Payrolling & P11D issues: an overview
Currently if an employer wishes to provide what is deemed a Benefit In Kind (BIK) to an employee, there are normally tax and/or National Insurance (NI) implications, and the liabilities are reported on the form P11D or P9D annually, explains the CIPP's Diana Bruce.
HMRC then marry the P11D information to data supplied by employees via their self-assessment tax returns and or the employer end of year information and calculate the tax due and adjust the individual’s tax code accordingly. There is also a Class 1A NI liability for the employer on some BIKs which are reported on form P11D (b) annually.
In 2007 the CIPP lobbied for a change in this process, along with members of the Admin Burdens Advisory Board (ABAB); a consultation forum set up to challenge HMRC regulations and burdens. The proposal, which came about from a HM Treasury’s initiative of aligning PAYE and NICs, was to replace the reporting structure with BIKs being taxed and NI applied at source, otherwise known as “payrolling”.
Research conducted by the CIPP and ABAB found that opinion fell into three areas regarding BIKs reporting, namely:
- Full support for HMRC’s proposals to process Benefits In Kind directly through the payroll, therefore taxing at source
- Opposing the proposals as the belief is that it will prove more of an administrative burden
- Unsure of what it will mean for them, or do not offer Benefits In Kind
So what is payrolling?
Payrolling basically means that employers would put all benefits and expenses through the payroll, as cash equivalent amounts; resulting in employees being taxed at “real time” rather than at some point in the future via their tax code, or self-assessment collection.
For example, take healthcare; the payroll department would calculate the annual figure and divide by 12 for the monthly amount or fifty two for the weekly and so on. This would then be added to the gross salary monthly amount to ascertain taxable income. There are two ways the NI may work.
For employer only NI, the employer would need to ensure that the amount through payroll only applied to tax, but that they record the amount for Class 1A NI to enable correct payment at the end of the relevant year. Currently those benefits subject to Class 1 National Insurance must be processed through the payroll at the time the benefit was received so there would be no change to the administration process for these types of benefits if payrolling.
At the end of 2007 HMRC issued a consultation document to seek public opinion on the proposal of payrolling. A number of lessons were learned from this consultation, one of which was that the consultation document did not go into sufficient detail of how payrolling might work for HMRC to obtain a clear opinion. Although the CIPP members supported the process there were a number of other bodies that did not, which could be due to a lack of understanding or fear of the unknown. Due to this split opinion HMRC decided not to make a recommendation to ministers, but to instead consult further.
HMRC did then hold a number of productive meetings with groups of stakeholders and other representative bodies to discuss how payrolling might work. Maybe more importantly HMRC also endeavoured to understand the reasons for those that opposed the idea and met with such employers to discuss the issues.
However, despite consultation and further meetings, there is still no official agreement in place.
Advantages to payrolling
There are a large number of organisations who are already payrolling. One common payrolling practice is where an employer uses HMRC’s AMAP (Approved Mileage Allowance Payments) rates. Once the employee exceeds 10k miles at 45p per mile, the tax rules state that a maximum of 25p per mile can be paid tax and NI free to the employee.
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However organisations will continue to pay 45p and pay the additional 20p through the payroll with some not wanting to place the tax and NI burden on their employee, so adds the tax and NI amount to it (commonly known as grossing up), in order to deduct tax and NI from the employee, but still leaving them with 45p net.
An agreement has to be made with HMRC for payrolling of any BIKs and the amounts must still be reported on a P11D when an employer does this. If payrolling happens this would then save employers the time and admin resource of having to report a benefit that has already been taxed at source.
One major irritant, using the example above is where an organisation pays the 20p per mile directly to the employee; the 20p must still be processed through the payroll for NI purposes, and the tax be reported on a P11D.
Other advantages, identified through CIPP research are:
- Cash-flow for employee, allow them to budget more efficiently as no tax bill at the end of the year
- Simplification for self-assessment purposes (nothing to declare on form)
- Smaller employers will collect data as a matter of routine rather than trying to remember the rules at year-end
- A chance to look at the all the Benefits In Kind legislation and make the long awaited changes
- Easier administration of flexible benefits
- Would reduce the number of in-year movements e.g. P6s. This would also have an impact on HMRC systems as less traffic flowing through the IT systems
- Late notification of benefits could be recovered with a more gentle approach by spreading over the tax year, rather than a coding notice recovering all at once
- No penalty regime for late notification of P11Ds as they would not exist
- Class 1A process could be abolished
Possible disadvantages of payrolling
Currently Class 1A is employer only NI and some organisations are fearful that this might be abolished and be replaced with Class 1. This of course could lead to employees paying NI on benefits not currently subject to NI too. The CIPP asked its members whether they think the current Class 1A process should change to a monthly process rather than the current annual process. The survey results showed that more than 60% of respondents would prefer Class 1A to be calculated on a monthly basis, but ensure it is an employer only liability. This would lead to software changes, as the payroll element may have to be programmed to be taxable, but NIC-able for employer only. With the Budget announcement of another review into Tax and NICs alignment it is possible that the Class 1A process may be brought into the scope of the review.
