global pandemic has changed the way many of us work, but this can trigger tax and other unintended consequences. Make sure you have effective visibility of employees that are working remotely and overseas.
Employees working outside their country of employment can often trigger employer reporting obligations unintentionally. This can catch out those employers who do not manage these obligations proactively.
Employees working remotely from another country can trigger income tax, permanent establishments, payroll and social security employer obligations and other unintended consequences.
Employees working remotely and overseas are often overlooked.
Determining whether employees working remotely can create issues for an organisation can be tricky. The rules are not straightforward and are often nuanced. It is important to seek advice.
A real and significant risk?
Where an employer does not fully understand the local rules and the interaction with home country rules then this can lead to tax audits, tax reviews and settlements of potentially large unpaid tax and social security taxes.
Take action now – make your employees working remotely more “visible”.
Would you like to know more?
If you would like to discuss any of the above guidance or have other queries about how you can make the right decisions for the future of your business and your income, please contact your usual Blick Rothenberg contact or one of the contacts on this page.