01 December 2021

An enduring part of payroll work around the globe is dealing with benefits in kind (BIKs). In the first of an occasional series, Tim Kelsey FCIPP AIPA, global payroll consultant at Kelsey’s Payroll Services looks at how payroll deals with this important topic in other countries, all over the world


How many of us realise that the work perks comes from the more formal English word ‘perquisites’? Because this is the description that will often be applied in other English-speaking countries, from India to Jamaica, when describing the provision of BIKs to employees. The provision of perks, whether they are taxable, and what value to use when assigning them to tax will be a major challenge for any payroller required to work on multiple jurisdictions. Let’s start by considering how different the UK’s approach is from the rest of the world.

Firstly, the provision of benefits to employees is more likely to involve mandatory payrolling. Whilst some jurisdictions do follow the UK’s approach of merely relying on mandatory reporting (the approach taken in Hong Kong and Singapore, for example), it is far more likely that the employer will be required to process benefits for taxation via payroll at the time the benefit is provided. Secondly, the UK’s approach of not subjecting a benefit to employee social security contributions is, again, in the minority – most countries require the employee to pay a social security contribution on the value of any perks, and for this to be reflected in the earnings then used to calculate social security benefits. Lastly, the position of requiring an employer to pay a completely different category of social security contribution through class 1A National Insurance (NI) is also unusual – the employer will usually pay the standard employer contribution on a benefit using the same rules and rates applied to cash payments.

 

How different benefits are treated

One of the most comprehensive benefits provided by employers the world over is the provision of meal vouchers. And, of course, the UK used to agree with this approach with the award of a three-shilling tax-free voucher per day. When this concession was finally abolished in 2013, it wasn’t missed – what with three shillings being worth only fifteen pence. But it certainly would be missed in other countries. The pattern is for a voucher to be tax-free provided the employee makes a minimum contribution towards it. The table below summarises some of the meal voucher schemes available around the world.

Each of these schemes requires information on the vouchers provided to be recorded on payroll, and for any employee contribution to be deducted from pay. And, of course, if the maximum tax-free amounts are exceeded, any balance will need to be payrolled and subject to full deduction.

The provision of a company car is also one of those perennial benefits that employees value around the globe. As tax policies are used with the aim of having positive impacts on the environment, the methods of valorisation often use a similar approach to the UK by looking at CO2 emissions. Other countries will look at a percentage of list price – the Republic of Ireland used a standard percentage of 30% of original market value to set the annual taxable income represented by the provision of a car. This percentage is reduced should the user achieve high business miles. But the benefit is valued on the basis that the provision of fuel is automatically provided by the employer, and there is no reduction in the value should the employer not provide it. Indeed, should the employer then wish to pay the employee cash towards the cost of fuel used on business trips, this is considered fully taxable in Ireland. So, it makes sense to provide a fuel card to all employees and then get reimbursement for any private fuel used. This is then considered as an amount made good for the use of the vehicle and will accordingly reduce the value of the taxable BIK.

The payroll reporting of BIKs can also be somewhat more complex than the voluntary payrolling requirements in the UK. The P11D form requires us to classify benefits into a number of sections on the form. Payroll reporting in other countries requires the same level of detail, with private medical insurance reported separately from the provision of a car. The Nordic countries have detailed reporting requirements, with Norway requiring the breakdown of benefits provided into over twenty categories. We therefore need to know the exact nature of each benefit provided as well as its value in order to report information correctly.

 

How different countries treat benefits

Everyone in the UK likes a trivial benefit, the tax concession that allows employers to provide up to £50 worth of benefits not provided as a direct reward for service tax-free. Other countries push this much further. The Republic of Ireland allows employers to provide benefits (items, not cash) up to the value of €500 per year free of tax, universal social charge and pay related social insurance. For the last two years, the government there has further liberalised the concession by allowing this to be the provision of multiple benefits with a combined value up to the threshold. Before the pandemic, this had been limited to the provision of the first benefit in the year. The Germans allow employers to provide up to €50 per month of benefits free of taxes to employees.

Many countries will allow the provision of transport tickets to get to work as a tax-free benefit. In Japan, an employer may provide a monthly travel pass worth up to Japanese Yen (JPY) 150,000 (roughly £980) completely free of tax and social insurance. Austria allows employers to provide any ticket (known as an Öffi-Ticket) to get to work by the most direct route as a tax-free benefit. Ireland allows for the operation of a salary sacrifice scheme for employer-provided tickets to use public transport to get to work.

The Philippines has an interesting concept known as de minimis benefits. These can be provided tax-free, provided they meet certain criteria. The purpose of providing de minimis benefits must be as a means of promoting the health, goodwill, contentment or efficiency of the company’s employees. There are several prescribed items, including certain cash allowances paid to cover the payment of unused vacation pay, the provision of uniforms and other clothing, laundry allowances to ensure this is kept spick and span and even the provision of a fifty-kilogram sack of rice each month.

We are also likely to encounter items which are considered tax-free in the UK generating a tax charge and payrolling requirements in other countries. Consider the provision of a mobile phone or laptop computer to an employee. The UK treats the provision of a single phone or computer as being an essential business tool and thus being tax-free regardless of the portion of private use. By contrast, Norway treats the provision of electronic communication tools as being a taxable benefit with a standard annual income valuation of Nowegian Krone (NOK) 4,392 (about £380). France allows the provision of new information and communication technology to be tax-free, provided that private use is restricted by a contractual clause. Private use must be incidental to the business use, and the employer is required to verify the exact cost of private use to prove it is ‘incidental’. Failure to do this to the satisfaction of the authorities will see a tax charge based on 10% of the cost of the particular item or service. Tedious, indeed, to do the administration on all of that.

It may not always be the employee who has a tax consequence when BIKs are provided. Some countries operate a fringe benefit tax (FBT), which falls on the employer, rather than the employee. The Philippines charge FBT at a rate of 35% on any benefits not meeting the de minimis definition provided to managerial or supervisory staff. Kenya charges FBT only on the provision of low or no-interest loans to employees, at a rate of 30% using an official interest rate of 7% to calculate the value of the benefit. Australia charges FBT at a whopping 47% of the value of the benefit provided, and to complicate matters further, uses a completely different fiscal year (1st April – 31st March, versus 1st July – 30th June) for the purposes of the calculation. Clearly any jurisdiction using an FBT does so wanting to discourage the provision of such benefits over providing cash to employees.

Finally, consider The Netherlands’ approach to providing benefits. All items provided to employees have to be classified as either salary (and thus are added to pay to be taxed accordingly) or WKR, standing for Werkkostewregeling. The employer has a cash budget calculated as 1.7% of the first €400,000 of their annual pay bill and 1.18% on the balance exceeding this threshold to use to provide items to employees – anything from providing free meals to staff to reimbursing an employee’s legal fees as part of negotiating a compromise agreement. Keep within the budget and that provision is wholly tax-free. But if the budget is exceeded then the employer (not the employee) is liable to an 80% tax charge on the excess. Tracking use of the budget versus the running total for the pay bill for the year is therefore a key payroll task in any Dutch company. A career-limiting move if we get those sums wrong! 


 

Featured in the December 2021 / January 2022 issue of Professional in Payroll, Pensions and Reward. Correct at time of publication.