…Well that’s what HMRC would have you believe. 6th April, this year more than most, will be a key date for employers. It will of course announce the start of their focus on P11D preparation and PAYE Settlement Agreements, but this year it will announce the start of a variety of new initiatives from HMRC:
- The removal of dispensation agreements and the start of ‘self-assessment for expenses’
- The introduction of the payrolling of benefits option and the repercussions for benefits reporting
- The introduction of a statutory ‘Trivial Benefits’ limit
The ‘self-assessment of expenses’ and switch in onus from HMRC to employers
From April 2016, HMRC is removing the need for employers to hold a dispensation to reimburse 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 alike. The employer benefits from less admin in applying and updating their dispensation agreements, and as a result less upfront scrutiny of their expense procedures. HMRC benefit from reduced staffing levels and therefore the costs of policing and approving dispensation agreements.
I’m keen to emphasis here, and advisers need to make clients aware, that what qualifies as a taxable and non-taxable expense hasn’t changed; only the need for pre-approval from HMRC to pay the expense without reporting it on a P11D. Employers will still be held liable for tax and penalties for getting the tax position of a reimbursed expense wrong. In fact, employers will need to be more vigilant and think carefully about the expenses they reimburse as their expense policy will no longer be subject to HMRC’s vetting.
Some employers will have had long standing bespoke dispensation agreements in place with HMRC, which allows them to reimburse expenses at rates above HMRC benchmark rates. Unfortunately, for those employers the removal of the dispensation generally, will also see the removal of the agreed bespoke rates from April 2016.
Employers will need assistance to re-apply to HMRC to have them agree again to the bespoke reimbursement, and advisers need to be making them aware of this ahead of 6th April. 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.
Real world examples we’ve seen of when employers may have agreed bespoke rates include:
- An employer reimbursing an employee more than 45p per mile, as they were required to tow a trailer and water bowser as part of their duties.
- An employer whose employees were involved in work that meant their clothing would become particularly muddy and incurred significant cleaning cost when they worked away from home, which exceeded the agreed scale rate for overnight incidental costs.
Advisors that have been through the process of getting a bespoke rate agreed will be aware that this is not a simple or quick process:
- A sampling exercise will need to be undertaken as evidence of the amount of expenses actually incurred.
- This is then submitted to HMRC for consideration through HMRC’s new ‘Approval Notice’ system
- Once approved the notice remains valid for 5 years, before it must be renewed.
Payrolling of benefits and the repercussions for benefits reporting
For the 2016/17 tax year employers are going 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, advisers need to be telling clients to consider whether all the benefits they provide are able to be payrolled. If not, the payrolling option could increase your client’s compliance rather than streamlining it, as they will still need to submit P11Ds for the non-payrolled benefits.
Whilst registration for the payrolling option remains open until the end of the current tax year, the start of HMRC tax code generation for 2016/17 started on the 21st December. If employers register after this date, it could result in them receiving multiple tax codes for the same employee, or the employee’s tax code not being adjusted in time and result in them being taxed twice on the same benefit.
Employers that payroll benefits will still need to file and pay across the Class 1A via a P11D(b) after the end of the tax year, in line with the normal reporting and payment deadlines.
One final ramification for clients to be made aware of before they sign up to the payrolling option is the potential for late PAYE payment penalties and interest to increase. HMRC haven’t given any confirmation either way, but the likelihood is that as the tax due on benefits is now collected under PAYE, when assessing any late payment penalty amount, the tax due on benefits that have been payrolled will be included within the figure used to calculate the penalty.
One other change to benefits reporting from 6th April is the removal of the P9D.
All benefits will now be reported on a P11D regardless of the level of the employee’s income. As P9Ds did not attract a Class 1A national insurance liability, by moving all benefits reporting to the P11D, the exemption from Class 1A is removed. This will increase the Class 1A liability of clients who have been utilising the P9D until now.
The trivial benefits statutory limit was something that was meant to have been in place for the 2015/16 tax year, but it was delayed at the last minute – HMRC had got wind of a potential avoidance scheme that had arisen from a gap in the legislation. HMRC believe they have plugged that gap, and the limit of £50 per benefit will come into force from 6th April. Generally speaking this is good news, as it gives advisers and employers certainty over an exemption that had previously been a ‘grey area’.
The one concern I have with using a statutory limit is the cliff edge factor. Consider a gift being provided to an employee on the birth of their child and the employer had looked to keep the value below the £50 limit, but without realising they purchased the gift and incurred postage costs that pushed the total cost to £51. Is it really fair that the entire amount to be taxed on an employee, as a result of being £1 over the limit? Under the old rules, the lack of a statutory limit meant that this sort of token monetary difference wouldn’t have impacted the tax impact.