With P11D season here, we consider the provision of benefits in kind and expenses payments by employers to their employees and the returns that need to be made, as well as ways of making the annual reporting process less burdensome.
Article contributed by ACCA
Higher v lower paid
The benefits in kind (BIK) legislation makes a distinction between:
- non-director employees earning less than £8,500 per annum (lower paid employees); and
- employees earning above this level (including benefits and expenses) and directors (irrespective of their level of income).
The rules for lower paid employees in receipt of benefits, now quite rare in practice, are slightly different to those for higher paid employees and directors and this article concentrates on the latter.
How are benefits in kind calculated?
When an employer provides payments to an employee in a form other than cash, this will normally give rise to a benefit in kind.
Broadly speaking, benefits in kind are calculated at their ‘cash-equivalent value’ which is defined as the ‘expense incurred in or in connection with provision of the benefit’, inclusive of VAT.
Generally speaking, any amount made good by the employee towards the provision of the benefit will reduce the chargeable benefit accordingly.
There are special rules relating to certain kinds of benefit and these are considered further below.
Further guidance on the tax treatment of benefits in kind may be found here.
Also, HMRC has a useful section on its website covering the A-Z of benefits and expenses.
Special classes of benefit
Certain types of benefit in kind are subject to their own rules for calculation of the cash-equivalent of the benefit and the main ones are considered below:
Cars and fuel
The provision of a car to an employee, which is ‘available’ for private use, represents a taxable benefit. Note, the car only has to be available for private use for a benefit to arise. The basic rule for calculating company car benefit is as follows:
[List price of car + Value of any optional extras] x Percentage based on the car’s CO2 emissions
For 2012/13, the relevant percentages range from:
- 0% for zero-emission cars; and
- 35% for a petrol car with CO2 emissions of 220 g/km; or a diesel car with CO2 emissions 205g/km.
It is the list price of the car and not the actual price paid that is used as the basis of calculation.
Special rules apply for classic cars where:
- the car is at least 15 years old at the end of the tax year of assessment
- the market value of the car for the year is £15,000 or more and
- the original list price is less than the market value of the car for the year.
If the above conditions apply, cost is replaced with market value for the purposes of calculating car benefit.
In all cases, where the employee makes a capital contribution to the car (up to £5,000), the capital contribution is deducted from the list price (or market value, if appropriate) for the purposes of calculating car benefit.
When an employee is provided with fuel for private purposes, an additional benefit arises. Fuel benefit is arrived at by multiplying a fixed base figure, £20,200 for 2012/13, by the same percentage rate used to calculate the car benefit.
An important point to note with car fuel benefit is that the normal rule whereby the benefit is reduced by a contribution made by the employee does not apply. Car fuel benefit is an ‘all or nothing’ charge; eg if an employer provided an employee with £2,000 worth of fuel for private motoring and the employee reimbursed £1,950 of the cost of the fuel, the full fuel benefit applies. Conversely, if the employee reimbursed the full cost of £2,000, no fuel benefit will arise.
Where an employee is provided with a van and this is available for private use, there is a fixed benefit in kind. For 2012/13, the benefit in kind is £3,000. Ordinary commuting and insignificant private use are disregarded for the purposes of determining whether there is any private use.
Where fuel is also provided for private use, an additional fixed benefit of £550 applies.
Interest-free or cheap loans
An interest-free or cheap loan or advance provided to an employee is taxed on two fronts:
- any amounts written off are taxable, and
- any difference between the actual interest paid and the ‘official rate’ are taxable. Small loans are exempt from beneficial loan interest benefit provided that the maximum amount outstanding at any time during the tax year did not exceed £5,000. NB, the £5,000 limit will be increasing to £10,000 but not until 2014/15.
The ‘official rate’ is prescribed by HMRC and for 2012/13, the rate is 4%.
For the purposes of establishing whether a taxable benefit arises, it is necessary to aggregate all loans and advances. As well as loans in the literal sense, the following are also regarded as loans for these purposes:
- overdrawn director’s loan account; and
- advances on account of expenses payments (although, in practice, HMRC disregard advances not exceeding £1,000, provided that the amounts are spent within six months and the employee accounts to the employer at regular intervals for the expenses).
There are two methods of calculating beneficial loan interest:
- average basis (based on the opening and closing balances of the loan)
- alternative method – calculated on the day to day outstanding balance of the loan.
When completing the P11D (see below) for an employee, the requirement is that the ‘normal method’ should be used. The ‘alternative method’ is available to use either at the option of HMRC or the director/employee.
The provision of living accommodation to an employee represents a taxable benefit.
If the accommodation cost less than £75,000, the benefit is the lower of:
- annual value (gross rateable value)
- rent paid for it by the provider.
Where the accommodation cost the employer more than £75,000, there is an ‘additional charge’, calculated as follows:
Cost* – £75,000 x ‘Official rate’
For these purposes, the official rate is the same as the beneficial loan rate, ie 4% for 2012/13.
