Payrolling Benefits & P11D
Employers are increasingly using flexible arrangements to payroll what are benefits in kind – via the payroll operation. Often, but not exclusively, some of these arrangements coincide with flexible benefit schemes and salary sacrifice arrangements. However, some standard benefit items are often handled through what is referred to as ‘tax at source’.
If an employee receives £2,000 of medical benefit in the 2012/2013 tax year, this is reported to HMRC by 6 July 2013 and potentially the individual’s self-assessment submission is made in January 2014. This often results in an underpayment of tax for the 2012/2013 & 2013/2014 tax year. When HMRC catch-up, the individual receives a bill for the underpayments of tax, which in this example, can range from £400 to £900 per annum and the employee often owes two years of underpayment.
Sometimes, HMRC adjust the individual tax code to undertake the collection of the unpaid tax and adjust to collect future potential tax liability. Then the accusations start (and often from very senior personnel) – “Payroll has not collected the correct amount of tax”, “Why should I have to pay for someone else’s mistake”, “The employer must pay this underpayment” etc. – and some employers do pay it!
The reality is that PAYE often does not collect the correct amount of tax even though the employer is applying the correct calculation. It is purely a guestimate of liability. However, payrolling the benefit gets rid of this problem (or at least smooth’s its impact).
For example, with medical insurance, the payroll would apply a notional value of the monthly or weekly equivalent benefits amount, which would then be subjected to tax but no National Insurance (NI). The employee would pay the correct amount of tax on the benefits. However, there is only Employer NI due so the employer would be required to account for the Class 1A NI liability at the end of the relevant tax year. Class 1A NIC cannot currently be accounted via the payroll operation.
Some organisations would argue that to payroll benefits, an agreement has to be made with HMRC. Other will argue that no such agreement is required. Regardless of whether there is agreement or not, the practice of payrolling benefits has become increasingly popular.
The advantages for payrolling are numerous:
- The employer saves administrative time and costs;
- The employee pays the correct amount of tax when the benefit is received;
- Simplification of self-assessment as the benefits are already included in Taxable Gross reported to HMRC;
- No nasty shocks of underpayment in a year or two.
Due to common practice by many employers, HMRC had to make provision within its Real Time Information (or PAYE in Real Time – PiRT) reporting to allow the provision of separating out benefits in kind for Universal Credit Purposes. Without these being reported separately, the Department for Work and Pensions (DWP) would consider that an individual’s cash earnings had been inflated, which could adversely impact their social security entitlements.
HMRC instruct employers that “the value of any expenses and benefit in kind that you have payrolled must be reported on your FPS“ (the RTI Full Payment Submission). Employers “still have to send HMRC forms P11D or equivalent lists, even if you have entered into an arrangement to payroll benefit in kind and expenses. You may make yourselves liable for penalties if you fail to do so”.
If the employer payroll all the expenses and benefit paid to their employee, and file the P11D via electronic means, they must:
- Notify HMRC that they are sending P11D for Directors or Employees where payrolling has taken place in order to avoid incorrect processing of the data. HMRC now provide an online service for you to do this;
- Complete the ‘amount made good or from which tax deducted’ boxes;
- Complete the P11D (b) ensuring that the total expenses and benefits are provided irrespective of payrolling.
Where paper documents are submitted to HMRC, then the relevant forms and lists must indicate that the benefits have been operated through the payroll by marking the documents ‘PAYROLLED’.Simon Parsons
Director of Payments, Benefits & Compliance Strategies