Salary sacrifice changes have 'temporary legal force'

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Because legislation is yet to receive royal assent, experts advise employers to delay entering new arrangements with employees

The new salary sacrifice regulations coming into effect today (6 April) will not be legally binding until they are given royal assent.

This is not likely to be until later in the year because the Finance Bill – which contains the changes to the Income Tax (Earnings and Pensions) Act 2003 – is unlikely to have its second reading in the House of Commons before the end of April 2017, according to Jeff Fox, principal at Aon Employee Benefits.

The Finance Bill must be passed by both houses of parliament, and receive royal assent from the Queen, before the salary sacrifice changes will be entirely enforceable by law. The new rules have been given “temporary legal force,” said Malcolm Frost, tax associate at Clyde & Co.

Vaneeta Khurana, national head of employment tax at accountancy and advisory firm, Mazars, added that Finance Bill may still be amended between now and when the regulations become legally binding. However, “the indications are that the government is not likely to make significant changes,” she said.

Tax and legal experts have urged employers to follow the government’s draft legislation and guidance on the salary sacrifice changes in the interim. This means that the new rules, stipulating that some salary sacrifice benefits will be taxed through payroll for the first time, will apply from today (6 April) for new or revised contractual arrangements.

Because the new rules only apply to new salary sacrifice arrangements entered into on or after 6 April, Stefan Martin, partner at Hogan Lovells, said that employers should wait until the Finance Bill becomes law before entering into new arrangements with employees.

Some transitional arrangements already exist for plans already in place before April 2017, which are protected until April 2018 or April 2021 in some cases. The regulations will not be applicable to pension contributions and advice, childcare, cycle-to-work schemes or ultra-low emission vehicles.

Employers who do not comply with the regulations from 6 April 2017 could potentially be subject to interest and penalties for failure to carry out with their obligations. “A deliberate failure to pay taxes could even result in criminal prosecution for tax evasion,” added Frost.

Although it may seem unusual for the government to introduce new regulations for employers that are not legally binding as yet, parliament does have the authority to specify when laws will come into force. Frost emphasised that it is “commonly assumed” that laws can never have retrospective effect, despite the fact that this is not the case.

He said: “It is common for tax legislation changes to come into force either from the day they are announced or from the beginning of the next tax year. Where changes are intended to have effect after Budget day but before royal assent, these are given temporary legal force by the use of a binding 'budget resolution' passed on the day of the budget.”

Stephen Ratcliffe, employment partner at Baker McKenzie, agreed that this legal arrangement is “fairly typical” for Budget announcements, where the government often makes changes effective from a date before royal assent is given to the relevant bill.

The changes to the way salary sacrifice arrangements operate are part of a swathe of employment law changes coming into effect this month, including gender pay gap reporting, the apprenticeship levy and the immigration skills charge.