Another area of concern is if payrolling happens should it be mandatory? There are pros and cons for both mandatory and allowing flexibility. The debate is mainly around an employee moving jobs. Using healthcare again as an example, if an employer operated medical benefits through the payroll, the employee would pay tax in real time, however if they then moved to an employer that chose to continue with the P11D process, they will be hit at year end with a change of code. This will be very confusing for the employee. If it was not made mandatory, under a phased in approach, HMRC would not be able to save processing resource in the P11D area of their business.
The cost of training the payroll staff and any upgrades to the payroll software also need to be considered.
How do employers currently operate payrolling?
Of those that are already payrolling they have all agreed that the reduction in burdens of producing P11Ds has saved them in both time and money. Some examples have been provided by CIPP members as to how they have overcome some of the obstacles.
- Where an employee commences or leaves employment during the tax year a P11D or substitute statement would be provided to HMRC for that tax year only. Thereafter the employee would be transferred to the “payrolling” process.
- Cross over on year end with a company car. One employer currently has the arrangement that if an employee is provided with a company car in March, but payroll not informed until April, that this employer can recover the tax due in March in month one of the new tax year.
- Where Class 1 employee NICs due on a benefit e.g. vouchers, rather than taking all in one month, the employer has an agreement to spread over one tax year, in that current year. Companies would need to consider their provisions e.g. offer benefits at the start of the tax year, or for new employees explain that due to the number of months left in that tax year, that their NICs contributions would be higher in the periods left. (Please note this provision is not in current legislation but a local agreement with HMRC).
- An employer with more than 4,000 employees receiving Benefits In Kind introduced payrolling and although it did have teething problems to start with, it now operates a successful payrolling option. This company uses separate P11D software to maintain BIK information, and then electronically uploads the information into the payroll software. The company operates; company cars, vans, fuel cards, loans, healthcare, and flexible benefits directly through the payroll, taxing at source and in “real time”.
What are the main issues/considerations?
For any change, particularly under the admin burdens agenda there has to be, where possible, a win for all parties. The following issues, which is by no means an exhaustive list, do need careful consideration to enable workable solutions to be found.
- The BIK legislation is extremely complex and the most obvious concern is whether employers will have the necessary expertise to administer the tax rules within the payroll department. A large number of payroll professionals already understand the benefits legislation but of course there would be a massive learning curve for those that don’t
- There have also been concerns raised about double taxation in the first year, but it should be noted that this already happens. When a P11D is submitted, it is normally in the following tax year that HMRC adjust the code to collect the underpaid tax, in addition to adjusting their tax code to reflect that they receive a benefit. This means that with the current process employees are more often than not taxed for the benefit twice in one tax year
- Another issue occurs when starters and leavers are joining or leaving part way through a tax year
- What happens if a person leaves, and a tax liability exists but there is no pay to deduct from?
- What happens if a person is receiving no pay due to sickness, or on unpaid maternity leave?
- How does one calculate employer provided loans before they know the interest rate?
- How would the taxable earnings be reported, via the P60? If so would this impact on areas such as tax credits?
The first stage of HMRC’s consultation on "Improving the operation of PAYE: Collecting Real Time Information (RTI)" closed in February and we are waiting for the second phase to be published. Within this consultation it states, (3.11) Benefits In Kind are not included in the proposals. This means that employers will still be required to submit forms P9D, P11D and P11D (b) at the end of the year. However included in the RTI internet specification are fields that will allow employers to report BIKs by informing HMRC of the individual elements that are subject to tax and or NI for those employers who do payrolling.
Without doubt RTI would be the ideal solution for payrolling and would remove the requirement for this element of year end reporting. The CIPP Policy team will be continuing to push this subject on to future agendas.
As mentioned earlier and not for the first time, the government is also about to start consultation on the alignment of the tax and NI process. The consultation has not yet been published, but it will likely include an area around the complexities of reporting BIKs and seek views on how to simplify, i.e. payrolling.
If you have been or are considering payrolling then you must still send HMRC completed P11Ds/P9Ds or equivalent lists as you may be liable to penalties if you fail to do so. HMRC included updated guidance on payrolling in their April edition of the Employer Bulletin (no. 38) and it was also originally published in March on their website.
Following representations by software developers, HMRC has been exploring the feasibility of accepting P11D details, where the benefits have been payrolled, in the form of a spreadsheet on a CD.
Employers may send HMRC these details on a CD, rather than in the form of paper P11D lists, however CDs cannot be accepted for any other type of P11D/P11D (b) submission. A trial process has been set up to facilitate this and HMRC is asking that it is strictly adhered to in order to help the process work. The trial will be evaluated fully later in the year.
Payrolled benefits and P11Ds on CD - see PDF attachment.
Diana Bruce is a senior policy liaison officer for the Chartered Institute of Payroll Professionals (CIPP).