Benefits reporting: what you need to know
The year-end PAYE process doesn’t end on 19 May, warns Chartered Institute of Payroll Professionals (CIPP) policy officer Diana Bruce. In this comprehensive guide to P11D reporting, she sets out the processes that must be completed by 6 July. The section on dispensations has been updated to take account of amendments suggested by AccountingWEB.co.uk members in comments below.
Accountants and payroll managers breathing a sigh of relief as they complete their PAYE year-end duties mustn’t relax too much. Next on their agenda will be the 6 July P11D filing deadline.
Since the introduction of self assessment in 1997, employers have been required to calculate cash equivalent values of expenses and benefits provided to their employees.
When the PAYE system was first introduced only P9D benefits were assessable. However, over time company owners and managers realised they could work the rules so that if the company paid for certain items, employees would only have to pay the tax on the secondhand value as opposed to the original full value. This tactic prompted the introduction of the P11D.
HMRC guidance states that at the end of the tax year, you must report the expenses and benefits you've provided to your employees, and about the total Class 1A NICs due on them. To do so, you must use the following forms:
- P11D - for recording the expenses and benefits you provided to most company directors and to employees earning at a rate of £8,500 or more per year.
- P9D - for employees earning less than the £8,500 rate.
- P11D(b) - for reporting the total amount of Class 1A NICs due. You add this up from all the forms P11D you've completed. Even if you haven't had to file any P11Ds, you must still complete and return form P11D(b) if HMRC has sent one to you.
Submitting forms P11D and P9D isn't optional. If you've provided an employee with expenses or benefits that need to be reported, you must send HMRC the appropriate form and the employee must also be provided with a copy (also by 6 July) so that they can use it to complete their Self Assessment tax return, if applicable.
All transactions between employees and employers need to be declared, even if there is no tax liability. Forms must show the cash equivalent value of benefits or the taxable payment and any employee contribution to the cost. By 19 July you also need to pay any Class 1A National Insurance contributions (NICs) that are due on the expenses or benefits.
Dispensations & PAYE settlement agreements (PSAs)*
Employers can apply for dispensations to ease the reporting burden where expenses and benefits are paid to employees. If HMRC agrees one, a dispensation will reduce the paperwork by removing the need to report non taxable expenses and benefits to HMRC at the end of the year on forms P11D or P9D.
There is normally no requirement to pay any tax or NICs on routine expenses such as travel & subsistence where the amounts are within HMRC's acceptable limits, and are not subject to any tax or NICs. To apply for a dispensation there is an admin process which is via the P11D(X).
Once the dispensation has been agreed by HMRC there is normally no need to apply again, providing there is no change in rates or items. Usually the agreement will stay in place for around five years, at which point it will be reviewed. Good practice however is to review your dispensation on a regular basis and at least once a year. HMRC has introduced a facility to allow employers to apply for dispensations online.
There is also an option for employers to pay the tax due on benefits provided to employees for minor, hard to value, and irregular items. This is known as a PAYE Settlement Agreement. Information on this process can be found on the HMRC website.
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Where Class 1A NICs due on P11D items are due by 19 July, you are given until 19 October to pay any Class 1B NICS due on a PSA. If paying electronically these dates extend to the 22nd of July and October.
Calculating the £8,500 threshold
Is a P11D or a P9D required for the employee? In essence, this depends on whether they earn less or more than £8,500 a year. The calculation must include salary, all payments of overtime, commission, bonus and so on, plus the cash equivalent of all benefits and any expenses – including those where a tax deduction may be claimed.
Some expenses are not included, namely contributions made to an approved super annuation fund and/or to an approved payroll giving scheme.
National Insurance & PAYE Service (NPS)
We all know about HMRC’s new NPS, probably for all the wrong reasons. It has highlighted so many tax coding errors since its introduction that it is being seen as a negative change and not a positive one. However, when all the data has been cleansed HMRC will have a far more accurate system. Unfortunately during the interim it is having to deal with a backlog of errors.
NPS has also caused disruption due to the late application of 2009/10 P11Ds. The records are now being linked to individuals rather than employers and this has made the matching process more efficient. The updated system has given HMRC a truer picture of a tax payer record and is catching up with the P11D backlog. Unfortunately some people ended up with Month 1 codes for the last three months of the tax year, and were effectively being taxed for nearly two years’ worth of benefits. This is no fault of the employer, but a consequence of a new and more efficient system.
Common P11D errors
HMRC accepts there have been some coding issues, but as is its habit, highlighted two common errors that employers make when completing their P11Ds:
- Fuel benefit omission – you need to include the details where this applies and a number of employers omitted the information from their forms. Amended P11Ds are required to correct the employee’s tax code.
- Incorrect completion of “from and to” dates – some employers have completed the boxes for “dates car available” giving the period dates of 6/4/2009 to 5/4/2010. If the car was available in the previous tax year then the “from” box should not be completed. This also applies if the car will be available in the next tax year – the “to” box should remain open so that the tax code is carried into the next year (2011/12).
Both errors will mean employees receive incorrect tax codes. Where there is a change of tax code, staff may receive their pay slips, with a change in take home pay (this is dependent upon the error type) and this could mean less pay or a large refund if the new code is wrong.
Additionally there have been problems for employers sending P11D information in list format to HMRC. They have a quality standard for P11Ds to help increase the amount of information that can be processed without the need for further contact between HMRC and employers. To avoid rejection or the need to re-submit the information, employers should:
- present your list in an easy to read format, using at least font size Arial 11
- enter all benefits for each employee on one list; HMRC cannot accept separate lists for each benefit
- show the employer reference, employee’s name, National Insurance number, date of birth and gender
- show the full range of benefits, including the benefit code numbers as shown on form P11D.
Paper P11D and P11D(b) for 2010-11: new address
HMRC have now set up a dedicated post room to deal with the receipt of paper P11D & P11D(b) submissions for 2010-11. Please address your envelope to:
P11D Support Team
Benton Park View
Newcastle Upon Tyne
Full guidance on how to complete each section of the forms is available from HMRC and guidance on BusinessLink.gov.uk outlines the different methods you can use to complete and file these three forms. It also contains a list of common errors to avoid and sets out the key information you need to provide on each form.
*The section on dispensations and PSAs was amended in response to the comments below. The author is aware of the differences between the two, but recognised that the original wording did not portray that difference clearly and submitted the amendments now published. Both the CIPP and AccountingWEB.co.uk apologise for any confusion. The address published for submitting Paper P11D(b)s is taken from HMRC's 20 May 2011 employer update.