Payrolling benefits: Take the plunge
Guidance for employers on voluntary payrolling of benefits recently slipped quietly on to .Gov. Kate Upcraft advises what tips and traps have emerged from this guidance.
This was the guidance that was first circulated in draft just before Christmas. In fact, when many of us read it we thought it had been written by someone at HMRC who was anxious to head home for the Christmas holidays; so littered was it with errors.
A redrafted version was not circulated, as far we can establish, before it was published, still with ‘draft’ in the URL. HMRC tell me this is because it is a ‘living document’ that will be further amended as and when feedback is received.
I am bound to say that for a tax authority who are anxious for new employers to adopt payrolling, and need the current 3000 or so PAYE schemes who already payroll to move to formally adopt the new approach, they are making life very difficult. We have no software specification for payroll software developers, the brave providers who are offering ‘2016 payrolling’ have coded it based on the regulations.
Now we have guidance that may not be able to be relied upon published six weeks before the latest date to register, which is on 5 April 2016 (interestingly by 8pm, it seems the tax year now ends four hours earlier than we thought).
If your clients are planning to take the plunge and move to payrolling from April 2016, or you have been payrolling some, or all, of their benefits in kind already and they need to formally register to continue to do so, what tips and traps emerge from the guidance and the regulations?
Let’s start with registration. The client registers for payroll in benefits in kind or PBIK.
It is understood that agents cannot register on behalf of a client
The client selects a section, or sections, of the P11D that will in future be taxed through the payroll. For example, if section one for medical benefit is selected, all items that the client would normally submit in section one on the P11D must now be taxed through the payroll i.e. medical insurance, dental insurance and medical treatment.
The employer can choose to exclude some members of staff who they prefer that you continue to provide a P11D for, for example directors or expatriates.
HMRC will respond to the registration to become an ‘authorised employer’ by removing the chosen benefits from the employees’ tax codes, and new codes will be issued to both employee and employer. The later the registration is done in this tax year the more likely that the amended codes will not be able to be supplied before the start of the 2016/17 tax year. So a tax code with the, now to be payrolled, benefit still in it may well be in force at the beginning of the tax year and will then be removed and reissued
Employers are required to write to employees explaining the payrolling move. A sample letter is provided within the guidance that can be used. New employees will also need to be made aware that the employer chooses to payroll some, or all benefits in kind, as this maybe something that they haven’t experienced before and are used to receiving a P11D.
Before the first payroll
Before the first payroll run of the 2016/17 tax year you will need to calculate the cash equivalent value of the benefit(s) to be payrolled, subtract any expected ‘made good’ figure and add the appropriate amount as a notional addition to gross taxable pay.
So for a monthly paid employee whose medical insurance premium is £600 per year and who has to contribute £20 per month, the net notional amount to be added per month is £30. Care must be taken that it is a notional amount that is added and that it is not added to Ni’able pay. You are only seeking to tax the benefit(s); the value is not subject to Class 1 NICs but rather to Class 1A which will be paid at the end of the year on this notional amount along with any Class 1A from any remaining P11Ds that need to be submitted to HMRC. You will probably need a report from your payroll system of the accruing amount subject to Class 1A so that the client is aware of the Class 1A liability as it builds during the year.
Your payroll system needs to have a gross to net functionality that is able to apply the 50% regulatory limit to the cash taxable pay for the pay period, ignoring the notional benefit in kind amount. This ensures that if the employee has a drop in pay the tax due on the benefit will not take their pay from that period below the 50% limit. Where the limit does kick in on the cash pay alone, the unpaid tax on the notional amount of the benefit in kind will carry forward to the next pay period. If the reduced level of cash pay continues throughout the tax year the employee will have unpaid tax that HMRC will have to collect post year-end.
Where benefit values change during the year, or a new benefit is provided, you will have two recalculate the net cash equivalent value and divide this by the number of remaining pay periods in the tax year. Equally in the final pay period for a leaver you may well have to make an adjustment if the net cash equivalent value is now not as predicted at the start of the tax year
Employers are required by 31 May following tax year end to provide employees who have been subject to payrolling with confirmation of the notional values that have been included in gross taxable pay, to assist with the completion of their self-assessment return. This information can be provided on each payslip or on a post-year end statement
Each pay period the total value of payrolled benefits for each employee are included as a separate field within the FPS when this is submitted to HMRC
End of the year
At year end no P11Ds, or P11D entries, are made for benefits in kind that have been payrolled. However, P11Ds must still be submitted for excluded employees or any benefits that have not been payrolled. A P11D(b) must still be provided to HMRC which will be an aggregate of the class 1A from the P11D and the class 1A from the payrolled benefits
So, what should I do now?
So the question is, do I or don’t I encourage clients to payroll from April 2016? I think my response would be if your payroll software can support it and you have a few clients you can practice on this may well be a good idea because things that start out ‘voluntary’ almost certainly don’t stay that way. So we may well be waving goodbye to be P11Ds in fairly short order. There is just the small matter of sorting out the living accommodation exemption and the legislation around loans and vouchers! But given this is an attractive proposition for the Treasury (upfront rather than deferred tax), HMRC (no more processing of over four million P11Ds), and DWP (who really need benefits in kind reported in real-time so they can take them into account for Universal Credit) I think they might find time to amend the legislation.