01 March 2021
Gemma Mullis ACIPP, CIPP policy and research officer, discusses salient issues and provides timely reminders
Whilst the coronavirus pandemic has dominated almost every aspect of life, what is deemed as ‘business as usual’ tasks still need to be considered by the payroll industry, even more so with the end of the tax year approaching.
Almost every business offers their employees some sort of benefit, the majority of which will need to be reported to HM Revenue & Customs (HMRC). How this is done will depend on the choices the employer makes.
Payrolling of benefits
Since 6 April 2016, employers have been able to register to payroll their benefits, meaning that the taxable benefits given to their employees would cease to be reported via a P11D return, but the relevant income tax and class 1 National Insurance contributions (NICs) would be processed via pay as you earn (PAYE) each pay period. Most benefits can be payrolled, with the exceptions of employer-provided living accommodation and interest-free and low interest (beneficial) loans. If these benefits incur a tax liability, they must still be reported via a P11D.
Although reporting benefits via a P11D return is not required if they are payrolled, the employer still needs to complete and submit a P11D(b) return where class 1A NICs liability applies to them.
Employers intending to payroll benefits and expenses must register to do so with HMRC. This is done by using the payrolling employees taxable benefits and expenses service (https://bit.ly/2MclA64) before the start of the tax year. When registering, employers must select which benefits they wish to payroll. This only needs to be done in the first year, as there is no requirement to reconfirm for each subsequent tax year.
Where the registration deadline has been missed, employers will be unable to payroll employees benefits for that tax year, unless they have a valid reason. If this is the case, HMRC will agree with the employer that they can informally payroll in which event they can payroll the benefits and collect the associated liabilities via PAYE; however, they will still need to complete P11D returns for their employees, making a note in each that the benefit has been processed via PAYE.
...letters must include details of the benefits that are payrolled...
If an employer chooses to stop payrolling a benefit, this will also need to be actioned before the start of the tax year in which payrolling is to cease. If the tax year in question has started, the employer must wait until the end of the tax year before stopping. The employer will still need to continue to deduct tax each payday and report this deduction via PAYE.
Once an employer has registered to payroll benefits, employees must be provided with a letter explaining that their benefits will be payrolled, and an explanation of what that means for them. The letters must include details of the benefits that are payrolled, with information provided about:
- the cash equivalent of each benefit payrolled
- the relevant amount that has been payrolled for optional remuneration arrangements (OpRA)
- benefits that have not been payrolled.
Annual statements should also be issued to give the employees details of their payrolled benefits, which must be provided before 1 June after the end of each tax year. This information can be given via an employee’s payslip, however, it should be clear to the employees which benefits have been subject to PAYE tax, and how much of the value of each benefit the employer has collected and reported tax on. If an employee files a self-assessment tax return, they will need this information to inform HMRC.
Employers must tell new employees with payrolled benefits how these will be taxed, and advise them that:
- their tax code may be amended in relation to any benefits from previous employments
- the new benefit will not be included in their tax code
- any underpaid tax they may be paying through their existing tax code will still be collected this way.
The traditional method
Many companies still process benefits the traditional way, by completing and filing P11D returns. This is ether done by manually completing the form or processing via payroll software.
If this method is used, employers must complete and issue P11D returns by 6 July following the tax year to which the benefits relate, to both HMRC and employees. Benefits reported via a P11D are then reflected within the employee’s tax code HMRC sends to both the employer and employee accordingly.
Employees can check the calculation of their tax codes by logging into their personal tax account.
Payrolling v P11D
Whilst both ways of reporting benefits have their pros and cons, the payrolling of benefits offers better clarity to employees of the effect that benefits derived from their employment have on their pay. Employees are taxed in real time for such benefits and do not have to wait for their tax codes to be adjusted, meaning that the cost of the benefit is processed each pay period, and they do not have to wait until halfway through the following tax year to pay tax on that benefit.
...a PSA remains valid until it is cancelled or varied.
Class 1A NICs
Regardless of which method is chosen to report expenses given to employees, any benefits provided that attract class 1A NICs liabilities must be submitted via a P11D(b) return. Employers are still required to calculate these NICs on the cash equivalent (or relevant amount for OpRA) and complete the P11D(b).
Details of benefits supplied throughout the tax year should be recorded to enable employers to accurately report and submit P11D(b) returns by 6 July after the end of the tax year. Details of how to complete the return (and a template) are available at https://bit.ly/39OOr8V.
PAYE settlement agreements
Sometimes, a benefit may be provided which the employer wishes to include in a PAYE settlement agreement (PSA). Employers must apply to HMRC to gain a PSA, but once in place a PSA remains valid until it is cancelled or varied. An employer wishing to change or cancel a PSA must send details to the HMRC office which issued it.
Employers will need to report any outstanding tax and NICs due on benefits and expenses using P11D returns and form PSA1 accordingly, with tax and class 1B NICs due arising from a PSA being paid by 19 or 22 October after the tax year in question.
Any class 1A NICs owed on expenses or benefits reported in P11D returns are to be paid by 19 or 22 July after the tax year in question.
Any benefits provided after a PSA has been cancelled will need to be reported via either payrolling or P11D returns.
Although there is not a deadline imposed on the employer for sending HMRC details of a PSA, there is for payment of the liabilities that arise from it. Good practice, however, is to send the PSA to HMRC as soon as possible in order for it to issue a remittance of what needs to be paid. Employers are reminded that they should not wait for a remittance to be received from HMRC in order to make their PSA payment.
Covid-19 and its effects
With the constant changes that occurred during 2020 due to the pandemic, every aspect of ‘business as usual’ tasks have been affected, including how some benefits will now be reported, with some not needing to be reported at all. Items that relate to working from home now fall into new exemptions as well as employers providing or reimbursing Covid-19 tests, which have no tax and NICs liability.
Employees who are provided with cycles or cycle safety equipment under cycle to work schemes prior to 20 December 2020 will now not have to meet the conditions which would exempt them from tax and NICs until June 2022.
HMRC has also added Covid-19 as a reasonable excuse if an employer doesn’t meet the filing/payment deadlines. In cases where this happens, employers must be aware that in order to appeal a fine, the liability must be fulfilled (meaning the filing has been sent or the payment been made) for a reasonable excuse to stand.
Guidance (https://bit.ly/2XXCY1g) now states: “If you or your business have been affected by coronavirus (Covid-19), HMRC will give you an extra three months to appeal any decision dated February 2020 or later. Send your appeal as soon as you can, and explain the delay is because of coronavirus.”
Unaffected by the pandemic are the statutory deadlines imposed by HMRC. It would be good practice to keep a note of the entries in the table.
|What needs to be done||Deadline|
|Register for payrolling||5 April, for the year the employer wishes to payroll|
|Send a statement to employees of payroll benefits||1 June, following the end of the tax year|
|Submit P11D returns online to HMRC||6 July, following the end of the tax year|
|Give employees a copy of the information in the returns||6 July|
|Tell HMRC the amount of class 1A NICs in the P11D(b) return||6 July|
|Pay any class 1A NICs due||22 July (19 July if paying by cheque)|
|Pay tax and class 1B NICs due under a PSA||22 October (19 October if paying by cheque)|
|Pay PAYE tax or class 1 NICs owed on expenses or benefits that have been payrolled||Monthly through payroll|
Featured in the March 2021 issue of Professional in Payroll, Pensions and Reward. Correct at time of publication.