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Making the switch to payrolling benefits

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 With the tax faculty calling on HMRC to revamp form P11D, Lora Murphy extols the benefits of switching to payrolling benefits.

7th Feb 2023
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So, we’re now firmly in 2023. Granted, it’s only February, but as we all know, the new tax year will rapidly be upon us. It felt apt, therefore, to discuss the virtues of reporting benefits in kind in real-time via payroll software.

To switch from using the P11D reporting process to that of payrolling benefits, organisations must ensure they register online with HMRC by no later than 5 April prior to the tax year they wish to begin doing so. For example, for tax year 2023/24, registration must be completed by 5 April 2023.

Almost all benefits can be processed in real-time, with the exceptions of 
•    employer provided living accommodation
•    interest-free and low interest (beneficial) loans.

These must still be reported on form P11D, even if other benefits are being payrolled for the same employees. Additionally, there’s still a requirement for a P11D(b) form to be sent and class 1A National Insurance contributions to be paid by 6 July following the end of the tax year the benefits were awarded in.

Employees must be provided with written notification regarding the payrolling of benefits by 1 June after the end of each tax year. This can be via their payslips or by email / letter. It must advise:

•    Details of the benefits that have been payrolled
•    The amount that’s been payrolled for optional remuneration (OpRA)
•    Information regarding any benefits that haven’t been payrolled.

It's clear that HMRC would like more organisations to report benefits in kind via payroll, as in recent publications, it refers to the ‘legacy’ P11D process. The CIPP supports this direction, as reporting benefits in real time, and allowing employees to pay tax on them as they receive them, gives individuals a clearer, more accurate representation of their pay.

With the P11D process, employees often need to wait well beyond the end of the tax year to receive their adjusted tax code, to include consideration of the benefits they’ve received. This is particularly pertinent at present, given the focus on the cost-of-living crisis, and supporting the financial well-being of staff as far as possible.

Payrolling benefits also remove the mad rush following year-end to distribute P11Ds, saving time and removing the risk of human error associated with completing sometimes hundreds or thousands of P11Ds.

Sticking with the P11D process

There is still, and will continue to be, many organisations who use the P11D process for the reporting of benefits in kind. Let’s not forget that there are still two benefits that cannot be processed in this way (as per above). As a result, professional bodies have approached HMRC to urge it to make some improvements to the form P11D. This is to make things simpler for not only employers, but also for employees and indeed, HMRC itself.

The Institute of Chartered Accountants in England and Wales (ICAEW) has sent a letter to HMRC, requesting that some of the processes and rules around reporting benefits in kind are changed. The Institute has recommended that the law be amended so that beneficial loans and employer-provided accommodation can be payrolled in real-time. 
This would remove a significant barrier for organisations that offer these benefits and don’t want to have to carry out two processes, so payrolling all other benefits but still recording these elements on forms P11D.

Also, if HMRC wishes P11Ds to be abolished, given that they’re now being referred to as ‘legacy’, this is a legislative issue that needs to be ironed out.

ICAEW has also requested changes to the P11D form itself, and suggested the form is made available at the start of the tax year, as opposed to the end, so that employers can prepare ahead of time with full awareness of the reporting requirements related to the benefits they’re providing. 

Additionally, one-off benefits and expenses should be identified, as they can be treated as ongoing when code numbers are calculated, leaving employees with incorrect tax codes. Also, an online process should be introduced for amendments to form P11D, as currently this must be done by paper, which is open to delays and errors.

Will there be changes to the P11D process and forms in the future? Will we see a complete abolition of the P11D process at some stage, as there appears to be a push for organisations to adopt payrolling of benefits over the P11D process? Watch this space, the ball is in HMRC’s court…

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Replies (17)

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By Hugo Fair
07th Feb 2023 18:39

".. the ball is in HMRC’s court…" where it has been for the past 7 years!

