As the new UK personal tax year starts (for interesting, historical reasons, six days into the fourth month of the calendar year), employers’ attention will in part turn to reporting obligations in respect of the year just gone.
The purpose of this Article is to cover those obligations of UK employers arising from employee (and director) expenses and benefits.
In the interests of brevity, this Article does not cover employee share scheme reporting (some of the reporting dates for which mirror a number of those referred to herein). Fear not, Centralis can assist with this also.
What, when and how?
Well, as businesses may have become accustomed to hearing from their advisers, it depends. To be more helpful, what the answer depends on includes:
- what expenses and/or benefits are being provided
- whether expenses and benefits are being formally “payrolled”.
We go into more detail on each of these below.
Benefits in Kind
The forms
Many UK businesses will be familiar with Forms P11D and P11D(b). The former is the document given to the employee (or director) provided with the benefit(s) and/or expense(s). The latter is the employer’s declaration. Both must be (if late filing penalties are to be avoided) submitted to Her Majesty’s Revenue & Customs (“HMRC”) by 6 July each year (in respect of the UK tax year ended on the immediately preceding 5 April).
Submission to HMRC is now typically undertaken electronically, while employees are (often) provided with the P11D in the same portal as they access their regular payslips. The idea being to ensure that the employees have such documents to hand when it comes time (if applicable) to file their UK personal tax return. As with all such tax documents, leavers should therefore be reminded to download their relevant documents before departure/allowed access for a period of time after departure so as employers do not need to expend resources posting paper forms or reinstating access.
What is included on a Form P11D?
Following the end of each UK tax year, an employer must provide HMRC with details of any expense payments, benefits and/or facilities given to each of its employees or directors. The reporting must include any expenses payments, benefits or facilities provided to members of the director’s or employee’s family or household.
An employer should not complete a P11D for a director or employee if:
- there are no taxable expenses, payments or benefits to be returned for that individual
- the expenses and/or benefits have been formally taxed through payroll
More on the second bullet later in this Article.
The P11D itself is (relatively) intuitive in terms of what HMRC expect to appear on the form. This includes:
- assets transferred (from the employer to the employee or director)
- living accommodation
- company cars and fuel
- interest free, or low interest, loans
- private medical insurance
- relocation expenses payments and benefits (although these can often be covered instead by a Pay As You Earn Settlement (“PSA”). More on PSAs later).
There are detailed rules, beyond the scope of this Article, on how such benefits are to be calculated for UK tax and National Insurance contributions (“NICs”) purposes. These rules have in (relatively) recent times been further complicated by the introduction of the Optional Remuneration Arrangement (or “OpRA”) legislation. While in place for some years, the OpRa rules will need to be particularly front of mind for the upcoming 2021/22 filings, given certain transitional arrangements lapsed at the end of the previous tax year (i.e., on 5 April 2021).
Certain benefits are, by law, exempt and so do not need to be included on the P11D. An example of such an item may be group life/death in service insurance. Critical illness or income protection insurance could have different UK tax treatments, however, and so it is crucial for an employer to understand exactly what types of policies they have. This can impact both the if and how benefits are reported.
In more detail
Regular readers of the Form P11D will notice that the document asks for more information than just a description of a benefit and its value. For example, boxes are:
- provided for items such as amount made good or from which tax has been deducted
- either brown (and marked “Class 1A”) or blue for different benefits and expenses.
In terms of “amounts made good”, employees will, on occasions, contribute to the cost of an expense or benefit with which they are provided. In fact, employers will sometimes require this e.g., an employer may have a policy of paying for their employee’s healthcare but only including the latter’s family if there is agreement to reimburse the additional cost. In order to reduce the taxable benefit, the contribution(s) must be made good on or before 6 July 2022 (for the tax year ended 5 April 2022).
With respect to disclosing UK tax already deducted, this could be necessary as a result of, for example, informal payrolling (of an expense or benefit). This aspect is covered in more detail below.
Whether a benefit is liable to Class 1A (or Class 1) NICs is relevant to the different colour P11D boxes. Broadly, the distinction falls into one of three typical scenarios. These are:
- if the contract is between your employee and the provider and you reimburse the employee directly: in this scenario, the item does not feature on the P11D (and so P11D(b)) at all. It appears in neither a brown nor blue P11D box. This item is instead processed through the payroll for both tax and NICs, and so may need to be “grossed-up” for UK income tax and NICs if the employer wants the employee to receive the amount the latter actually paid out
- if the contract is between your employee and the provider, but you pay the provider directly: this is a blue box scenario. The item appears on the P11D, but in a blue box as it is not liable to Class 1A NICs. Instead Class 1 NICs apply, which are collected by processing the amount through the payroll (for National Insurance only). The item appears on the P11D to collect the UK income due thereon. PAYE is not collected through the payroll in this scenario
- if the contract is between the employer and the provider and you pay the provider directly: this is a brown box scenario. In the absence of informal payrolling then the item is not payrolled (for UK income tax nor NICs) and Class 1A is due. If the item is informally payrolled then the item still appears on the P11D, with tax deducted shown, in a brown box. NICs on such benefits are not collected through the payroll where informally payrolled.
What is the P11D(b) for?
As alluded to above, the P11D(b) is the employer’s form that, essentially, sums all of the items in brown boxes (on the P11D(s)) to determine the Class 1A NICs payable. The total benefits are shown and, once adjustments are made (e.g., in respect of international employees paying social security exclusively outside the UK, so as UK NICs are not due on their benefits) the rate of 13.8% (for 2021/22 tax year) is applied.
Assuming a business continues to trade, Class 1A NICs are due and payable, if paid electronically, by 22 July after the tax year.
Does every UK employer have to file a P11D(b)?
