Benefits in kind – reporting and dispensations
Soon we will need to consider the annual reporting of benefits in kind, which can be a burdensome task. Here, we examine the mechanism for reporting benefits and expenses for employees and directors and look at ways in which the administrative burdens can be reduced.
All employers – whether companies, sole traders, partnerships or LLPs – must submit returns of benefits in kind and expenses payments paid to employees and directors for each tax year ended 5 April. There are three return forms to be considered but, in practice, the third of these is seldom used in practice:
- Form P11D – to report expenses and benefits provided to an employee earning at a rate of £8,500 or more per year;
- Form P11D(b) – to report the total value of benefits and expenses paid to P11D employees and to report the Class 1A national insurance contributions due;
- Form P9D – to report expenses and benefits provided to employees earning at a rate of less than £8,500 per year.
What affects reporting requirements?
The way in which a benefit is provided is important for determining its tax treatment and how to report it. HMRC’s guidance says:
|Manner in which provided||Tax/NIC Due||Report on|
|Employer arranges and pays directly for benefit||
Class 1A NIC
|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)||Through Payroll|
Deadline for submission of returns
The return forms must be submitted to HMRC by 6 July following the end of the tax year. Employers are also required to provide details of benefits and expenses to each employee by the same date, for inclusion in their own self assessment tax returns.
All transactions between employees and employers need to be declared, even if there is no tax liability. Forms must show the cash equivalent value of benefits or the taxable payment and any employee contribution to the cost.
Any Class 1A NIC liability which may arise should be settled by 19 July following the end of the tax year.
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.
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 is widely viewed as an unnecessary burden on businesses and can often involve a lot of work for little or no purpose. This is often exacerbated by difficulty in getting the expenses payments correctly reflected in the employee’s PAYE tax code.
This burden may be eliminated by applying for a P11D reporting dispensation.
A dispensation is an agreement with HMRC that removes the requirement to report certain expenses on forms 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. This can be done by submitting Form P11D(X) to HMRC or there is a facility on HMRC’s website to apply online. If applying by post, Form P11D(X) should be submitted to the:
Specialist Employer Compliance
299 Silbury Boulevard
Witan Gate West
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.
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.
Timing of dispensation applications
HMRC’s guidance states:
‘You can apply for a dispensation at any time. In general, dispensations take effect from the date on which HMRC issue them. However, HMRC may agree your dispensation can take effect from the beginning of the tax year in which you applied for it if you were paying those expenses and making the benefit payments at that earlier date.’
HMRC’s manuals also state, at EIM30053, that:
‘Including expenses on forms P11D, where they could be covered by a dispensation, can be a burden for the employer. It also means more work for the Inland Revenue on processing forms P11D. Employers should be encouraged to apply for dispensations where appropriate.
Give dispensations that are applied for whenever the criteria for giving them are met.’
It may, therefore, still be possible to apply for a dispensation to apply for 2011/12, provided that the application is made before 6 April 2012.
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 forms 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.
If you are applying for a new PSA, this must be done before 6 July following the end of the tax year at the latest.
For further details on PSAs, including how to calculate the tax and Class 1B NIC, please click here.
Time limits for submission of forms
Finally, here is a quick summary of the due dates for submission of the forms referred to above and the payment dates:
|Submission 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)|