How to Stay Safe from HMRC
5 December 15 | By: Jas Jhooty
From next April you can start to payroll your benefits-in-kind (BiKs). In this article we discuss the considerations you should be taking into account when arriving at a decision of whether or not to payroll your BiKs.
Payrolling of BiKs results in employees paying tax on their employer provided BiK at the time they receive the BiK, therefore removing any possibility of underpayments of tax occurring. The current system of waiting until after the end of the tax year to submit BiK details on P11D forms results in provided benefits not being coded out for significant periods of time, during which significant underpayments can arise.
Unfortunately, it is a common assumption amongst most employers that it is only “simpler” benefits-in-kind that are easy to payroll. Even HMRC have acknowledged this with certain BiKs (e.g. loan benefits) being deemed unsuitable for payrolling.
HMRC are keen to see payrolling of BiKs being taken up by most employers as this will result in many less P11D returns requiring to be processed by them, thus helping them to deliver mandated efficiency savings. But it remains a fact that more complex benefits such as company cars are not as easy to payroll as simpler BiKs such as medical benefits.
However if HMRC get their wish, and employers start to payroll “easy” benefits en masse, then the number of P11Ds submitted annually will drop by around 90%.
Before employers embark on a new programme of payrolling their employees’ BiKs they need to streamline the flow of information relating to the benefit data points that are necessary to calculate the cash equivalents of BiKs. Traditionally BiKs data is held by various disparate departments within an organisation. E.g. company car information is held in the fleet department, medical benefits are often held in either the HR system or the Finance system etc.
Methods need to be explored in how to enable the payroll department to quickly and efficiently gather the required cash equivalent data on a regular basis, be able to validate this for any inaccuracies and then calculate the required notional pay pertaining to each BiK that is to be payrolled for that earnings period.
After exploring these avenues, interested employers may decide that initially they are only capable of payrolling the simpler benefits such as medical BiKs. Once the decision has been reached the employer should register their intent to payroll selected benefits via HMRC’s Payroll Registration Service which is accessible through your Employer’s Tax Account. The default setting on this system is to remove the selected benefit type from all of your employees who have a coding restriction for that benefit type included in their tax code and then manually deselect those employees for whom you still want to complete P11Ds for that benefit type.
It is much more likely that larger organisations will adopt payrolling of BiKs in greater numbers than smaller employers. This is because larger employers are much more likely to have the in-house resource to be able to develop the benefit data flows of information required for successful payrolling BiKs.
A lot of larger employers already payroll BiKs on an informal basis, but they are still required to complete end-of-year P11Ds despite the fact that the benefit has already been payrolled. These employers will be the first to sign up, as P11Ds will no longer be required for any payrolled BiKs.
It is also likely that employers with proactive payroll departments who want to lower the number of tax code related queries they receive regarding BiKs, will also be very interested in exploring payrolling their BiKs.
It is also expected that smaller employers who provide professional services (e.g. accountancy firms, architects, financial advisors etc.) will also be much more likely to be early adopters to payroll BiKs. This is because these types of employers tend to provide simple BiKs (e.g. medical BiKs) to all of their employees.
It is highly likely that it will be mainly payroll departments who take the lead when it comes to making a decision on whether or not they should payroll their BiKs. However other interested departments may also be driving the need to payroll BiKs. For example, the Fleet department may want to take control to ensure that new company cars allocated to drivers are being taxed correctly and on time.
Human Resource departments may also be interested in having a say as the decision to payroll BiKs can be seen as a tool for staff retention. This is because employees can be convinced that by working for an employer who payrolls BiKs, they will not experience any unexpected nasty tax related surprises when HMRC finally get around to processing their P11D.
The IT department may also be called upon to possibly develop the benefits data flow routines. The availability of this resource will be a key factor in how quickly an employer is able to payroll their BiKs.
The simpler benefits such as medical benefits can be easily payrolled. In most cases all it requires is a regular feed from the Finance system or the HR system of how much has been paid in particular period.
However for more complex BiKs that rely on various data points to perform a calculation of the cash equivalent (e.g. car benefit) it is not such an easy proposition. In the ideal world your existing P11D software solution should be able calculate the periodic values of notional pay pertaining to the cash equivalents of payrolled BiKs. However most P11D solutions have not been designed to be used all year round and are merely simple end-of-year form fillers. Even the better commercial systems that can be used all year round to calculate real-time BiK details do not produce reliable figures for notional pay. The best interested employers can hope to do is to extract the annual combined figure for a particular benefit type and manually calculate the periodic notional pay figure using spreadsheets.
Another alternative method may be to store the current calculated annual total figure relating to benefits in your payroll system, and then let the payroll system divide and calculate the annual figure into periodic notional pay figures. Again this methodology is dependent on the functionality of your payroll system.
One thing is certain though, payroll software providers will not be developing any BiK cash equivalent calculation functionality any time soon.
Employers need to be able to quickly validate the supplied benefits data for accuracy. Their chosen BiK/P11D software should be able to produce exception reports of invalid benefits data to be sent back to the data provider to correct at source. E.g. there should be automatic checks to ensure that a company car is being exclusively used by one employee at any given time. If there are any overlapping dates of use, the Fleet department should be notified and they should correct the Fleet system so that any future feeds do not contain any invalid data.
If an employee’s BiKs are payrolled they will no longer receive a P11D form. However best practice would be that employers are able to provide an explanation to employees of how the figures for their notional pay as shown on the payslip have been calculated.
Hopefully your chosen payroll system allows for the entry of different types of notional pay. E.g. If an employee has an annual company car benefit of £5,400 and a medical benefit of £600 then it would be more informative to show a split of the notional pay on the payslip each month as CAR £450 and MED £50 rather than BiKs £600.
It should also be considered whether or not you should provide a breakdown of how the various figures relating to notional pay have been calculated. To minimise employee enquiries, it would be best to produce such benefits statements any time an employee’s benefits provisioning changed.
We have tried to provide a good overview of all of the points you should be taking into considerations when deciding whether or not you should take the plunge and decide to payroll your BiKs.
If you are interested, you need start to prepare how you intend to develop workflows that will allow the reporting and processing of benefits information in a real-time environment. Our consultants are well versed in the practical problems surrounding obtaining accurate benefits information and can advise you of best practice solutions to develop such workflows.
If you are interested in this or any other employment tax service please do not hesitate to contact us.