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End of term reportIndependent schools
Aut
umn
2017
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Contents
Introduction 03
Changes to termination payments 04
A gift aid health warning 06
Board assurance: Do you know what you think you know? 08
The fine line of a fair dismissal 10
The social recruiter 12
Independent schools urged to prepare for the new GDPR legislation 14
End of term report
We launched RSM’s Board Assurance Toolkit for Independent Schools in September 2017 to assist schools in looking at their risks and governance. If you have not yet downloaded a copy, please follow the link in Matt Humphrey’s article “do you know what you think you know?”.
Employment taxes and law are constantly evolving and schools must keep up with the changes to avoid unwelcome financial surprises. Issues over worker status and the so-called “gig economy” continue to make the headlines and may in turn impact independent schools. In this End of Term Report, we look at two staff cost areas for schools to consider:
• Deborah Parks-Green discusses the upcoming changes to termination payments; and
• Charlie Barnes from RSM Legal Services (LLP?) looks at the employee dismissal process.
Also in this edition Graham Batty offers a reminder on the rules for claiming gift aid. We are aware that some schools are operating “donation” schemes which could fall foul of HM Revenue & Customs requirements.
A reminder that as we enter 2018, GDPR is now just around the corner. Is your school ready for the new rules?
If you would like any further information on any of the topics covered, please contact a member of the team using the details enclosed or your usual RSM contact.
Please also visit our Independent Schools insights page rsmuk.com/ideas-and-insights/independent-schools-insights
On behalf of the team at RSM have a Merry Christmas and Prosperous New Year!
Nick Sladden Head of Independent Schools and Charities
Introduction
Nick SladdenHead of Independent Schools and Charities T +44 (0)20 3201 [email protected]
Kerry GallagherEditor and Audit Director T +44 (0)118 955 [email protected]
Welcome to the Autumn edition of RSM’s End of Term Report.
Changes to termination payments
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It was in 2014 when the Office of Tax Simplification reported the need to reform the treatment of termination payments. It’s been a long time coming and, what started out as a recommendation for the simplification of the process, has turned into an opportunity to increase both the tax and national insurance contributions (NIC) yield.
BackgroundWhen considering the tax treatment of a payment in relation to a termination of employment, it cannot be assumed that the £30,000 ‘termination payment exemption’ applies. You must always break the payment down into its constituent parts and review each one individually. For each part, you must consider if it is taxable as earnings or under some other provision and, if so, you must put it through the payroll to charge it to both income tax and class 1 NIC. Examples of such taxable payments on termination include:
• contractual payment in lieu of notice (PILON);
• payment for a restrictive undertaking;
• payment on retirement; and
• release of a loan.
If it is not earnings or taxable under any other provisions, you must then consider if it must be taxed as a termination payment, with the first £30,000 being exempt. There is no corresponding NIC charge on such termination payments. It is the treatment of these termination payments that is changing and that is the focus of this article.
Post-employment notice payThe new legislation seeks to bring a uniform approach to the treatment of PILONs. Currently, where the employment contract provides for a PILON to be made, this is treated as earnings and charged to income tax and class 1 NIC. On the other hand, where there is no provision for a PILON, these payments are often treated as termination payments, meaning they are not charged to NIC and are tax exempt within the available £30,000 limit. This means that you can currently have two employees with fundamentally identical termination packages, but with very different net payments.
Going forward, there is to be a formulaic calculation of post-employment notice pay (PENP). This is equal to the employee’s basic pay before any salary sacrifice, over the period for which they are legally or contractually entitled to receive notice. The basic pay calculation excludes overtime, bonus, commission, benefits and, although not applicable for almost all independent schools, share based earnings.
If the termination payment is no more than the PENP, then it is all treated as earnings and charged to income tax, along with both employee and employer NIC. If the termination payment is more than the PENP, the excess is treated as qualifying for the £30,000 exemption, with the PENP amount treated as earnings.
Broadly, the intention of the new legislation is to tax as earnings the basic pay that the employee would have earned, had they worked their notice.
