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How you will be able to payroll your benefits-in-kind

26 August 15 | By: Jas Jhooty

P11D end

Report from HMRC’s consultation meeting on simplifying benefits and expenses – Part 2

On 14th August 2015 emTax attended a meeting (along with other stakeholders) with HMRC’s policy unit to provide our views on draft new regulations on three important new benefits and expenses measures. The measures being discussed were the: -

  • Abolition of the £8,500 threshold for those in ‘lower paid’ employment
  • Replacing the expenses dispensations regime with an exemption for paid and reimbursed expenses
  • Real time collection of tax on benefits in kind (BiK) and expenses through voluntary payrolling

A lot of important information was provided by HMRC during this meeting relating to the practical measures of how they intend to implement the above new measures. Last week’s article focussed on the first two measures. This week we are providing an in-depth analysis on how voluntary Payrolling of Benefits will operate in practice.

Payrolling – the voluntary framework

HMRC’s policy intention is to develop a framework to allow employers to payroll which:-

  • Is built on learning from organisations already informally payrolling;
  • Provides rules which are simple and easy to apply; and
  • Reduce the administrative burdens for employers and HMRC.

Initially it was announced that only four BiKs could be payrolled car, car fuel, private medical insurance and subscriptions. When the draft regulations were published it was announced that HMRC would be extending the framework so that it supports the payrolling of all BiKs – EXCEPT:-

  • beneficial loans;
  • accommodation; and
  • credit vouchers and tokens

From 2017 additional data about cars will be required.

Draft regulations

The draft regulations have been published and they set out how the framework will work. Employers have to register to payroll benefits before the start of the tax year: -

  • This will be done via the Payroll Registration Service which will be accessible via Your Employer’s Tax account.
  • Employers select which BiKs want to payroll. – Please note that all benefit types within a benefit section will have to be payrolled.
  • Then select any employees they want to exclude from payrolling. – Unfortunately this will be a manual process.
  • The default setting is that all employees will have their BiKs payrolled.
  • This automatically removes the (selected) BiKs from the employees’ tax codes and places flags on HMRC systems to stop them being reinstated by mistake.

Once payrolling has started, employers must continue for the whole tax year

  • BUT they don’t need to complete a P11D (or P46 Car) for payrolled benefits.
  • Individuals can be excluded in-year but only if the employee has insufficient income to pay the tax on their BiKs.
  • Employers can only stop payrolling in-year if they cease to offer the benefit(s).
  • Employers can start payrolling in-year if they are offering the BiK for the first time part way through the tax year.

Please also note the following: -

  • There is no change to the underlying cash equivalent formulae to arrive at taxable BiKs
  • There is no change to National Insurance position i.e. the Class 1A NIC will still have to be calculated and returned on the P11D b and paid as normal.
  • Employers also have to notify employees what is being and what has been payrolled. This can be done via the payslip or on an accompanying benefits statement. HMRC are not being over prescriptive on exactly what level of detail is required to be provided and are leaving it up to the employer to decide what is appropriate for their employees.

Calculating the Amounts to Payroll

The basic premise is that you calculate the value of the benefit in the usual way and then divide it by the number of the pay periods in the year.

  • Step 1 – Determine cash equivalent of BiK(s)
  • Step 2 – Identify the number of pay periods
  • Step 3 – Divide value by the pay periods
  • Step 4 – Add value as additional notional pay to payroll in each cycle

Changes to the Amount Payrolled Due to Errors in the Initial Calculation

The regulations set out what employers need to do when they discover that they haven’t calculated the value of the BiK correctly.

  • Step 5 – Determine what the cash equivalent should have been
  • Step 6 – Determine how many pay periods remain
  • Step 7 – Deduct value payrolled from new cash equivalent
  • Step 8 – Divide new value by the remaining pay periods
  • Step 9 – Add value as amended notional pay to payroll in each cycle

Changes to the Benefit

The regulations also set out what to do where the benefit that the employee is receiving changes part way through the year – for example the employee gets a new car

  • Step 10 – Determine value of new benefit
  • Step 11 – Determine how many pay periods remain
  • Step 12 – Divide value of new benefit by the remaining pay periods
  • Step 13 – Remove value attributed to old benefit from payroll
  • Step 14 – Add new value to payroll in each cycle

Making Good on Employer Provided Benefits

Where an employer is payrolling BiKs any making good must be done in year. Employers should be able to anticipate what the employee is going to make good and payroll a lesser amount. Where an employee hasn’t made good by the final pay period then the BiK must be payrolled in the final pay period.

There is one exemption for this in the regulations and that is for car fuel. Employees have 30 days from the final pay period to make good for their private mileage. This is because HMRC recognise that the payroll may close before then end of the month so it is not possible for the employee to make good.

However, if the employee doesn’t make good on their final fuel within 30 days then this must be payrolled. Where this happens employers are not able to anticipate that the employee will make good in the following year.

Failure to Make Good

Where an employee fails to make good the employer has to payroll the BiK in the remaining payperiod(s) of the year.

  • Payrolling – employee agreed to repay part of the car value
  • March: employee has not paid what he said he would
  • Before final pay period: recalculate value of BiK
  • Deduct value payrolled from new cash equivalent
  • Add value to final relevant payment

Where an employee fails to make good their private mileage even though the employer has anticipated that they will the employer must payroll these amounts on the following year.

  • Payrolling – employee agreed to repay fuel benefit
  • April CY+1: employee has not repaid private mileage
  • Calculate cash equivalent of fuel benefit charge
  • Divide value across pay periods in CY+1
  • Add new value to payroll in each cycle in CY+1

If an employee fails to make good then the employer must payroll the cash equivalent in the following year.

Where the Employee Has Insufficient Income

Where an employee has insufficient income (the tax would be more than 50% of their income) then the employer cannot payroll the BiKs. Where they think that the income will increase again in year then they can recalculate the amount they need to payroll in the remaining pay periods.

  • Payrolling
  • Employee on 2 months unpaid leave
  • Employee does not have enough income to pay tax on BiKs
  • Calculate value of reported benefit
  • Determine how many pay periods remain
  • Divide value of new benefit by the remaining pay periods
  • Add new value to payroll in each cycle

Where the Employee Has Insufficient Income (scenario 2)

Where the employee’s income drops and it isn’t expected to rise again in the year the employer needs to notify HMRC that this employee is an exemption to payroll and complete a P11D at the usual time.

  • Payrolling
  • Employee: maternity leave. SMP
  • Employer registers employee as exclusion via the Payroll Registration Service
  • Employer submits a P11D for employee

How emTax can help

emTax has been canvassing HMRC to develop a framework to allow interested employers to payroll benefits for many years, therefore we welcome these draft regulations.

In our opinion, employers need to be starting to prepare now on how they 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.

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