Tax challenges and reward models

1. Maintaining & attracting the best people as the war for talent heats up across different industry sectors.
2. Ensuring new flexible working models and changes to contractual arrangements are tax compliant.
3. Responding to the demand from employees to demonstrate a clear commitment to the ESG agenda.

The sector could be a great destination for the increasing proportion of graduates leaving university today who want to work for organisations where they feel they are actually making a difference. They want to work for organisations that have a higher purpose, rather than feeling as though they are “just doing their job”.

A career in public and social sector organisations puts people at the coalface of ESG issues and enables employees to make a real difference in their local communities. Local authorities should build on this enthusiasm for ESG to shine a light on the great work that they do within their local communities to attract more talent.

However, public and social sector organisations cannot rely solely on their ESG credentials to attract the best staff. They need to ensure their reward models also reflect their ESG ethos as a responsible employer.

Reward models

With public service budgets getting tighter and tighter, competing on salary or bonuses may be unaffordable. Yet there are more creative options available to public service organisations electric bikes or green vehicles, for example, are both environmentally friendly and very tax-efficient incentives to offer employees. The benefit in kind rules for electric vehicles are now incredibly generous.

Many employers are also offering employees the opportunity to ensure that their investments have an ESG focus. Local authorities could do more to highlight the ethical nature of pension investment funds, for example, as well as offer employees the opportunity to save into ethical funds via payroll deductions.

Working models

At Mazars, we also see that many public and social sector organisations, like their private-sector peers, are embracing new working models in response to the COVID-19 pandemic. Utilising contractors is a sensible way to increase workforce agility, but it also increases risk. Some organisations have fallen foul of changes to IR35 tax regulations which cover off-payroll working arrangements for contractors and individuals using personal service companies.

Under these regulations, employers may be required to deduct income tax and national insurance contributions if contractors are deemed to be carrying out either similar or the same work as permanent members of staff. Since 2017, the burden has been on the public and social sector employer – and not on the contractor – to ensure compliance with these rules. Even those who have been applying the rules correctly need to be aware of the additional requirements that came into effect from April 2021.

The Department for Work and Pensions (DWP), for example, was hit with a £87.9 million tax bill this summer for incorrect IR35 status determinations resulting in unpaid tax and national insurance contributions between 2017 and 2021.

This high-profile case, and others like it, highlight the dangers of organisations relying solely on HRMC’s free Check Employment Status for Tax (CEST) tool to check the status of their off-payroll staff. Instead of relying on CEST, at Mazars, we encourage public and social sector organisations to seek specialist tax advice to gain peace of mind that their employment and reward models are compliant with all relevant regulation.

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