NIC on termination payments in excess of £30,000The charge on termination payments in excess of £30,000 is currently limited to income tax. The new legislation will ensure that any termination payment in excess of £30,000, that is chargeable to income tax, will also attract a class 1A NIC liability. Charging it to class 1A NIC rather than class 1 means that only the employer will suffer NIC and not the employee. Until now, employers have associated class 1A NIC only with benefits reportable on form P11D and class 1A NIC has been payable by 6 July after the tax year end. However, this new type of class 1A NIC is expected to be payable under real time information.
Payments for injury to feelingsWhere a payment is made in connection with the termination of an employment on account of death, injury or disability of the employee, the payment can in some circumstances be fully exempt from charge to both income tax and NIC. The new legislation ensures that payments for injury to feelings connected with the termination will fall outside this exemption, except where the injury amounts to a psychiatric injury or other recognised medical condition.
Anticipated timing of changesAll these changes were expected to be effective from 6 April 2018; however the government recently announced a delay until 6 April 2019 on the charge to class 1A NIC on termination payments exceeding £30,000. This delay is welcome, to give employers more time to prepare for increased costs associated with these payments, but also to give time for software developers to adapt payroll software to allow payment of class 1A NIC in real time.
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Recommendations • With the playing field levelled for the treatment of PILONs, employers should discuss with their lawyer the use of a contractual PILON in future.
• Professional advice is always recommended when making a termination payment to ensure the tax and NIC rules are accurately followed, as HMRC will hold the employer responsible for any underpayment of deductions through the payroll along with interest and penalties.
• When agreeing a settlement, clear records should be kept of the proportion of payment relating to each element. This will help to ensure the correct income tax and NIC treatment.
• With the cost to employers of termination payments set to rise significantly, careful thought should be given to the timing of payments when negotiating the termination of an employment.
Deborah Parks-GreenEmployer Solutions T +44 (0)1256 486 [email protected]
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A gift aid health warning
There are strict rules relating to gift aid which can only be claimed on unconditional money gifts that do not result in the donor receiving anything other than minimal benefits in return. Any gift aid you claim where these rules are not complied with must be repaid to HMRC, together with interest and possibly penalties.
The scheme involved a school partnering with a commercial provider that sources the equipment. Under the scheme:
• parents agreed to make 12, 24 or 36 monthly ‘donations’;
• their child received a laptop, case, charger etc. for use at school and home;
• children were not allowed to use a laptop bought direct by parents at school;
• some school laptops were available for use but these could not be taken out of school;
• after the last payment is made the parent owned the computer and accessories; and
• parents were asked to sign a gift aid declaration.
It is likely that this sort of arrangement will not work as there was not really a donation. There was no voluntary element since parents had to pay the fixed monthly amount without the option to choose a higher or lower payment to participate. If they did not pay their child did not get the computer, so the arrangement fails on basic principles. In reality, this had the character of a lease purchase agreement. Interestingly the monthly donation plus gift aid was almost identical to the example high street cost finance cost given in the documentation.
Even if the payments were donations, the benefit obtained as a result ie the retail value of the computer will be far more than permissible limits.
If you have any queries about claiming gift aid please contact:
Graham BattyCorporate TaxT +44 (0)121 214 [email protected]
No one doubts the benefits of pupils having access to a laptop that is compatible with the school’s IT system. However, we have recently come across an arrangement for providing laptops to school pupils that purports to be eligible for gift aid but could result in an unwelcome surprise.
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Board assurance: Do you know what you think you know?Schools can manage and prevent the occurrence of most risks they’re facing by ensuring their control environment remains robust and vigilant.
This is proven through our experiences with independent school clients suggesting that approximately 80 to 90 per cent of their perceived or actual risks being face relate to ‘business as usual’ rather than ‘exceptional’ risks.
The board is collectively responsible for strategy, stewardship, performance, and therefore also the oversight of the management of risk. However, this is, in our experience, an area of common weakness.
Boards can become fixated with the ‘exceptional’ risks and not put in place suitable arrangements that enable the reporting and monitoring of the core controls that protect the school from a good majority of ‘business as usual risks’. This is where assurance becomes a key element of the board’s risk management approach.