No. If an employer has not provided any taxable expenses or benefits to any employee or director then a P11D(b) only need be submitted if issued by HMRC. If so issued, this can be marked as nil and returned to HMRC before the 6 July filing deadline. Alternatively, a declaration can be completed at Declare no return of Class 1A National Insurance contributions – GOV.UK (www.gov.uk)
If the employer has formally or informally payrolled benefits, do they still need to file a P11D(b)?
Yes. The P11D(b) tells HMRC how much Class 1A NICs an employer needs to pay on all the expenses and benefits it has provided to its employees (and directors) both through the payroll and those included on a P11D (which can include informal payrolling, as noted above).
What is the price of non-compliance?
Penalties can apply for both late and incorrect returns.
Late returns are the less expensive offence, although also carry the employee dissatisfaction factor when P11Ds are provided after the deadline.
Late P11D returns attract penalties not exceeding £300 (plus additional £60 per day charges if the failure continues). Incorrect P11Ds are penalized at a maximum of £3,000 per form.
Payrolling benefits
This Article has already mentioned payrolling benefits, be that formally or informally, a number of times. So, what’s the story? Well, in the name of tax simplification (which often feels like an oxymoron in the context of UK taxation), HMRC introduced the ability to include benefits and expenses that would otherwise appear on a P11D in the regular payroll. The supposed (simplification) advantages include the fact that P11Ds are not required where all benefits are payrolled. The (lack of simplification) disadvantages, in our view at least, include:
- formally payrolled benefits still have to appear on the employer’s P11D(b), to collect the Class 1A NICs due
- P11Ds are still required if any benefits were provided outside of those formally payrolled
- Instead of giving employees a P11D, employers have to provide employees with a letter explaining what was formally payrolled. So, one might reasonably ask, why not just provide a P11D, the format of which is determined by HMRC and readily available?
- Formal payrolling has to be agreed before the start of a UK tax year, so the opportunity to agree this for 2021/22 is long gone and it’s even too late (already) to adopt this for the current tax year (2022/23).
We’ve also talked herein about informal payrolling. This simply means opting to payroll benefits and expenses that in strictness should not have tax collected through PAYE (and the payrolling of which has not been agreed with HMRC). Such items may still need to be subject to Class 1A (rather than Class 1 through the payroll) and so will still appear on the P11D(b). It should be noted though that HMRC no longer accept new informal arrangements and so employers should look to formalise this with HMRC from 6 April 2023.
PSAs
Last, but by no means least, we wanted to cover PSAs. In HMRC’s terminology, a PSA:
“allows you [the employer] to make one annual payment to cover all the tax and National Insurance due on minor, irregular or impracticable expenses or benefits for your employees.”
In layperson’s terms, PSAs help with collecting the UK income tax and (Class 1B) NICs due on those taxable benefits and expenses where it is either impractical to otherwise collect or where the employee and employer agree the former should not be liable. For example, imagine the Christmas function where (assuming the event does not qualify for exemption[1]) a member of the Human Resources department has the unenviable task of recording each employee’s individual turkey consumption (or meat free alternative) for inclusion on their P11D. Equally, imagine an employee asked to relocate for their role. While a limited exemption applies for certain relocation expenses and benefits, the employee may not expect to personally be liable for UK tax on the excess. Such examples can be where a PSA is helpful.
Instead of individual employees being liable to tax and NICs, the employer is responsible for the payment of these. In the case of the aforementioned (assumed non-exempt) Christmas party, the total cost would be calculated and then spread amongst all invitees. Whether the employees were basic, higher or additional rate UK income taxpayers determines the amount the employer must, plus Class 1B NICs, pay.
An initial application for a PSA must be made and then updated only if the employer wants to add additional, or remove, items. The deadline to apply for a new PSA (or making any amendments to an existing agreement) is 5 July following the tax year it applies to e.g., for 2021/22 an employer has until 5 July 2022 to apply for or amend a PSA.
While many advisers will gladly advise on what can or, more often, cannot, in their view, be included in a PSA, the ultimate decision rests with HMRC. If an employer wants an expense or benefit included in a PSA and reasonably believes that an amount is:
- minor, irregular or impracticable
- taxable, e.g., not covered by a general exemption nor the Trivial Benefits Exemption[2]
then an application should, in our view, be made. It will be for HMRC to accept or reject this. In case HMRC should fail to agree the inclusion, this process is best undertaken during the tax year of provision, so as alternative arrangements can be made for collecting the tax and NICs (if necessary).
While there is no statutory deadline for filing PSA calculations, HMRC typically agree a submission date of 31 July after the tax year. While some advisers will go beyond this, and employers are rarely penalized by HMRC as a result, this is best avoided if at all possible.
How best to comply?
While benefits such as medical insurance or beneficial loans are usually (relatively) easy to identify and quantify, this is not always the case with all taxable amounts. The capture and classification of more regular (but modest) expenses such as (in a return to the office world) employee drinks and team dinners can be easily missed and time consuming even if recognized. Time may be in particularly short supply if service providers are at or near maximum capacity undertaking other tasks around the reporting dates. Equally, the treatment of certain benefits or expenses can be miscategorized (and therefore incorrectly reported) for many years if assumptions are made (due to time pressures) around reporting time.
The recommended approach is therefore to:
- interact with advisers early, as soon as new benefits are envisaged or changes to existing policies are considered. This will help identify possible exemptions, as well as aid correct reporting where amounts are taxable
- create and automate accounting systems that capture relevant data on more regular intervals than the annual reporting cycle.
Getting in touch
If you wish to discuss the contents of this article, please do not hesitate to get in touch with:
[1] Expenses and benefits: social functions and parties: What’s exempt – GOV.UK (www.gov.uk)