Taxable Benefits Simplified!
In the main newsletter we have put out the reminder that by the 6th July the lovely forms P11d have to be filed, reporting taxable benefits provided to employees during the tax year. The good news is this could be the last year of the P11D for some employers! April 2016 was the start of a variety of new initiatives from HMRC in the employee benefits arena, which can be summarised as follows:
- The introduction of the option to payroll employee benefits;
- The removal of dispensation agreements and introduction of the self-assessment for expenses;
- The introduction of a statutory Trivial Benefits limit.
Payrolling of benefits
From the 2016/17 tax year onwards, employers have the option to payroll all benefits with the exception of vouchers, credit cards, living accommodation and employee loan benefits.
When considering to payroll benefits, you need to consider whether all the benefits you provide are able to be payrolled, if it is one of the above, you still need to submit P11Ds for those non-payrolled benefits.
You need to register online before the start of the tax year you want to payroll benefits. If you opt to payroll benefits, you must add the cash equivalent of the employees’ benefits to their pay and then tax them through your payroll. If you payroll benefits you will still need to file and pay across the Class 1A national insurance contributions via a P11D(b) after the end of the tax year, in line with the normal reporting and payment deadlines.
Although payrolling benefits is a simple way of reporting the benefits, there is the potential for late PAYE payment penalties and interest to increase as the tax due on payrolled benefits will be included within the figure used to calculate the penalty.
Goodbye to the PAYE Dispensation
From April 2016, HMRC is removing the option for employers to hold a dispensation and avoid reporting reimbursed work related expenses; instead employers will be responsible for deciding whether the expense meets the requirements to be paid tax free. HMRC see this as a win-win for themselves and employers. The employer benefits from less admin in applying and updating their dispensation agreements, and as a result less upfront scrutiny of their expense procedures. There is no change to what qualifies as a taxable or non-taxable expense; only the need for pre-approval from HMRC to pay non-taxable expenses without reporting them on a P11D.
You, as an employer, will still be held liable for tax and penalties for getting the tax position of a reimbursed expense wrong. In seeking a dispensation, it was necessary to submit a “robust” expenses policy document outlining the internal controls and sign off procedures and this is still as important now, without dispensations, as this is what HMRC will request to see as part of any PAYE enquiry or review visit.
For those employers who have had a long-standing bespoke dispensation agreement in place with HMRC allowing for expenses to be reimbursed at rates above HMRC’s benchmark rates (rates set by HMRC for subsistence or travel), the removal of the dispensation generally will also see the removal of the agreed bespoke rates from April 2016. Employers in this situation will need to re-apply to HMRC to have them agree again to the bespoke reimbursement. Failure to do so and continuing to reimburse the expenditure at rates above the approved benchmarks will result in an associated tax charge on the excess reimbursed. The new application for the enhanced rate, is to be submitted to HMRC for consideration through its new ‘Approval Notice’ system. Once approved, the notice remains valid for 5 years, before it must be renewed.
A new fixed limit of £50 per benefit came into force from 6th April, replacing the old system whereby employers could seek to negotiate specific arrangements with their local tax office whereby the definition of “trivial” was a matter for negotiation. Under this exemption, if an employer provides a benefit to its employees, the benefit is exempt from tax as employment income if all the following conditions are satisfied:
- the cost of providing the benefit does not exceed £50 (or the average cost per employee if a benefit is provided to a group of employees and it is impracticable to work out the exact cost per person);
- the benefit is not cash or a cash voucher;
- the employee is not entitled to the benefit as part of any contractual obligation (including under salary sacrifice arrangements);
- the benefit is not provided in recognition of particular services performed by the employee as part of their employment duties (or in anticipation of such services).
Where the employer is a close company and the benefit is provided to an individual who is a director or other office holder of the company (or a member of their family or household) the exemption is capped at a total cost of £300 in the tax year.
If any of these conditions are not satisfied then the benefit is taxed in the normal way, subject to any other exemptions or allowable deductions.
A point to note with the statutory limit is the “cliff edge factor”. For example a gift being provided to an employee on the birth of their child with the employer trying to keep the value of the gift below the £50 limit, but without realising they purchased the gift and incurred postage costs had pushed the total cost to £51 – the entire amount is to be taxed on the employee, as a result of being £1 over the limit!
Employers need to consider whether:
- forms P11D are required at all;
- to payroll benefits in kind;
- it is necessary to update the expense policy documentation and procedures or any enhanced benchmark rates and
- the application of the trivial benefits exemption.
Should you require any further details on the items contained in this guide or tax advice in general, please do not hesitate to contact Harbour Key Limited.If you wish to sign up to our regular update please go to our website.