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Benefits & Expenses, P11D’s, Exemptions & Flat Rate Allowances

It’s the tax year end (AGAIN!) and hence we thought we’d summarise the basics on benefits, expenses etc..

Here goes:

Benefits

Benefits in kind provided for employees/directors are treated as taxable income for the individual (and subject to Class 1a NI for the employer).

Benefits would include:

  1. Provision of car/fuel
  2. Provision of van/fuel (where private use is not restricted to “home–work”)
  3. Private Medical Insurance
  4. Loans (inc. overdrawn Directors Loan Accounts)
  5. Provision of living accommodation
  6. Assets placed at employee’s disposal / given to employee
  7. Payments of personal liabilities by employer (inc. Life Insurances where the beneficiary is someone other than the employer e.g. spouse)

These are declared on forms P11D after the end of each tax year (due date for submission to HMRC by 6th July after the tax year end).

Form P11D(b) which is in effect a ‘cover sheet’ to the P11Ds and shows the amount of Class 1a NI payable on the total benefits provided by the employer in the year carries penalties for late submission of £100 per month (or part thereof).

There are special rules for calculating most benefits. If these benefits are provided to employees, we would let you know what information was needed and calculate the value of the benefit from this.

Benefits Provided Instead of Cash (salary sacrifice/optional remuneration arrangements)

From 6 April 2017 there are new rules where benefits are provided instead of a cash payment.

So perhaps an employee takes a salary reduction to have a company car, or, a new employee is offered £X salary or £Y (lower) salary and a benefit of some kind, or, an employee is offered £X per month Car Allowance or a company car.

In these cases the taxable benefit is the higher of the cash foregone or the value of the benefit under normal rules.

Note that this could make previously exempt benefits taxable if they are provided instead of cash/salary (eg Mobile Phones, Workplace Car Parking).

If any benefits are provided on this basis, you need to assess the taxable amount on the correct basis.

Expenses

Forms P11D should also record the payment of certain expenses to/for employees/directors:

The main items included are:

  1. Home telephone lines
  2. Professional subscriptions

These have to be declared, even where there is no “benefit” to the employee because all the expenses are for business purposes. It is then for the employee to make a claim to HMRC that these are for business purposes, and hence not taxable.

Note that mileage expenses paid for business travel in a private car do not have to be declared provided that they are paid at or below the allowed limits (currently 45p for the first 10,000 business miles in tax year, 25p thereafter). You must, however, ensure that the claims are correct in that only business mileage is claimed for.

The inclusion of some of these expenses is where the problems arise. It can be a huge task, even in the smaller business, to produce the information required to make the correct declarations on forms P11D.

It is often the case that some of these expenses are not included on the forms, and we too are guilty of completing many on this basis on behalf of our clients, as they are unable to provide the accurate details required.

The penalty for submitting an incorrect P11D is upto 100% of the tax shown on the return.

The penalty for not submitting a P11D when one was due is:

Initial amount of up to £300 then

Up to £60 per day for continuing failure

Whilst these aren’t often imposed, HMRC have the right to issue them.

Exemptions / Flat Rate Allowances

The following expenses also used to have to be declared on forms P11D:

  1. Travel (e.g. train fares, taxis, flights, hotels)
  2. Subsistence (meals & refreshments whilst away from normal place of work) c. Entertaining (customers/clients and other business contacts)
  3. Expenditure on a company credit card

unless upto 5 April 2016, a dispensation was obtained – a process whereby, with HMRC approval, there was no requirement for the expenses to be reported as they accepted they were for business purposes.

From 6 April 2016, existing dispensations were abolished and replaced by an exemption which covers most tax-allowable expenses including those listed above.

There is a requirement that employers have systems in place so that they can demonstrate that someone other than the employee checked that the reimbursement related to qualifying business expenses and that they are not excessive.

Expenses provided under a relevant salary sacrifice arrangement are not covered by the above exemption, and should be subjected to tax/NI via PAYE.

Any expenses that do not meet the rules for the exemption should continue to be disclosed on form s P11D.

If you wish to play a flat rate allowance to employees for expenses (eg. £30 per night for B&B when employees worked away), this must be either a bespoke rate agreed with HMRC, or a benchmark rate as set by HMRC – see https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim0523

If you wish to pay a bespoke rate (which would include industry/sector standard rates), you would need to apply to HMRC for an agreement (known as an approval notice). HMRC would require evidence that the rates suggested are based on employees’ actual expenses before approving the bespoke rate, by the carrying out of a sampling exercise.

If you pay more than benchmark scale rates or any approved bespoke rate, the excess needs to be subjected to tax/NI via PAYE.

Note though that whether you pay a bespoke agreed rate or a Benchmark rate you must still have a system in place to check that the rates are only paid when due and that they are being paid at a reasonable rate. This requires the employees to obtain and retain receipts for expenditure so that you can randomly check that they are spending around the same amount as the flat rate you are paying to them.

If you had an old dispensation which included flat rate allowances, you can still use these rates for 5 years from when they were agreed with HMRC (even if this was before 6 April 2016), but you should apply to HMRC for them to convert it into an Approval Notice.

Trivial Benefits

From 6 April 2016, trivial benefits provided by employers (such as flowers, chocolates, a meal out) do not have to be disclosed on the P11D and hence do not incur tax or NIC for either employer or employee, provided they meet certain conditions.

These are that the benefit must cost no more than £50, it is not a reward for services or is contractual and must not be in cash or a cash voucher. Eg. a member of staff locks up the office every night. The employer buys them a bouquet of flowers every quarter as a ‘thankyou’ for this. This would not be exempt as it is a reward for services.

There is no limit on the number of trivial benefits that an employer can provide but directors (including benefits provided to members of their family or household) are subject to a £300 per annum cap.

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