Assurance goes to the heart of the work of any board. The provision of education involves risk, and being assured is a major factor in successfully controlling risk. Having the right assurances provides confidence that risks are being controlled effectively, or, conversely, highlights that certain controls are ineffective or that there are risks where no assurances are being provided.
A board assurance framework brings together in one place all the relevant information on the risk to the board’s strategic objectives. It is an essential tool for boards, but like all tools it needs to be used with skill and diligence.
RSM are pleased to launch their Independent Schools Board Assurance Framework. We believe this is a timely publication that will provide enormous benefits to those schools seeking to develop and strengthen their governance, risk and control arrangements and make themselves more resilient and sustainable in an ever-changing risk landscape.
‘Business as usual’ Risks are only likely to occur if the existing control environment failed or was weakened. These risks should already be managed.
‘Exceptional’ Risks relating to new initiatives, activities or changing in your operating environment, enforced or planned.
Key questions to considerAre your school’s strategic objectives clearly defined and understood?
Does your school have a clearly defined approach to the management of risk?
Does your risk management approach ensure the focus is on those risks which have a material impact on the achievement of your school’s strategic objectives?
Has your school got a clear understanding how these risks will managed?
Has your school established its risk management reporting and monitoring through to the board?
Download our Board Assurance toolkit at www.rsmuk.com/ideas-and-insights/board-assurance-a-toolkit-for-independent-schools
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Matt Humphrey Risk and Governance T +44 (0)116 282 [email protected]
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The fine line of a fair dismissal
Employees dismissed after they have accumulated two years’ continuous service have the right to bring an unfair dismissal claim to an employment tribunal. If successful, they can be awarded compensation of up to a year’s lost income (capped around £95,000 for higher earners) from their employer or their job back.
Employees dismissed after they have accumulated two years’ continuous service have the right to bring an unfair dismissal claim to an employment tribunal. If successful, they can be awarded compensation of up to a year’s lost income (capped around £95,000 for higher earners) from their employer or their job back.
All schools must make staff changes but it’s vital to achieve fairness when terminating employment so that the risk of a claim can be contained.
A fair dismissal has three aspects. All are needed.
1. A potentially fair reason
2. A fair process
3. A decision which is reasonable in the circumstances.
1) Potentially fair reasons for dismissalThese include redundancy, capability and misconduct.
2) A fair processThis will depend on the reason for dismissal. In the case of misconduct, it will involve (as a bare minimum):
• a reasonable investigation;
• holding a disciplinary hearing;
• confirming the decision in writing;
• offering a right to appeal against the decision; and
• giving the employee the right to bring a companion to the disciplinary and appeal hearings.
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Top tipsThis guidance will be relevant in any future disciplinary decisions concerning the failure to disclose safeguarding issues.
Schools must keep up to date with any updates to the Keeping Children Safe in Education guidance.
Schools must ensure that all staff recognise both their safeguarding responsibilities and the action the school will take when there is a breach.
The seriousness of the possible sanctions must be clearly spelled out to all staff either through communications, the disciplinary policy or any safeguarding policy.
3) A decision which is reasonable in the circumstancesSuccess in proving a termination decision is reasonable, in all the circumstances, can often depend on very fine margins.
No better is this demonstrated than in a recent Court of Appeal decision. A head teacher with 23 years’ teaching experience was dismissed for not disclosing her close personal relationship with a friend, who was a registered sex offender and had been recently convicted of downloading indecent images of children. Whilst the head teacher’s relationship with the sex offender was platonic, they jointly owned an investment property where they both stayed overnight and went on holiday together.
On discovering her friend’s conviction, the head teacher chose not to disclose it to the school’s board of governors. She had sought advice from a police officer, a probation officer, the Disclosure and Barring Service and governors at other schools from all of which she understood she was not required to disclose. The Childcare Act 2006 and Childcare (Disqualification) Regulations 2009, which require those working with children under a certain age to disclose whether they live with anyone holding a relevant criminal conviction, did not apply in these circumstances.
The school discovered the head teacher’s association with the registered sex offender, followed a disciplinary process and then dismissed her for gross misconduct for failure to disclose it to them stating they considered it put the safety of the school’s pupils at risk.