A couple of practical points that could have been included:

* When registering, the employer has to specify each BiK type that will be payrolled, so they need to know before the start of the tax year what will be offered/provided;
* For each of those BiK types, the employer can exclude specific employees or groups of them (such as Directors), so again those decisions have to be made before the start of the tax year.

These are important because they cut across the motivation for HMRC's push - which at heart is part of the MTD alignment (at least in terms of up-to-date, near real-time, digital data).
In reality it's hard enough for HR & Payroll depts to move their 'benefits' mindset & processes to being a real-time activity (having got used to it being an annual exercise), without being told that the real-time aspect only works in one direction (to HMRC's benefit ... intentional pun).

Like everything else (from PAYE to CGT etc), it's time that HMRC realised that 'digital' and 'real-time' are part of a two-way process ... otherwise it's pointless for the rest of us!

Thanks (6)
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By [email protected]
08th Feb 2023 11:57

Another unwieldy process - real-time payrolling of benefits have so many benefits for both employees and HMRC, it should be as easy as possible for employers!

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By alejandra
08th Feb 2023 12:15

I really don't understand why payrolling benefits gives any benefit at all. In the year of introduction, the employee pays tax on this year's benefits as well as last year's. I don't see a benefit to the employer, as you still have to do the P11d(b) and you still have to give the individual employees an annual statement of what their benefits were (surely that's equivalent to a P11d?) But you have to get the benefits correct at the payroll stage as well, so that's extra work every month. Plus if you introduce a new type of benefit during the year, you have to do P11ds anyway. Happy to learn what the benefits are, I just don't see them?

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Replying to alejandra:
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By matttaxnpayroll
08th Feb 2023 13:05

I agree - in a company that already has P11D's I don't see there being any 'benefit' to payrolling. Plus there's the catch-up from coding out the benefit from the prior year, to being payrolled in the current year.

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Replying to alejandra:
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By NotAnAccountant2
08th Feb 2023 15:51

alejandra wrote:

I really don't understand why payrolling benefits gives any benefit at all.

No idea what the benefits might be for the employer but a significant benefit for (some) employees is being able to see what your total remuneration will be ahead of the end of the tax year, worst case is when you get your March payslip.

I have yet to receive a P11d (or equivalent?) for any employment that normally provides a P11d for the year that the employment ceased. I have absolutely no idea what is supposed to happen but it doesn't - whether it's small employers or multinationals. My most recent move was from an employer with payrolled benefits - so I can see exactly what benefits I've been taxed on from my payslips.

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Replying to NotAnAccountant2:
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By alejandra
09th Feb 2023 10:08

Yes I suppose that would be useful to some people, thanks

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Replying to alejandra:
By ireallyshouldknowthisbut
08th Feb 2023 17:41

alejandra wrote:

In the year of introduction, the employee pays tax on this year's benefits as well as last year's.

I don't think that is quite right. The employee is usually paying on an ESTIMATE of the current years through their tax code, and then catch up might be coded in for earlier years too, but its supposed to be a stab at it. The main plus on payrolling is it cuts out all that noise, the employee pays the right amount of tax in day one, without any catch up/guessing/coding changes.

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Replying to ireallyshouldknowthisbut:
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By alejandra
09th Feb 2023 10:09

Yes that's a good point, thanks. I guess I've just been looking at it from the employers POV

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All Paul Accountants in Leeds
By paulinleeds
08th Feb 2023 13:15

I'm an accountant, with 36 years practice experience.

Doing a few P11ds is not a major task. If I were doing hundreds with the same benefits for lots of staff I may use some software to prepare and submit them.

I do a handful for several clients each year. I use the HMRC Gateway. I do not use paper P11Ds or P11D(b). That may be slow and you never actually know if they have been received and processed for months.

I normally have the employer and employers set up from previous years, if not, It's not a big task.

Unless I can be sure that the benefit will not change in the tax year, I believe that I'd spend more time checking the final benefits against payrolled benefits and then making a year-end adjustments than actually just picking this up once a year and dealing with.

I'm not against change, but it has to save me time and/or money. Unless I'm doing this often then I firmly believe that there's nothing wrong with the old legacy system for the smaller employer with several P11Ds.

