Employee Benefits and Expenses

HMRC has issued four consultations on various aspects of employee benefits and expenses as follows:

  • Exemption for paid or reimbursed expenses
  • Abolition of the £8,500 threshold for lower paid employment and form P9D
  • Trivial benefits exemption
  • Real time collection of tax on benefits in kind and expenses through voluntary payrolling

You’ll find the consultation documents via the following link:

https://www.gov.uk/government/publications?departments%5B%5D=hm-revenue-customs&publication_filter_option=consultations

The closing date for comments in relation to all four consultations is 9 September 2014 and in the meantime we will be giving full consideration to our own response. If you would like to make comments that we might incorporate, please contact us.

More information about the consultations can be found below.

1. Exemption for paid or reimbursed expenses

The suggestion is that the dispensations regime might be removed and replaced with a statutory exemption for expenses paid by employers where the nature of those expenses and the controls around their management meet specified requirements. The new system might be optional so that employers could simply report expenses on forms P11D to avoid exposure. It seems likely that benchmark scale rate payments would be covered by the exemption and that non-standard scale rates could be used where sufficient sampling evidence provided support for the amounts paid.

The Government has published its belief that salary sacrifice arrangements in exchange for the payment of expenses are not within the spirit of the current rules because their motive is tax and NIC efficiency. There is also a suggestion that the proposed change in the tax rules might be used to end the use of travel and subsistence schemes by using a targeted anti-abuse rule to prevent salary sacrifice being used in conjunction with the new exemption.

It seems likely that revised legislation (subject to the consultation process) will be a feature of the Finance Bill 2015 but its impact effective from 6 April 2016 or soon after to allow sufficient time for HMRC and employers to prepare. There could be some transitional arrangements in the meantime to avoid, for example, new dispensation applications being required that will have a very short shelf life.

2. Abolition of the £8,500 threshold for lower paid employment and form P9D

Originally designed to ensure benefits in kind were only reportable and taxable on employees in ‘higher paid’ employments, the £8,500 threshold for determining when form P11D is required has remained static since 1979. It’s generally accepted that it is completely out of touch with current earnings levels.

The consultation is considering options for changing the arrangements, favouring abolition of the threshold rather than an up rating in line with current earnings levels. The justification for this is that HMRC believe the threshold is an administrative burden for employers at its current level and to raise it would make the task of differentiating the workforce into two populations even more onerous. The accompanying abolition of Form P9D would mean benefits and expenses that aren’t currently reportable on lower paid employees would need to be declared on form P11D (where nor covered by an exemption or dispensation). The consultation is considering whether a transitional arrangement is required to support any vulnerable groups who may see their tax liabilities rise as a result of an increased level of benefit declaration.

Any increase in reporting requirements could be affected by the expenses exemption mentioned above and the ability to voluntarily payroll benefits as mentioned below.

3. Trivial benefits exemption

Other than in a few specific areas (e.g. beneficial loans, long service awards) tax legislation does not currently provide any limit below which a benefit in kind is not taxable. HMRC’s own guidance does allow for some benefits in kind to be exempted from reporting and tax/NIC charge where HMRC specifically agree they are ‘trivial’. Common examples are a bottle of wine or box of chocolates at Christmas.

The consultation considers where a statutory exemption for trivial benefits should be introduced. The administrative burden to employers to declare small items provided across their workforce plus the cost to HMRC in processing those forms and dealing with enquiries outweighs the tax take in a lot of cases.

The government is looking to introduce both a statutory limit for an individual benefit plus an over-riding annual exemption where multiple benefits are awarded. In practice this would appear to operate , similar to that for annual functions, with single benefits above the individual limit or total benefits above the annual limit subject to tax and NIC. A limit has not yet been decided, the consultation uses £30 for the individual limit and £75 for the annual limit as a guide. However, the c document comments ‘as the exemption is intended to apply only to genuinely trivial BIKs provided on an irregular basis, a low limit will be appropriate”.

The document also comments that the exemptions will not apply where benefits that may otherwise be trivial are awarded as part of a salary sacrifice arrangement.

4. Real time collection of tax on benefits in kind and expenses through voluntary payrolling

The Office of Tax Simplification (‘OTS’) recommended to the government that allowing employers to voluntarily account for the tax and NIC arising from benefits provided to employees through the payroll, rather than annual declaration on forms P11D and subsequent tax code adjustments, will reduce the administrative burden. The current consultation document considers to what extent employers can choose which benefits could be payrolled and how the system should work.

The consultation recommends the introduction of a standard list of benefits that could be payrolled. This would likely not include benefits that could vary greatly during the year such as an employee loan. Where employers opted to payroll benefits they may need to include all benefits on the standard list, if provided. The arrangement would also need to include all employees in receipt of those benefits, with the possible exception of employees on a separate payroll or those with complex international affairs. Benefits that had been payrolled would not be reportable on form P11D, although the OTS recommended that employees would still need ‘a clear notification from their employer of the benefits they have received during the tax year’. So to what extent payrolling would reduce administration is unclear.

Employers who choose to payroll benefits under the proposed arrangements would likely only be able to do so from the start of a tax year, due to the complexities with P11D forms and tax codes from an in-year transition. In order to ensure a consistent approach the government is planning to introduce standardised rules, guidance, compliance arrangements and agreed reporting arrangements.

Due to the number of issues to consider the consultation only proposes enabling legislation that formalises payrolling as a concept from April 2015, being the first tranche of a phased introduction.