Last month, the EAT handed down its judgment in the case of Peninsula Business Services Ltd v Donaldson. They reached a conclusion, which ran counter to HMRC guidance and common practice by holding that employers did not need to continue to pay salary sacrificed childcare vouchers during maternity leave. In this article we examine the implications of the judgment and the current law around salary sacrificed benefits during periods of maternity or other family leave.
Benefits during maternity and family leave
When a person goes on maternity, paternity, shared parental or adoption leave they remain entitled to receive all of their normal employment benefits, except for remuneration. Instead of receiving their normal pay, they may receive statutory maternity (or family leave) pay and may also receive enhanced contractual maternity (or family leave) pay for all or a portion of their leave before ultimately stepping down to nil pay. In all other respects, their terms must remain the same and they remain entitled to receive any benefits that are not “remuneration”.
Salary sacrifice schemes allow employers to offer benefits to employees in a tax efficient way and also save on national insurance contributions. Most commonly, salary sacrifice is used to provide access to childcare vouchers or to make pension contributions in a tax efficient manner. The key ingredient in salary sacrifice is that the employee must give up their right to receive an element of their salary, which is converted into childcare vouchers or pension contributions in order to receive the advantageous tax treatment.
There has always been some ambiguity over whether benefits provided via salary sacrifice should be classed as remuneration (and as such should cease during maternity leave) or not (in which case they would need to continue). It is important to note that the tax treatment of a payment/benefit is not necessarily determinative of its legal status for other purposes.
Until the EAT decision in Peninsula Business Services Ltd v Donaldson employers tended to follow HMRC guidance which stated that childcare vouchers, even if funded by salary sacrifice, were non-cash benefits and as such must continue during maternity leave. The common understanding was that where the employer enhanced maternity pay they could continue to deduct the sacrificed element of salary to fund childcare vouchers provided the employee’s pay did not drop below the rate of statutory maternity pay (SMP). When pay dropped to SMP or nil pay employers needed to continue to provide the childcare vouchers.
In its judgment, the EAT rejected the previously held view that by sacrificing an element of your salary for some other purpose that sum ceases to be remuneration because you have formally given up your right to receive the cash. Instead, they decided that the sacrificed element of pay is merely a diversion of salary that you are due, and therefore it could still be treated as remuneration. As such, there was no legal requirement for employers to continue providing benefits funded by salary sacrifice during paid or unpaid maternity leave (unless they have a separate contractual obligation to do so which was not the case here).
In reaching its decision, the EAT stated that while the arguments were finely balanced, it did not consider that there was a legal basis for HMRC’s guidance stating that salary sacrificed childcare vouchers must continue during maternity leave. It agreed with Peninsula that childcare vouchers funded by salary sacrifice were a diversion of remuneration and there was nothing unlawful in having a policy which stated that childcare vouchers would cease during maternity leave. That said, if childcare vouchers were paid for by the employer, and not via salary sacrifice, these clearly were a benefit which was separate to remuneration and must therefore continue during maternity leave.
The EAT also argued that it could not have been Parliament’s intention that businesses continue to provide such benefits when the employee was not able to contribute to them via salary sacrifice as this resulted in an out of pocket expense for employers and a windfall benefit to employees. For small businesses in particular, this could act as a deterrent against offering such schemes.
Interestingly, the EAT made it clear that it had reached its decision “somewhat tentatively”. The claimant was unrepresented and the EAT was not certain that it had been directed to all relevant authorities. Commentators have already questioned the reasoning and raised concerns that the relevant tax legislation was not sufficiently considered. As such, the judgment should be treated with some caution, and it may be appealed.
Another important consideration is that most employers have a policy governing salary sacrifice arrangements and what happens during family leave. If employees have a contractual right or expectation that childcare vouchers will continue during leave, then this case will not be enough to relieve employers of their duties without them first taking steps to amend their contracts. The Government intends to change the childcare voucher scheme in 2018. Employers may decide to wait until the details of the new scheme are known before taking steps to change existing practices. However, the cost of funding child care vouchers during maternity leave often outweighs the national insurance saving the employer enjoys as a result of operating salary sacrifice schemes. Accordingly, many Finance Directors will welcome the EAT Judgment and seek an immediate change to their Company’s practice.
While the Peninsula case relates to maternity leave, the same reasoning could be applied to other types of family leave including adoption, shared parental and paternity leave. However, as paternity leave lasts for a maximum of two-weeks these issues are rarely relevant as the employee will normally earn enough over the month for salary sacrifice arrangements to continue as normal.
There has been some speculation as to whether the Peninsula ruling will have broader implications for pension contributions made via salary sacrifice.
The general rule is that pension contributions must continue during periods of paid maternity and other family leave. Employer contributions must be based on full pay and employee contributions on actual pay received. During periods of unpaid maternity and other family leave, employer contributions need not continue unless the contract of employment provides otherwise.
In contrast, where pension contributions are made via salary sacrifice, many take the view that they must be continued during periods of both paid and unpaid maternity and other family leave.
Employers may be tempted to rely on the Peninsula decision to argue that pension contributions paid via salary sacrifice are “remuneration” and so need not be continued during periods of unpaid maternity and other family leave. However, as highlighted above, the judgment could be appealed and so should be treated with some caution.