*Note, if the employer has held an interest in the property for at least six years prior to it first being provided to the employee, ‘cost’ is substituted by market value in the above calculation.
No benefit in kind arises where the accommodation is ‘job-related accommodation’.
Use of an asset owned by the employer
Where an employee has use of an asset which the employer owns (excluding cars, vans and mobile phones), a benefit arises. The amount of the benefit is the greater of 20% of the market value of the asset when first provided to the employee and any actual rental payments paid by the employer.
Any benefits and expenses payments made to a higher paid employee or director are reported on a form P11D; for lower paid employees, a simpler version of the form, known as a P9D, is used. Copies of the form must be provided to HMRC and to the employee.
Benefits in kind (provided they are organised correctly) do not go through the payroll and do not attract class 1 NICs. They are subject to a special class of NIC, known as Class 1A. Class 1A NICs are payable by the employer only; there is no employee NIC liability on BIKs. The rate of Class 1A NIC for 2009/10 is 12.8%.
Any employer who provides either BIKs or expenses payments to their employees is required to submit a P11D for each employee.
The employer must also submit a form P11D(b) to HMRC with the forms P11D. The form P11D(b) is a return of the Class 1A NICs due on benefits provided to all employees during the tax year.
The way in which a benefit is provided is important for determining its tax treatment and how to report it, as follows:
|Manner in which provided:||
|Employer arranges and pays directly for benefit||
|Employee arranges benefit; employer pays for it||
Class 1 (employee and employers)
Account for NIC through payroll; report benefit on P11D
|Employee arranges and pays for benefit; employer reimburses cost||
PAYE Tax and Class 1 NIC (employees and employers)
Tax legislation specifies that expenses payments reimbursed to an employee, eg travel expenses, courses, client entertaining, represent taxable earnings and need to be reported on the form P11D. The employee may submit a claim under ITEPA 2003, s336 that an expense should not be taxable, provided that it was incurred ‘wholly, exclusively and necessarily’ in the performance of the duties of employment.
The requirement for reporting and then claiming business expenses payments as non-taxable can be particularly burdensome and this is often exacerbated by difficulty in getting the expenses payments correctly reflected in the employee’s PAYE tax code.
This burden may be eased somewhat by applying for a P11D reporting dispensation.
A dispensation is an agreement with HMRC that removes the requirement to report certain expenses on form P11D. Expenses covered by a dispensation are not liable to tax or class 1 or 1A NIC.
In short, it’s a helpful scheme and HMRC is actively seeking to encourage the use of dispensations and has recently added a facility to their website enabling dispensations to applied for online.
A dispensation can apply for all expenses for which the employee would normally be able to claim as being ‘wholly, exclusively and necessarily’ incurred. Dispensations cannot be obtained for ‘round sum’ amounts.
Expenses which may be covered would typically include:
- travel and subsistence
- business entertaining
- professional fees and subscriptions.
For a full list of what expenses and benefits are eligible for dispensation, see the A-Z of benefits and expenses
When applying for a dispensation, HMRC will seek confirmation that you have an independent system in place to check claims and deductions. This can often cause problems for smaller entities, although it should still be possible to obtain a dispensation, provided that valid receipts are retained in support of all expenses. For further details on dispensations, click here.
PAYE Settlement Agreements (PSA)
This is another helpful scheme that allows an organisation to settle any PAYE and NICs on certain expenses and benefits, directly on behalf of its employees. Items covered by a PSA do not need to be shown on form P11D or put through the payroll. The following expenses/benefits may be covered by a PSA:
- minor items (eg small gifts to employees)
- irregular items (eg non-qualifying business trip for spouse)
- items which are impractical or difficult to value for P9D/P11D purposes (eg items difficult to attribute to a single employee).
The employer calculates the tax due on the grossed-up value of the benefits in kind. A special class of NIC, Class 1B, is payable on the grossed-up value of the benefit.
For further details on PSAs, including how to calculate the tax and Class 1B NIC, please click here.
Time limits for submission of forms
The due dates for submission of the forms referred to in this article and the payment dates are summarised below:
|Submission of forms P11D and P9D to HMRC||6 July following the end of the tax year|
|Provide employees with copies of their information from their P11D or P9D||6 July following the end of the tax year|
|Submit form P11D(b) to HMRC||6 July following the end of the tax year|
|Payment of any Class 1A NICs on benefits provided||Must reach HMRC’s bank account by 22 July (19 July if you pay by cheque)|
|Payment of tax and Class 1B NICs owed under a PAYE Settlement Agreement||Must reach HMRC by 22 October (19 October if you pay by cheque)|
Submission of returns
HMRC has set up a dedicated post-room for submission of P11Ds. Forms should be sent to:
P11D Support Team
Benton Park View
Newcastle Upon Tyne
As an alternative to filing paper return forms, the P11D/P11D(b) and P9D forms may be filed using HMRC’s online filing service, although this is not compulsory.
See ACCA’s further guidance on benefits in kind and also general guidance on taxation matters