Ask the Expert: UK’s PAYE Settlement Agreement process explained

Q. Her Majesty’s Revenue & Customs (HMRC) have been talking about simplifying the Pay As You Earn Settlement Agreement (PSA) process for ages, but everything seems to have gone quiet lately. Could you provide an update?

This situation does appear to have been rumbling on for years, and the great simplifications promised have not yet materialised. But it is quite interesting to look back at the history of it, culminating in where things actually are to date.

It all started in January 2014 when the Office of Tax Simplification (OTS) published its ‘Review of employee benefits and expenses: second report’. In the report, the OTS talked about ‘Broadening PAYE Settlement Agreements’. What this meant was that the scope of the PSA should be widened to such an extent as to enable employers to settle any employee tax liability relating to expenses and benefits.

As you are no doubt aware, the expenses and benefits that can be included here fall into one or more of the below categories:

• Minor;
• Irregular; and/or
• Impracticable to calculate value per employee.

In August 2016, a consultation took place to address a number of issues within the PSA process that were administratively burdensome for both employers and HMRC. But the consultation did not pick up on the OTS’s suggestions around broadening its scope and instead sought views on these four particular proposals:

1. Remove the need for employers to agree with HMRC on which items may be included in a PSA. Instead employers should assess the matter in reference to the existing legislative rules and guidance;
2. Take away the requirement for an upfront annual agreement;
3. Explore whether to digitise PSA returns;
4. Eradicate the ‘minor’ criterion as it may not be necessary following the introduction of a £50 (US$67) ‘Trivial Benefits’ exemption. 

In December 2016, the UK Government responded to the consultation with two announcements that came into effect in 2018/19:

1. ‘Enduring agreements’ would replace the previous requirement for an annual agreement between employers and HMRC;
2. PSA returns would be undertaken digitally for the 2018/19 tax year ie later in 2019.

The government confirmed it would neither remove the ‘minor’ criterion nor broaden the scope of the PSA as suggested by the OTS way back in 2014. The Finance Act ensconced these changes into law.

Little change

In February 2018 (coming up to the start of the 2018/19 tax year), another consultation was issued on several clauses in the Income Tax (PAYE) Regulations 2018 concerning PSAs. This legislation does two things:

1. Removes the requirement on employers to renew PSAs annually, which means they become an enduring agreement instead. Essentially, the PSA will be agreed once with HMRC and, as long as it does not change, the agreement will remain in place;
2. Allow for digitised PSAs at some time in the future, but not in 2018/19.

So despite the broad review recommended by the OTS in 2014, only one change will actually take place in 2018/19, and that is the move to enduring agreements or everlasting PSAs.

If you had a PSA in 2017/18, HMRC should have sent you a P626 ‘How to get a PSA’. This document asks you to confirm the details recorded on it and to return a copy to the tax authority. It will then become an enduring agreement.

Should circumstances change, read the ‘change or cancel a PSA’ guidance on Gov.UK, notify HMRC and sign a new P626. This will enable you to enter into a new enduring agreement.

For those employers without a PSA (or that did not receive a P626), it would be advisable to make an application to HMRC’s Business Tax Operations PSA Team by 6 July 2018. If accepted, this document will form the basis of your PSA for 2017/18 and an enduring agreement from 2018/19 onwards

So despite the twists and turns, it is not quite the transformation of the PSA landscape that many people thought would take place – or even that HMRC talked about during 2017 (see its internal PSA manual). While digitisation is on the cards and is included in existing legislation, it will not be happening during 2018/19.

Ian Holloway is head of legislation and compliance at Cintra HR and Payroll Services. He has been in the payroll profession for over 30 years, processing payrolls large and small from organisations across all sectors until 2011 when he started helping to educate the profession by means of course material, newsletters and face-to-face presentations.

Q. Her Majesty’s Revenue & Customs (HMRC) have been talking about simplifying the Pay As You Earn Settlement Agreement (PSA) process for ages, but everything seems to have gone quiet lately. Could you provide an update?

This situation does appear to have been rumbling on for years, and the great simplifications promised have not yet materialised. But it is quite interesting to look back at the history of it, culminating in where things actually are to date.

It all started in January 2014 when the Office of Tax Simplification (OTS) published its ‘Review of employee benefits and expenses: second report’. In the report, the OTS talked about ‘Broadening PAYE Settlement Agreements’. What this meant was that the scope of the PSA should be widened to such an extent as to enable employers to settle any employee tax liability relating to expenses and benefits.

As you are no doubt aware, the expenses and benefits that can be included here fall into one or more of the below categories:

• Minor;
• Irregular; and/or
• Impracticable to calculate value per employee.

In August 2016, a consultation took place to address a number of issues within the PSA process that were administratively burdensome for both employers and HMRC. But the consultation did not pick up on the OTS’s suggestions around broadening its scope and instead sought views on these four particular proposals:

1. Remove the need for employers to agree with HMRC on which items may be included in a PSA. Instead employers should assess the matter in reference to the existing legislative rules and guidance;
2. Take away the requirement for an upfront annual agreement;
3. Explore whether to digitise PSA returns;
4. Eradicate the ‘minor’ criterion as it may not be necessary following the introduction of a £50 (US$67) ‘Trivial Benefits’ exemption. 

In December 2016, the UK Government responded to the consultation with two announcements that came into effect in 2018/19:

1. ‘Enduring agreements’ would replace the previous requirement for an annual agreement between employers and HMRC;
2. PSA returns would be undertaken digitally for the 2018/19 tax year ie later in 2019.

The government confirmed it would neither remove the ‘minor’ criterion nor broaden the scope of the PSA as suggested by the OTS way back in 2014. The Finance Act ensconced these changes into law.

Little change

In February 2018 (coming up to the start of the 2018/19 tax year), another consultation was issued on several clauses in the Income Tax (PAYE) Regulations 2018 concerning PSAs. This legislation does two things:

1. Removes the requirement on employers to renew PSAs annually, which means they become an enduring agreement instead. Essentially, the PSA will be agreed once with HMRC and, as long as it does not change, the agreement will remain in place;
2. Allow for digitised PSAs at some time in the future, but not in 2018/19.

So despite the broad review recommended by the OTS in 2014, only one change will actually take place in 2018/19, and that is the move to enduring agreements or everlasting PSAs.

If you had a PSA in 2017/18, HMRC should have sent you a P626 ‘How to get a PSA’. This document asks you to confirm the details recorded on it and to return a copy to the tax authority. It will then become an enduring agreement.

Should circumstances change, read the ‘change or cancel a PSA’ guidance on Gov.UK, notify HMRC and sign a new P626. This will enable you to enter into a new enduring agreement.

For those employers without a PSA (or that did not receive a P626), it would be advisable to make an application to HMRC’s Business Tax Operations PSA Team by 6 July 2018. If accepted, this document will form the basis of your PSA for 2017/18 and an enduring agreement from 2018/19 onwards

So despite the twists and turns, it is not quite the transformation of the PSA landscape that many people thought would take place – or even that HMRC talked about during 2017 (see its internal PSA manual). While digitisation is on the cards and is included in existing legislation, it will not be happening during 2018/19.

Ian Holloway is head of legislation and compliance at Cintra HR and Payroll Services. He has been in the payroll profession for over 30 years, processing payrolls large and small from organisations across all sectors until 2011 when he started helping to educate the profession by means of course material, newsletters and face-to-face presentations.