Urgent clarification is needed from HMRC on how it intends to view people giving up salary during the COVID-19 crisis from a tax perspective.
New anti-avoidance rules were introduced in 2017 to prevent people avoiding tax and national insurance contributions by giving up a proportion of their salary in exchange for a benefit from their employer. This measure even covers the case where an employee gives up salary and the employer donates an amount to charity – https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim44141
This means that people giving up salary to benefit COVID-19 causes could, if they don’t follow the correct procedure, be hit with an unexpected tax liability and have to pay tax at their marginal rate on the amount of salary given up. If looking to pay salary to charity, it is imperative that this is done through payroll giving; recognising that both the employer and employee will be paying national insurance on the amount gifted.
Giving up salary to benefit the employer’s business could also be caught by these rules if HMRC deems the employee to have benefited from the business surviving the crisis better than it would have without the salary being given up. In these cases the employee could be liable to pay tax on the amount of salary given up or, even worse, on the present value of their future earnings from the business.
In the current environment where people are doing all they can to support the NHS and help the economy it would be terrible and wrong if altruistic acts done at speed inadvertently fell foul of a sweeping anti-avoidance power. The Chancellor, Treasury or HMRC urgently need to clarify that simply foregoing salary would not be counted as an optional remuneration scheme.
Peter Hopkins, technical director at AJ Bell, comments:
“The tax rules were amended in 2017 to stop a range of salary sacrifice schemes. The way the rules are drafted would catch an employee reducing salary and the employer paying it directly to charity, and might possibly catch those continuing to work but forgoing salary to try and keep their employer’s business afloat.
“It would be extremely helpful if the Treasury or HMRC urgently clarified the position for people who want to put their salary to good use. The rules were never intended to penalise people in this way but the wording was intended to stop charitable gifts through the employer and it looks like they might bite in the current environment.
“Rangers football club is perhaps the highest profile case of HMRC taking a business down due to how key staff were remunerated – in that case by loans from Employee Benefit Trusts which avoided tax. Today’s motivation is very different but the rules are there to catch people avoiding tax and if you give up salary altruistically, but in the wrong way, you may be doing so in a way that people have used before to avoid tax and the law doesn’t look at the motivation.”