UK: A MUCH NEGLECTED TAX PLOY. - Profit-related pay sounds too good to be true: a game that no-one can lose, not employee nor employer. Perhaps the Government could be said to come off the worse for it, but the Government wins too if the scheme succeeds

Last Updated: 31 Aug 2010

Profit-related pay sounds too good to be true: a game that no-one can lose, not employee nor employer. Perhaps the Government could be said to come off the worse for it, but the Government wins too if the scheme succeeds in its aim of creating more (taxable) wealth. So why aren't all businesses playing?

The Inland Revenue defines PRP as 'part of an employee's pay formally linked to the profits of the business in which he or she works'. Under a qualifying scheme, this profit-related element can be paid tax-free to an employee up to a maximum of £4,000 - so can be worth £1,000 a year to an employee taxed at the basic rate, or £1,600 to a higher rate taxpayer.

Don Brame, corporate services partner at Windsor-based accountants Williams Allan, enumerates some of the the benefits from an employer's point of view: 'Because PRP is calculated as a proportion of the profits of the company, managers know what it is going to cost. There are minimal administrative costs because it's operated through the PAYE scheme. It encourages employees to identify with the success of the business and there is no need to alter existing bonus schemes.' PRP is, in short, 'a marvellous catalyst in human resources' which can also save the company money.

David Longford, managing director of Isle of Wight components manufacturer Pascall Electronics, recently agreed a PRP scheme with his workforce. 'It has allowed us to reduce pressure on the company to ratchet up the pay bill and given us the chance to remunerate loyal staff,' he says. It has also reduced manpower costs, thereby freeing up funds for other purposes. Employees accept the principle of a variable element in their pay packets and Longford is confident that the scheme will be a powerful motivating factor when profits are healthy.

But what if profits were to dip? David Coats, author of the TUC pamphlet on 'Human Resource Management', agrees that it's an excellent thing for employees to share in the success of the business in which they work. On the other hand, he adds, 'Even though profits may vary, people's financial commitments don't.' However Brame insists that 'all the employee loses is the tax-free element - in practice it doesn't become an issue'.

The Inland Revenue estimates that 1.9 million employees currently belong to PRP schemes. One reason why the number of workers is not greater is that, in order to qualify, a scheme requires the approval of four-fifths of the employees in the business unit. Up to now employers have been entitled to exclude from that 80% all part-time staff and those with less than three years' service. Further, PRP schemes obviously cannot apply in non profit-making organisations.

The Government has recently made PRP fully available to part-time staff. Since more than 90% of the companies in Britain employ some part-time workers, this should be a big step towards enlarging the take-up. The snag is, though, that most part-timers are not taxpayers, so a scheme which promises to tax them less is actually worth nothing. Any business with a large percentage of part-time staff is still unlikely to be able to agree upon a PRP scheme.

But the main reason why more employees are not covered by PRP is that the device is not particularly well advertised. 'There is tremendous ignorance about PRP,' according to Brame. Some firms think they have PRP because they pay bonuses or commission. They don't realise that they are neglecting a 'tremendously effective' tax ploy.

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