Samantha Mann, senior policy and research officer at the Chartered Institute of Payroll Professionals (CIPP), shines a timely spotlight on a subject that was hailed to be a solution for just one of the many administrative burdens that are placed on the shoulders of the employer.
The debate about whether benefits in kind should be payrolled has raged on for much of the 21st century, however with prompting from the Office of Tax Simplification (OTS) a system for employers to choose to payroll voluntarily became available from April 2016 – but has it been the success that the government hoped for?
The current deadline for submitting forms P11D and P11D(b) to HMRC is 6 July 2019. The form P11D will record the taxable value or ‘cash equivalent’ value of benefits in kind that have been provided to the employee during the 2018/2019 tax year plus any expenses that need to be reported.
Failure to meet the 6 July deadline, as with any HMRC deadline, signify the starting point for penalties to be applied, for failing to submit on time, which start at £100 for each month or part month, per 50 employees. Penalties can also be applied for late payment and for inaccurate returns.
The information being reported also needs to have been provided to each employee by 6 July – ideally well before that date – so as to provide an opportunity for correction where it may be needed.
Tax is then collected on these values directly from the employee either through self-assessment or, more commonly, through an amendment to the employee’s tax code.
As an additional mandatory obligation, I think we can all agree that this requirement adds to the burden of the employer significantly both in terms of time and cost – particularly where this task is fulfilled by an external provider.
For many years a small number of employers have chosen to process the cash equivalent values through the payroll to collect the income tax directly from the employee as they are paid – this has proved popular for these employers and their employees.
Agreement with HMRC has been needed for this to happen but these employers have still been required to submit P11Ds by the usual deadline marking the P11D to identify that the amounts have been ‘Payrolled’ to prevent HMRC from incorrectly collecting any tax amounts in the normal way.
A double administrative burden – but one chosen by the employer for a range of reasons that suited them.
Early in the 21st century, a consultation was carried out to gather views about the idea of ‘mandatory’ payrolling.
Held at a time when employers together with their agents were just beginning to embrace the idea of submitting PAYE annual returns electronically, the world was a very different place and so a policy to introduce payrolling wasn’t progressed.
The OTS however, reintroduced the idea again, alongside a number of other simplification measures – but suggested instead that it be a voluntary option for employers who wished to lighten their burden of end of year P11D reporting (by this time PAYE end of year processes had been largely removed due to the introduction of RTI reporting).
In April 2016 an online payrolling of benefits in kind service was launched for employers to register their intention to begin payrolling.
Key features of the service:
- The employer must register in the tax year preceding the tax year in which they wish to begin payrolling (unless they are new employers and/or new to providing a benefit)
- The employer can select which BiKs they wish to payroll
- The employer can exclude employees
- P11Ds may still be required in certain circumstances
- Not all BiKs can yet be payrolled – beneficial loans and living accommodation still need to be reported on a P11D
- Class 1A NIC remains an annual payment along with an annual reporting requirement via the P11D(b)
- Agents cannot register on behalf of their clients.
Informal payrolling continues outside of the voluntary payrolling process, however, with the exception of a small number of teething problems (surprisingly so), ‘so far so good’ appears to be the overall view of employers who have taken the plunge to voluntarily payroll BiKs.
Administrative Burdens Advisory Board (ABAB)
In their 2019 annual report, ABAB was both ‘surprised and disappointed that progress in this area had not advanced’.
The publication of the report followed their February board meeting during which time it had been confirmed that HMRC had committed resource, together with a project team, to further develop this service so as to increase the take up of voluntary payrolling – with the ultimate aim of reducing the administrative burden on small and medium-sized employers (SMEs).
Earlier in 2019, the CIPP ran a joint survey to gather views from pay, reward and tax professionals about their experiences, asking questions such as: why they chose to begin payrolling; what barriers are preventing them from taking up payrolling; and from those that have taken the plunge, what benefits they gain as a result of payrolling.
Benefits of payrolling
We know from the results to the CIPP survey that removing the need and burden of completing P11Ds was the biggest driver to making the decision to payroll.
However, ‘real time’ payment of tax together with greater accuracy of the detail and improved clarity and visibility was also seen to be a huge benefit for affected employees.
Setting aside the reduction of administrative burden on the employer, it was clear from the responses that the desire to improve the service delivered to employees was significant in making the decision to go forward to payroll.
Barriers to payrolling
Whilst there are benefits to be had, only 35% of the survey respondents were already payrolling, and so we asked what was preventing the remaining 65% from doing so (multiple reasons could be chosen):
38% of respondents found the processes to be too complicated
41% asked for better guidance – particularly where there is a risk/perception of ‘double taxation’
17% saw the need for agents to be able to register as an important factor
33% would benefit with greater flexibility from in-year registration
Further reasons included:
- Not all benefits are included yet (loans being a significant omission)
- Class 1A is still an annual payment with P11D(b) reporting
- The risk of double taxation in year one – guidance needs to be clear in this area
- Lack of support from internal stakeholders
- Concerns about software limitations
From the responses above it is apparent what improvements will be needed to encourage greater take up, the majority of which can only be delivered by HMRC e.g. improved guidance, greater flexibility with in-year registration – and restore their original plans to allow agent registration, to name but a few.
There is no getting away from the fact that the rules around the taxation of benefits in kind are complex and in many cases are dealt with outside of the payroll function and payroll software and so a key shift in working together with the development of skills, knowledge and software will be needed before the mandating of payrolling could ever be seriously considered.
However the biggest winner by far if take-up numbers continue to increase will be HMRC and so it is encouraging to hear that a renewed commitment to this programme of work has returned – long may it continue.
On a final note, it will come as no surprise to read that company cars and vans, together with medical health insurance were the most popular items currently being payrolled.