Taxed incentive

Eighteen months ago, the forecasts were apocalyptic. The extension of National Insurance Contributions (NIC) to cover incentive vouchers was going to result in widespread staff demotivation and knock the promotions sector – and possibly the economy as a whole – for six.

As so often, tempered by some heavyweight lobbying, the reality has proved far less dramatic than anticipated. As the dust settled, it became clear that the problems relating to third party vouchers in particular – often used as an incentive to partners in the supply chain – were largely administrative. These questions were resolved by the end of 1999, and operators of the scheme now argue that the market has readjusted to its pre-NIC levels, with the bigger budget clients taking the added costs in their stride.

From the start of the current tax year, the pain for face-value voucher schemes has been eased still further. Or rather, it has been spread around more evenly. Now it is the turn of merchandise vouchers to be beaten with the same NIC stick, bringing them into line with the other types of incentive.

There are no firm figures as to the value of the non-cash vouchers sector in the UK, but conservative estimates puts it at some £500m a year. According to Capital Incentives managing director Graham Povey, when the new rules on National Insurance were implem-ented in April last year, sales of vouchers were initially hit hard. A year-on-year drop of 28 per cent during the first quarter appeared to confirm all his company’s worst fears.

But in fact, the news was not as bad as it might have been. Second quarter sales were still down, but only by 18 per cent. The third quarter saw a recovery to 1998 levels, and in the fourth, some of the losses were clawed back, resulting in a 20 per cent growth in business. Other voucher schemes report a similar sales profile for the year.

“It was all very badly handled and poorly communicated by government,” Povey explains. “So our clients panicked at first but then came back, obviously appreciating the value of these incentives.

“The main confusion was over third party schemes. Since payments for a company’s own staff can be dealt with through a PAYE Settlement Agreement, they were not a problem,” says Povey. But NIC for third party incentives was originally classified as the responsibility of the company, such as a dealership, receiving them. There was no mechanism by which the incentive provider could handle and pay the relevant contributions.

According to Capital Incentives, this anomaly goes a long way to explaining last year’s confusion.

“Now, it’s still the dealer’s responsibility, but the authorities have opened up a route for the provider to pay,” says Povey. “And in a year’s time, the responsibility will shift squarely to the provider.

“All along, the issue has been more about administration than the actual cost. Clients might have to tweak the amounts they paid or amend their budgets, but that was not the real problem.”

In the run-up to last year’s NIC changes, some in the industry suggested that the burden would have a knock-on effect on staff productivity and on the economy as a whole. Povey believes that this prediction were misplaced. “It’s rather a tenuous link to make, to say that people won’t work so well because they’re so demotivated.”

One of the key objectives of the introduction of NIC was, of course, to shore up a loophole whereby companies could avoid paying contributions by topping up workers’ salaries with vouchers. No one had any idea how much of this type of avoidance was going on, even if individual examples of malpractice were highlighted. The incentives industry believes the problem was not as great as the government suggested. Either way, companies which might have been using vouchers as something other than an incentive now have no reason to do so.

Not everyone shares Capital Incentives’ buoyant optimism about the effects of the new NIC rules. Business may have recovered more robustly than expected, but Julie Rosehill, sales director of The Voucher Shop, adds a note of caution. “People certainly have turned away from using vouchers, and I don’t believe the full effect has been felt yet,” she warns. “In particular, the end of year reporting of NI has yet to hit home.

“But already we have had some of our bigger clients saying that if this is going to mean more administration, they won’t use vouchers, or they’ll simply use cash,” she says. In fact, for The Voucher Shop, the effects have been felt across the board, from the largest clients to the smallest.

A “desperate” introduction

Rosehill believes that clients never recovered from the “desperate” way the NIC was introduced in the first place, despite subsequent attempts at clarification. The lack of consultation by the Government and the mystery that surrounded the new measure right up until the time of its launch simply made matters worse, she adds.

The use of vouchers as part of flexible employee benefit packages is one area that has been hit hard, according to The Voucher Shop. “This sector has a high value for us, and employees are now starting to say that is simply not worth their while getting part of their salary in vouchers,” says Rosehill.

But even she admits that the NIC shakedown may have served a useful purpose, clearing out those who were only interested in an incentive’s face-value rather than its quality.

The experience of retail brand voucher schemes has been mixed, but some share this upbeat analysis. “With this sort of process you’re going to lose people who use vouchers as a cost-saving exercise,” explains Virgin Vouchers business development manager Tim Scarff. “But blue chip companies will simply increase the budget to cover the NIC.”

Healing last year’s wounds

For some operators, clarifying how third party incentive contributions should be handled, along with the extension of NIC to cover merchandise vouchers, has largely healed last year’s wounds. “If these other types of voucher had not been taxed in the same way, it would simply have given them a competitive advantage,” says Scarff.

Despite the evident recovery in voucher business, the impact of NIC on companies deciding whether or not to plan a scheme cannot be discounted, says Virgin. “When the contributions were introduced it was a big deal,” Scarff comments. “And it’s still a lot to pay on an incentive campaign – but the Government was going to get you anyway. Now it means that they get you on tax, but also on NIC.”

In the case of Sainsbury’s Group Vouchers, as for Capital Incentives, it is the administrative burden rather than the cost that has taken its toll on client interest in incentive schemes. “Anything that takes this amount of time to understand, to administer and digest is going to have an impact on sales – of anything,” says voucher centre manager Yvonne West.

According to Sainsbury’s, the most immediate effect of NIC’s arrival was on the schemes’ one-off users. “Customers wanting vouchers at Christmas may have dropped off, because they didn’t understand what was happening, and felt it was easier to give cash,” West explains.

But she is wary of confusing downturns in overall retailer performance or problems for individual brands with the effects of NIC. As vice-chairman of the Voucher Association, she is keenly aware that companies’ experiences of the new NI regime vary enormously across the membership.

Back to the core benefits

One positive effect of the new rules, West says, has been to force branded vouchers to focus on their own product USPs and to remind clients of the core reasons for using vouchers at all. As the initial confusion subsides, the arrival of NIC could well fuel greater innovation and a stronger emphasis on the incentive benefits of any schemes.

Certainly, there is sufficient optimism around for operators to talk up the key growth areas for voucher programmes. Recruitment companies are increasingly keen to run loyalty schemes, says Scarff, and the range of programmes involving the computer hardware supply chain continues to expand.

Another area of growth in this type of incentive, according to Rosehill, is the in intranet-based system of rewards for large companies. “Points are allocated centrally, and the recipient can see how he or she is doing and redeem points through the intranet,” she explains. “The savings are enormous.”

Some in the incentives sector believe the confusion surrounding contributions will continue until the NIC burden is withdrawn. But since the likelihood of this happening is close to zero, many are making the best of the slight easing in conditions over the last year. Whether voucher schemes flourish in future as they did in the Nineties will depend partly on wider economic and retailer performance, to an even greater extent on the perceived administrative burden for customers but – above all – on the renewed vigour with which operators promote and develop their own brands.