Employers should be aware that any payments made to, or on behalf of, employees may need to be disclosed to the tax authorities and then subjected to taxation. Employers need to maintain adequate records to identify these items, which include payments in kind, any benefits, and even reimbursed business expenses. It also includes items received by the employee from third parties, if they were received as a result of their employment.
What is reportable to HMRC?
- The employer must submit annually a form P11D(b) summary and a form P11D in respect of each employee who had received any benefits or had any reimbursed expenses. The forms have to be submitted by July 6th and cover the tax year to April 5th. There are penalties for non-disclosure or filing incorrect returns.
- If you reimburse employees for business expenses and are satisfied that such payments include no element of benefit to the employee and are solely for business purposes, these items may fall under the HMRC exemption and will not be required to be reported on the P11D.
What tax relief is available?
- Business expenses refunded to employees will not be taxed on the employee as long as they are wholly, necessarily and exclusively for business purposes.
- This includes the cost of travel to a temporary work place and subsistence, during business trips, but it does not include the cost of travel between home and the normal place of work.
- Mileage allowances paid for the use of the employees’ own cars on business, within recommended limits (currently 45p per mile for the first 10,000 miles and 10p thereafter), are tax free and are not reportable.
- There are specific items which are excluded from the tax charge, such as the provision of a mobile phone, loaned bicycles or the provision of an office gym. These are generally items viewed by HMRC as socially beneficial.
- It is often possible to arrange insurances for employees, like death in service cover, which can be tax free. This does not include private health insurance which is reportable and taxable.
- There is a scheme for providing tax relief against childcare costs, up to £55 per week for basic rate tax payers.
- If trivial benefits are provide to your employees you do not need to pay tax if, it costs £50 or less, it isn’t cash or a cash voucher, it isn’t a reward for their work or performance and it isn’t in the terms of their contract. It has to be a freely given gift related to the employee’s welfare and goodwill.
- The first £150 per head of expenditure on staff entertaining at annual events is tax free, once this limit is breached staff entertainment is a taxable benefit.
- Food can be provided for staff during work time as long as it is made available to all staff on the same terms e.g. via a free or subsidised canteen.
- Interest free loans of under £10,000 are not taxed; loans over this amount incur a tax charge on the interest forgone.
Most other items will be subject to taxation. It is important to maintain proper records and to reimburse only the business element. For example, an employee’s claim for business mileage must be based on the actual mileage at the correct rate, if a higher mileage rate is used or any other basis of reimbursement is used then a tax charge is likely to arise.
How is the tax charged?
- The form P11D(b) includes a calculation of the Employers’ National Insurance Contribution due on the benefits and expenses (currently 13.8% of the cost). This liability is payable by the 19th July following submission.
- If the individual submits their own tax return to HMRC then the tax due on benefits will be dealt with under the tax return.
- Employees who do not submit a separate tax return will have their PAYE code number adjusted so that the tax is collected via the payroll. This adjustment can only be made, or altered, on instruction from HMRC and not at the employer’s discretion.
PAYE Settlement Agreements (PSA)
Under certain circumstances the employer may decide that the employee should not be taxed on something that is deemed to be a benefit e.g. non-cash sales bonus, staff entertaining in excess of £150, staff sales meetings in public restaurants, etc.
The employer can then enter into a PSA with HMRC under which the employer agrees to pay the tax that would otherwise be charged to the employee.
This is an expensive option for the employer because the amount received by the employee is treated as being net of tax and so has to be grossed-up. The resultant tax cost is often twice as much as the employer expected.
The PSA has to be applied for annually and generally only applies to items after the PSA has been approved.
The tax and national insurance liability under a PSA is due for payment by 19 October following the tax year.