The head teacher brought an unfair dismissal claim but lost. She appealed the decision all the way to the Court of Appeal. The Court agreed there was no legal or contractual obligation on the head teacher to disclose the relationship and criticised the absence of any evidence to support the Board’s belief that it placed the school’s children at risk. However, even so, the court considered that:
• the head teacher should have recognised that her association with a sex offender was a safeguarding issue; and
• she had a responsibility to disclose it to the Board for them to decide what, if any steps were needed to protect the children’s welfare.
It was key to the school’s success in this case that its disciplinary policy clearly stated disciplinary action would be taken against staff who failed to report when they had a duty to do so. For these reasons, the Court agreed the dismissal was fair.
This case is a reminder that, before making a decision to dismiss, all the circumstances of the case should be considered and the decision maker must have evidence to support the conclusions they make.
The government’s statutory guidance ‘Keeping Children Safe in Education’ published in September 2016 confirms that a head teacher’s key priority is the safety and welfare of anyone under the age of 18 who is under their care. In the decisions they make, they must always consider what is in the best interests of those children.
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Charlie Barnes Legal Services T +44 (0)1256 [email protected]
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The social recruiter
The use of social media in recruitment has risen extensively in recent years. Whilst there are clear benefits reported by organisations that do use social media in this way, such as, cost savings, increased pool and quality of applicants and being able to target specific applicants, is it a good idea to use social media as part of screening in your recruitment strategy?
Identifying the risksIf an employer is looking to check a candidate or employee’s social media profile online, they should be asking the following questions:
• have you or are you considering checking a personal media platform for someone applying for a role with your organisation?
• would you request permission from a candidate or employee or proceed without it?
• have you built social media checks into the recruitment process already? and
• is it worth the risk?
As information is increasingly available via a simple web search, employers may believe that an individual’s true character, experience and attributes are better viewed via their Facebook or other similar profiles.
There is no specific UK legislation on this use of social media, despite its significance and potential consequences. The following areas identify how these checks interact with existing laws of discrimination, privacy, data protection and the risks associated with them.
Discrimination The Equality Act 2010 outlines that employers do not request or expect sensitive personal information eg religion, political views, age, sexual orientation to appear on a CV or application form.
Therefore, why should the personal information visible on a personal social media profile be considered by a recruiter?
If a recruiter views it and subconsciously or consciously uses the knowledge as part of the recruitment consideration, there are serious risks of discrimination. Employers could face an employment tribunal hearing if they refused to interview or offer a job to someone based on a discriminatory judgement they made through looking at the candidate's social media profile.
Whilst the employer may not have to disclose which social networking sites they viewed in reaching their decision, sophisticated technology often makes it possible for individuals to see who has viewed their profile, thus increasing the risk for potential employers. In addition, claims of indirect age discrimination could be raised given that younger people are naturally more likely to have a greater social media footprint. Not to mention the fact, that such checks are likely to be more subjective, and based on the personal views of acceptability formed the recruiter, potentially impacting on diversity of the organisation.
It is possible to counter these claims by keeping a clear record of what reasons are used for rejection, however it could prove challenging.
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Privacy and data protection Viewing an employee or candidate’s profile must not overstep on their right to a private life. It remains that only if information has willingly been made public is it acceptable to view despite the claims that social media blurs the lines between public and private life. Confusion over privacy settings does make it difficult to determine what is purposefully public but clearly hacking or accessing information secretly is a breach of this.
Alleviating the risks of using social media sites as part of your screening process would include using professional networks such as LinkedIn or official blogs. These suggestions are based on the assumption that the postings on these websites would be intentional.
Although there are no specific laws on social media and the Data Protection Act 1998 does not address it directly, the type of information available it can provide does constitute data. With the forthcoming introduction of the General Data Protection Regulations (GDPR) in May 2018, guidelines were published in July this year by the EU data protection agencies have already started to raise the bar, proposing that employers have legal justification, that is ‘necessary and relevant’ to the performance of the employees job’, before checking social media accounts of their current or prospective employees.
Warning employees and candidates of the intention to look at their social media accounts, and retrieving consent from them, allows the chance for them to clean up their online profile and check their privacy settings beforehand. This would ensure a level of fairness if an employer is adamant they need to investigate social media profiles.
