Benefits in kind: All change please
Finance and payroll practitioners are bracing themselves for significant changes to the rules and some structural aspects of benefits in kind (BiKs), all thanks to the Office for Tax Simplification (OTS).
This is not before time, however are we ready for such sweeping development, asks Karen Thomson of the CIPP.
Four critically important formal consultation exercises were published on 18 June 2014 with responses due by 9 September at the latest. Professional bodies, such as the CIPP, mobilised its members, gathering views and comments before compiling its responses.
The four consultations cover:
- Abolition of the £8,500 threshold
- Voluntary payrolling of benefits
- Trivial benefits exemption
- Expenses exemption
Abolition of the £8,500 threshold
Simply put, BiKs and pay over £8,500 and it’s a P11D, but if BiKs plus pay is less, then the P9D applies. This is important, firstly because very few BiKs are assessable on a P9D, in some cases only values above £25 are reported and finally the employer pays no Class 1A national insurance charge on anything reported on P9D.
HMRC reports that only 15,000 P9D forms for 2011/12 tax year were received by them and this leads them and the OTS to conclude that abolition of the threshold would be in the best interests of employers and HMRC alike.
Of course, what we don’t know is how many P9Ds were wrongly produced and how many employees had a P11D when they should have had a P9D?
Removal of the threshold means all BiKs will be reported on a P11D (unless of course an employer chooses voluntary payrolling – see below) and this increases those subject to the employers Class 1A employers charge. Clearly there will be a potential increased cost to employers.
Interestingly, when abolition was first considered some time ago, ministers halted the work because of the detrimental effect on the low paid, so what has changed?
Voluntary payrolling of benefits in kind
Not the first time payroll has dealt with this issue, so this time will it pass the consultation test?
Payrolling of BiKs means including the benefit values through the payroll; this means the payroll processing will include the value amount and charge income tax in real time rather than from an annual year end event (P11D).
Many employers already do this, however until now there has been considerable confusion about the process. Employers should obtain approval first and submit a summary of BiKs payrolled at year-end. For some it seemed like payrolling but with the P11D to do anyway.
What we want is no requirement for authority or an annual summary, however, in the consultation it seems HMRC sees many situations where a P11D will still be needed.
This consultation asks whether payrolling should apply to all BiKs listed by HMRC and to all employees enjoying the BiK without exception and irrespective of their particular tax circumstances.
Interestingly, employers may have multiple suppliers of the benefits and as a consequence may have outsourced the management of the whole portfolio. It remains to be seen if voluntary payrolling will be easier or more difficult in such cases.
The CIPP believes that little has changed since the last consultation, that payrolling will suit some employers and employees but not others. It remains to be seen if a voluntary scheme will actually solve this conundrum and if it genuinely means a relaxation of the burdens on employers. The CIPP also has concerns around voluntary payrolling versus mandatory when considering those employees who move jobs and one employer payrolled and the new employer doesn’t those who have two jobs with the same scenario. The OTS does however make reference to inertia in that over time many employers will see payrolling as the obvious route. The CIPP would also support, at some point in the future a full review of how benefits in kind are treated so it would be possible that all benefits in kind could be payrolled.
Trivial benefits exemption
This exercise seeks to define, for the first time, a formal exemption for trivial BiKs and to place a fixed value to that. There is an unofficial triviality test of £25 simply because it is used in the current P9D form. Turning a blind eye to this unofficial practice clearly cannot, and will not continue long-term.
HMRC is proposing a low individual figure as a trivial benefit indicator, £30, but with an overall cap of £75 a year. This means two trivial benefits of £30 each would be exempt but a third one of £30 would be reported and taxed in full. A third one for £15 would be exempt but in the first example employers could not exempt the first £15 of the third trivial benefit.
Is this too complicated, is the trivial limit too low and what level of administration will be needed to get it right? The CIPP doesn’t believe an annual cap should be needed if all the principle tests are met.
Currently all expenses reimbursements made to an employee are, technically, reportable and potentially taxable income. Reporting is mandatory unless the employer not only has a “dispensation” but a valid one. It’s valid if no fundamentally rule change has occurred and it is not more than five years old. If there is no dispensation then employees have to submit a claim to HMRC to block the taxation, or to obtain a refund of any tax taken.
HMRC tells us that 65% of employers have a valid dispensation in place, but it is likely that many of these will be invalid under the five year rule.
CIPP, among others, has always advocated self-certification of expenses compliance. Our members know the rules, diligently apply them and know they will survive a compliance review. It would be wrong to declare it non-compliant simply because the dispensation is too old.
This consultation seeks to remove the requirement for a dispensation and replace it with a general exemption for expenses reimbursement where it is clear that the cost is a business one. In our view, if a cost is allowed for VAT and corporation tax purposes, it has to be allowed for PAYE and these proposals are intended to achieve this.
These four consultation exercises will, when the necessary legislation is completed and implemented, change the processes for BiKs and while one wonders if this is right, considering the current degree of change we are already facing, there is no doubt that much of the processing for BiKs needs changing and the opportunity to debate them openly like this is very long overdue. The CIPP is also involved in the CIS consultation, call for evidence on remuneration practices, the call for evidence from the OTS on travel and subsistence and much more.
Karen Thomson is an associate director of Policy, Research, and Strategic Visibility at the Chartered Institute of Payroll Professionals (CIPP).