Accountingweb.co.uk's tax editor, Nichola Ross Martin considers the P11D dilemma faced by many in small business: Do I bother to complete one or not?
To P11D or not to P11D? That is a really interesting question for small business which I had never really considered too deeply before HM Revenue and Customs (HMRC) issued its consultation last December on payrolling benefits in kind and expense payments.
Reactions to the consultation have been extreme. It seems to be a bit like riding a Harley, you either love it or hate it. Passing the burden of taxing benefits and expenses onto employers is a big money saving wheeze for HMRC, but every action has an equal and opposite reaction (well, actually, only in the world of physics, but stay with me) and so it will be costing some employers a lot to implement, an awful lot. The plus point should be that all those PAYE coding problems normally experienced when HMRC adjusts your tax code in advance are stemmed, but various observers in the tax press are far from convinced.
I was going to suggest that most small owner managed companies are going to be pretty indifferent to whether they put their benefits and expenses through the payroll, but then I realised that we have no details of what will actually happen in practice, so 'small business' probably did not feel too inclined to comment much on this consultation.
Consider the following example:
Pam runs a business in the UK, she does this through a company. She has a mobile phone and a Blackberry for business purposes and no taxable benefits in kind. She claims expenses in the form of business travel and subsistence and due to the nature of the business tends to purchase most of the company's goods and services on her personal credit card, or with her own cash. She submits an expense claim monthly and her company reimburses her.
The P11D is the annual return of benefits and expenses, that every employer who provides benefits or pays expenses for employees should complete on an annual basis. For 2007/08 and earlier years, Pam, as her own employer, should have applied to HMRC for a dispensation so that her company does not have to report her travel and subsistence expenses annually on a P11D (the other expenses – 'the company's goods and services' do not require reporting).
A dispensation also works for her as an employee and saves her part of the task of declaring the expense payments on her tax return and at the same time making a claim on her Self Assessment return or by letter to claim that she was obliged to incur expenses in proper performance of her duties of employment (if you like statute, this is the 'wholly, exclusively, necessarily' rule in s.336 ITEPA 2003).
Pam as it happens, did not apply for a dispensation, and has never completed a P11D. The company has a payroll, and so she completes her P35 annual return of PAYE and National Insurance, but she ticked the box 'P11D's not due' and apparently sleeps peacefully at night, unaware that she has done anything wrong.
In theory, HMRC could fine Pam if they caught up with her, and given that there is no tax at stake this seems unduly harsh. Late filing penalties for P11Ds where there are no taxable benefits are rare in my experience (please share your experiences and comment below if you do not agree with this statement). For late filing of P11Ds, HMRC can charge £100 per month, or part month in cases of 1 to 50 employees, for up to a year (£1,200) automatically. After that the General Commissioners must agree further late filing penalties (£300 max) and then daily penalties of up to £60 per form per day can be applied. Under the old tax penalty regime, there would be no additional tax geared penalties, as there was no tax or NI at stake in this example.
Pam is unlikely to be fined under self assessment, as not putting expenses on her personal tax return makes no difference to her tax liability.
Under the new penalty regime, Pam is the sort of taxpayer who would benefit from being given a penalty ASBO – a suspended penalty for non-compliance for 2008/09 and following years, except that there is no tax at stake and so an ASBO seems improbable. The new tax penalty regime does not apply to filing penalties, these will stay as they are, unless of course HMRC raises them.
To P11D or not to P11D?
Considering the example above, I have to say that it does seem pretty pointless having a P11D reporting requirement when all the expenses of employment are allowable for tax and NI. I know that there are a lot of Pams around, as I meet them from time to time. I am not sure how they do sleep at night, but they say that 'ignorance is bliss'. Looking at HMRC's consultation on payrolling benefits and expenses it is obvious that various local arrangements exist between HMRC and big employers and perhaps, reading between the lines, this might go some way to explaining why the Pams of this world are not 'hung drawn and quartered' with late filing penalties when they are caught not returning their expenses in the conventional way.
The future of expenses?
We will just have to wait and see what HMRC decides on this front as the large employers are the ones who tend to influence these issues. I am all in favour of a compliance question on a P35, perhaps, for owner managed companies (only) along the lines of: 'Did you pay any employee any expenses during the year? If so, are you satisfied that the payments were not earnings or that no taxable benefit in kind arose?' Assuming the guidance to the question is sound, that might avoid having to somehow otherwise deal with expenses via your payroll if that is to be the alternative.