Lately there has been a significant number of employers revising their policies to introduce point-based employee reward programs.
By introducing these type of arrangements, which form part an employer’s reward strategy, it is essential the income tax and National Insurance rules are explored. Here are are a couple of issues that need to be considered:
When does the employee have an entitlement to the point-based reward?
It is the case that many of these reward arrangements permit an employee to make an annual election over the points they may wish to take and how these are going to be utilised. This is often arranged by the employer’s flexible benefit provider.
Care is needed that what in fact is happening is that by making this election to their points, they sacrificed a right to a sum in salary. If the employee had a right to a cash salary, which they changed into points to utilise on benefits in kind, then PAYE and National Insurance will arise on the cash.
It may be possible to avoid the PAYE and National Insurance if the right to cash occurred. This is a technical area and if there are concerns in this regard you should seek support from your tax adviser.
It is also worth ensuring that the structure of the arrangement could not be seen to fall within the optional remuneration arrangements (OpRA) scheme rules which were introduced at April 2017. This would arise if there was a sum of money given away in regard to the benefit in kind acquired using the allotted points provided to the particular employee.
If it is found that OpRA applies then a tax and National Insurance charge will arise on the greater of the amount, given up in exchange for the points or the income tax arising on the benefit in kind acquired with the points.
Over the years we have seen a number of HMRC challenges around these arrangements, so it is worthwhile ensuring what you have in place is robust.
The taxing of the benefits acquired using the points
It is important to consider what is being acquired by the points offered to the employee. It may be that what is acquired is caught to income tax and National Insurance or if not to a benefit in kind with Class 1A National Insurance arising on the employer. It is essential that consideration is given to how this is dealt with and if in doubt you either contact HMRC or your tax adviser to get clarity.
I have seen some employers who have these types of arrangements in place overlook the particular need to deal with what the points have been utilised for when looking at the year end benefit in kind reporting. So, while this all sounds relatively straightforward it is essential that the appropriate tax considerations are made.