What do others think?

I can see the benefit for employees in having their tax bill collected weekly/monthly. Most tax on benefits (e.g. medical insurance) is not that large. Cars and vans can be addressed in year with P46(car) and therefore PAYE tax codes adjusted in year and the tax collected in year.

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Replying to paulinleeds:
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By Seadog
09th Feb 2023 20:11

I agree. Despite the fact that the Agent PAYE P11D offering is clunky and poorly set up it is still slightly easier than dealing with the paper forms.

Very few software providers have entered the P11D market. Clearly not enough in it for them commercially.

The HMRC offering is difficult for the employees too as the format of the printouts is poor.

If HMRC are serious about MTD this issue needs to be addressed sooner rather than later.

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Replying to Seadog:
A Putey FACA
By Arthur Putey
16th Feb 2023 10:18

Payroll software generally does P11Ds and payrolling benefits? Brightpay does.

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By Rgab1947
08th Feb 2023 16:11

Again a simple thing like payrolling benefits gets made difficult with lots of bureaucracy involved. Having worked in a 3rd world country (Emerging market) some 20 years ago they had all benefits on payroll submitted electronically monthly.

No registration. You employed a person with say a car, the software knew the rules (value of car x %, in this case) enter the value of the car as a payroll item and hey presto PAYE and NI (their version) calculated. Tick the includes fuel box if applicable. Whole laundry list of BIK all with their own rules all done by the payroll software. HR did not even have to know the rules. Just have the BIK item in.

MTD I would suggest.

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By ireallyshouldknowthisbut
08th Feb 2023 17:37

I think they should be phased out, and perhaps retained only for the smaller employer, say sub 10 employees, before knocking that on the head too.

I cant see why we still have this system of estimated benefits then being clawed back 2 years later through adjusted tax codes. The amount of downstream effort that is for employers/employees/HMRC is not insignificant. What % of tax code changes are P11D cases? Must be a very high %. What % of employee enquiries are the same? Calls to HMRC? It all adds up to a big amount of effort for 3rd parties as well as directly for the employer.

Doing it real time seems more sensible to me, no real excuse not to other than a 'this is how we have always done it' mentality. Usually its much easier to do things 'as you go', ie when the car is given to the employer, or the health insurance is taken out, and if its a month late, well it can go on the next return. It also solve issues around leavers which are often badly handled.

A first step would be to reduce the long deadline of the 19th July to 19th June, 19th May and 19th April over 4 years so as to encourage employers to adopt a proper 'in year' recording system rather than something you do after Easter when you vaguely get around to it. As a side issue this delay issue acts as a significant barrier to filing tax returns in the first 40% of the self assessment tax season.

I agree with Hugo and others that HMRC should certainly drop the "pre-registration" nonsense, and it just be like anything else. You just book it in the monthly PAYE and get on with it.

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By adam.arca
08th Feb 2023 19:03

Yes, payrolling benefits sounds good and, yes, there may be some efficiency and other advantages to doing it that way FOR CERTAIN EMPLOYERS.

And, yes, the current P11D process is the opposite of slick and requires estimated benefits, a process which creates its own problems.

But let’s get realistic here.

Most employers only have a handful of staff. That means they don’t have an HR department or even in many cases a decent payroll clerk. All they want to do is pay their staff and it’s not their job (and nor should it be) to get their employees’ tax spot on if that means creating unnecessary and unjustified burdens. Which it does.

Forcing payrolling on this type of employer won’t improve taxation of benefits, it will simply introduce new types of error into the mix.

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A Putey FACA
By Arthur Putey
16th Feb 2023 10:19

Trying to work out whether I can register clients for payrolling benefits using my agent login. Or is it yet another case of the employer having to do it which begs the question what are they paying us for.

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Replying to Arthur Putey:
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By bendybod
05th Apr 2023 11:46

Did you find an answer to this? I am trying to register a couple of clients but can't figure out how to do it!

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