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Reaping the Benefits

Ben Chaplin explains some of the initiatives coming from HMRC that accountants need to be aware of:

There is a continuing drive to make the taxpayer more responsible for both the accuracy of the information provided to HMRC and when such information must be provided. This will culminate with the introduction of Making Tax Digital, for which little practical information is available at present. This article provides an overview of some of the changes introduced so far that affect employers and especially small companies.

Forms P11D – Reporting taxable expenses and benefits

The most important change was introduced by Finance Act 2015 whereby employers must self-regulate which expenses payments are allowable for tax purposes with effect from 6 April 2016.

Forms P11D, up to and including 2015/16, had to include benefits and all expenses paid to or for an employee, irrespective of whether they were allowable expenses or not (subject to dispensations being obtained).

For forms P11D from 2016/17, only taxable benefits and expenses are shown. The relevant legislation is contained in S289A to S289E ITEPA 2003. All existing dispensations ceased to have effect and instead employers must apply to HMRC for ‘bespoke arrangements’.

HMRC has a table of exempt benefits and expenses in their Employment Income Manual at page EIM21241.

These changes save time for HMRC, not the employer. HMRC can now amend PAYE codes (or raise ‘simple assessments’) knowing that P11D entries are fully taxable and are not subject to a later expenses claim. Conversely, the employer has the obligation to ensure they know which expenses are allowable and which are taxable – not always a straightforward matter. In addition, the employer will be expected to have accurate record-keeping arrangements in place to substantiate their decisions.

Extra care will need to be taken regarding cash expenses, for example travel and subsistence. HMRC are known

to maintain that non-allowable cash payments are subject to PAYE as pay and should not appear on form P11D.

No doubt future HMRC PAYE reviews will include increased interest in this area.

Trivial benefits

In order to help the employer with the above P11D obligations, Finance Act 2016 introduced s323A ITEPA 2003, which sets out a welcome statutory exemption for trivial benefits. Not surprisingly there are conditions that are broadly as follows (and note particularly the no employment reward condition):

  • the cost of providing the benefit does not exceed £50.
  • the benefit is not cash or a cash voucher.
  • the employee is not entitled to the benefit as part of any contractual obligation.
  • the benefit is not provided in reward for services performed by the employee.
  • the benefit to a close company director/office holder (or a member of their family or household) is capped at a total cost of £300 in the tax year.

This exemption is clearly aimed at gifts on events such as birthdays, weddings, Christmas, etc. Employers should be very careful if they attempt to use the exemption for anything else.

Making good of benefits in kind

The rules determining when an employee ‘makes good’ a benefit by reimbursement, etc., were always overly complicated. There were different rules for different benefits and some benefits had no specific rules at all leading to much confusion and cases being heard before the Tribunals.

Clause 1 of the second Finance Bill 2017 (still a Bill at the time of writing this article) introduces simplification from 6 April 2017 so that an employee must make good any benefit in kind by 6 July after the tax year in which the benefit arises. Note that the changes only affect benefits in kind under Chapters 4 to 10 of Part 3 ITEPA 2003, not expenses payments under Chapter 3.

For example, an employer may provide a company car or van to an employee in 2017/18 and pay all for fuel costs. The employee will have to make good all private fuel costs by 6 July 2018 in order to avoid a fuel benefit charge.

The draft legislation does not introduce a new definition of ‘making good’, and so the existing meaning continues to apply. HMRC state in their Employment Income Manual at page EIM21120: “Usually the employee will ‘make good’:

  • by a direct payment, or
  • by deduction from salary, or
  • by a suitable debit to the employee’s current account in the employer’s books and records.

Any of these methods is acceptable.”

This change should also be borne in mind when preparing the annual company accounts for smaller companies. Benefits in kind cannot be ‘made good’ by journal entries to the director’s loan account after the 6 July statutory deadline.

  • Ben Chaplin is Managing Director of CronerTaxwise

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