Expenses and Benefits28/Feb/2020
As the end of the tax year approaches, we thought it would be a good time to remind everyone of the rules around expenses and benefits from employment. The benefits code, as HMRC calls it applies to both directors and employees. Hopefully everyone is applying the code correctly but if there is anything new in this blog or you have any questions regarding the contents please contact us.
One of the following five obligations will normally apply depending on the expenses paid or benefits provided:
- report the expense or benefit on form P11D and, where a P11D or P11D(b) is completed, pay Class 1A National Insurance contributions (NICs)
- treat the expense or benefit as if it is a payment, adding the value to the employee's earnings and calculating PAYE tax
- add the item's value to the employee's earnings for Class 1 NICs purposes (where the item attracts a Class 1 NICs charge) through the payroll
- there is no tax or NICs to pay, but at the end of the tax year the expense or benefit is reported on form P11D
- there are no reporting requirements and no tax or NICs to pay.
Exempt expenses and PAYE Settlement Agreements
To reduce the paperwork for expenses and benefits there are two separate schemes:
PAYE Settlement Agreements
A PAYE Settlement Agreement (PSA) is a scheme that can be used to settle any PAYE (Pay As You Earn) tax and National Insurance contributions (NICs) due on three types of expense and benefit:
- minor items
- irregular items
- items where it is impractical to operate PAYE or to value the items for P11D purposes.
A PSA can include expenses such as incidental travel costs, taxi fares and annual staff parties.
Employers wishing to pay or reimburse expenses are able to do so under the provisions of an exemption, with no deductions for tax or NICs, where they either pay or reimburse in an approved way or where the expense is fully deductible.
Areas of risk
A company car and van relates to any business vehicle provided to a director or employee. Mistakes can arise when there is an element of private use or private fuel which are not detected and are not reported on the relevant documents.
Travel and subsistence
Ordinarily, tax and NICs are not chargeable on business travelling expenses providing they are necessarily incurred on travelling in the performance of the duties of employment.
Some directors' or employees' personal bills may be allowable providing they are wholly, exclusively and necessarily incurred in the performance of their duties, for example where additional expenses are incurred when an employee works at home under a home working arrangement.
Use or transfer of assets
The term asset can cover a wide range of items and there are different rules if an asset is made available to use rather than transferring ownership.
Benefits are exempt from tax and NICs if all the following provisions are satisfied:
- the cost of providing the benefit does not exceed £50 (or the average cost per employee if a benefit is provided to a group of employees and it is impractical to work out the exact cost per person);
- the benefit is not cash or a cash voucher;
- the employee is not entitled to the benefit as part of their employment conditions; and
- the employer does not provide the benefit in recognition of particular services provided by the employee.
Where the employer is a close company and the benefit is provided to a director or office holder of the company (or to a member of their family or household) the exemption is restricted at a total cost of £300 in the tax year.
Payrolled expenses and benefits
The advantage of payrolling is that it removes the end of year obligation to complete form P11D. Employees also have a stronger understanding of their tax code as the benefit is removed and also tax is paid in time, avoiding any unwanted end of year payments.
Good record keeping is vital, and an employer must be able to demonstrate that the end of year expenses and benefits forms are correct.
A record of the date and details of the expenses and benefits provided should be retained together with documents and a record of any payments made by a director or employee contributing to the cost of expenses and benefits provided to them.
Optional remuneration arrangements
Optional remuneration arrangements are agreements under which an employee gives up the right, or the future right, to salary (commonly called salary sacrifice) or the right to some other form of cash remuneration in return for the benefit. They include flexible benefit packages with a cash option.