Employers should review their recruitment process and make sure they are protected from the pitfalls associated with social media and recruitment. RSM can support you with a recruitment review and further recruitment issues. Please contact our HR experts for further support, advice or information.
Hannah Gibson-Patel HR Consultancy T +44 (0)117 945 [email protected]
Our HR consulting team advise the following'Social media, beyond business networking sites like LinkedIn or Xing, is problematic for employers because online profiles are a natural extension and representation of people’s home lives. Recruitment decisions need to be taken first and foremost on capability, and there is too much risk that employers uncover irrelevant or inaccurate, and certainly inconsistent personal information amongst candidates which could adversely impact the integrity of their decisions.
The only scenario in which it may be good practice to check social media when hiring, is the appointment of people who may be of interest to journalists, and even then, the purpose of the check would be to provide advice on tightening privacy settings if needed. Beyond this rare occasion, our advice to employers is to avoid social media screening of candidates in all cases beyond those profiles created for the purpose of professional networking, which can naturally give insight in to relevant experience to the advertised role.'
A recent ACAS report into the use of social media in recruitment, found that over half of respondents did not have a formal policy covering use of social media for recruitment. Employers should therefore review their recruitment process and make sure they are protected from the pitfalls associated with social media and recruitment through the design and application of a robust policy. RSM can support you with a recruitment review and further recruitment issues. Please contact us for further support, advice or information.
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Independent schools urged to prepare for new GDPR legislation
This announcement highlights the magnitude of the change programme but also highlights the need for independent schools to prepare for the impending rule changes now to help mitigate substantial financial and reputational risks arising from issues of non-compliance.
The new legal framework is the biggest change to data privacy legislation in over two decades, and aims to protect EU citizen’s personal data, regardless of borders or where the data is processed.
The regulations, which come into force in less than six months time on 25 May 2018, will transform how independent schools need to store and manage personal data. A failure to comply with the new rules could see education institutions facing significant penalties of up to €20m, or four per cent of annual ‘turnover’.
The new rules include additional requirements in respect of consent and institutions will need to ensure all those involved in handling personal data within the institution are appropriately trained. For independent schools, personal data is wide ranging, from current staff and students to parents and former students. Any data from which individuals can be identified is considered ‘personal data’ so this covers paper based and digital, written and photographic.
Due to the amount of data, this could be an extensive two-fold process. The first step is to identify what data is currently being held, by whom and for what purpose; and the second stage is addressing the GDPR requirements for all held data.
An important factor is to ensure an independent school’s data processes protect the rights of individuals. Therefore, an organised data protection programme is needed, with all data activities accurately recorded. There is an increasing requirement to produce an inventory of personal data to facilitate wider data governance. Moreover, data governance obligation extends to any third-party contractors or partners working with a business, and will present institutions with much greater legal liability in the event of error. Education institutions also often share data with third parties, for example with examination boards, or in respect of sector data, such as SEND and NEETs.
5 top tipsMap out your PI data: carry out a data audit and inventory and then assess:
Do you have the right level of consent?
Do you have data retention polices for this data?
Can your systems delete this data if requested?
Have you appointed a Data Protection Officer?
Do you have procedures in place to notify of a data breach within 72 hours?
Elizabeth Denham, the UK’s Information Commissioner, has flagged the introduction of the General Data Protection Regulation (GDPR) as a significant future challenge for her office in the Information Commissioner’s Office (ICO) annual report.
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Steven SnaithTechnology Risk Assurance M +44 (0)7966 039 [email protected]
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In a growing digital economy, where data can be collected and stored within seconds, there is more risk of cyber security breaches, which was highlighted by the recent WannaCry ransomware attack. Therefore, it’s increasingly more important to make sure clear processes and safeguards are put in place to protect both clients and institutions.
Although GDPR is a welcomed attempt to curb growing fears around how organisations use and manage personal information, the new framework will drastically affect the future of stored personal data and increase institution accountability. Such a transformation is likely to disrupt internal data practices within organisations. Institutions must make sure they are ready for what lies ahead and not get caught out, as the financial and reputational risk could be significant.Steve Snaith, technology risk assurance partner at RSM
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