Tax experts warn of PAYE headaches

The confusion caused by the PAYE settlement agreement system may make it less attractive to employers, say tax experts.

The new Inland Revenue system replacing Annual Voluntary Settlements, will limit expenses and benefits against employee tax liability, they warn, and create the headache of maintaining PSA benefit records.

AVS enabled employees to pay lump sum settlements for employees’ tax liabilities on specific expenses and benefits at the end of the year.

Items such as relocation costs, were at local tax inspectors’ discretion.

The decision to withdraw a 5% cap on PSA benefits or expenses and to make ‘irregularity’ a test for eligibility was welcomed.

But KPMG tax partner Leslie Farrar said: ‘The introduction of PSAs on a statutory basis will inevitably limit the range of expenses and benefits in respect of which employers will be permitted to settle their employees’ tax liability, although not as much as originally feared.’

Farrar explained that only tax on benefits and expenses meeting certain criteria will be eligible for settlement. Qualifying items must be either minor, irregular, or impracticable to apply PAYE or apportion the value of benefits to employees.

Price Waterhouse tax partner, John Whiting, said the new system could require separate agreements for PAYE and National Insurance. ‘A number of employers would have just brokered a good deal under the system,’ Whiting said.

‘They could be worse off, because you can’t sweep all benefits under the new system. But the Revenue are providing a coherent framework and some employers will have to renegotiate.’

Ernst & Young tax partner Michael Kaltz added: ‘If it ain’t bust don’t fix it.

‘AVS worked quite well but the Revenue was advised that if a company refused to pay up they would have to chase round all the employees for their taxes. They are trying to give some sort of statutory authority to the system.’