Expenses and Benefits

It's that time of year again when UK employers and their accountants are busy gathering information on expenses and benefits provided to employees. This information has to be reported on P11D and P9D returns for the year ended 5 April 2010 by the deadline of 6 July 2010. The deadline for the related Class 1A NIC is 19 July 2010. So, it is worthwhile to look at how the system works.

Employers are required to use form P11D to report expenses and benefits provided to most company directors and employees earning more than ₤8,500 per year. A P11D is completed for each employee and the P11D(b) is used to report the Class 1A NIC payable to HM Revenue & Customs.

Expenses and benefits provided to employees earning less than ₤8,500 have to be reported on form P9D by the employer.

The ₤8,500 threshold includes wages or salary and expenses and benefits. This threshold has been in operation for many years and with the introduction of the National Minimum Wage, very few employees who are provided with expenses and benefits fall below the ₤8,500 threshold.

It is relatively easy to identify and calculate benefits such as car, van and fuel benefits but other benefits and expenses are trickier to identify and calculate. HM Revenue & Customs have provided an A to Z of expenses and benefits on their website which provides basic guidance on tax, NIC and reporting requirements for each type of expenses or benefit. This should make the task of completing returns easier.

For many employers, there is a large administrative burden in completing P11D and P9D returns which can be decreased by applying for P11d dispensations or PAYE settlement agreements.

P11D Dispensation

A dispensation is an agreement issued by HM Revenue & Customs that the employer does not have to report expenses and benefits on form P11D and the employee does not have to report them on their personal tax returns.

A dispensation may be backdated to the start of the current tax year i.e. apply and obtain a dispensation before 6 April 2011 and the dispensation will apply from 6 April 2010.

Employers should consider a P11D dispensation if they reimburse employees for their business expenses such as travel, meals, entertaining costs and subscriptions to professional bodies. It should also be considered if they pay round sum allowances for lunch, dinner or overnight stays to employees who are away from the office on business. The payments can then be made without tax or NIC deducted.

From 6 April 2008, HMRC would only agree scale rate payments paid to employees if a sampling exercise was carried out by the employer. Thankfully, HMRC introduced from 6 April 2009, benchmark scale rates for employers with dispensations which did not require a sampling exercise to be carried out. However, HMRC reserves the right to require a sampling exercise to be carried out if they are not satisfied that the payments do no more than cover the cost of the business related payments.

HM Revenue & Customs have also agreed benchmark scale rates for the UK and countries outside the UK.

PAYE Settlement Agreement (PSA)

Another alternative is a PSA which allows the employer to come to an agreement with HMRC to pay the tax on behalf of employees and also to pay Class 1B NIC on certain expenses and benefits supplied to employees. This means that the items do not have to be reported on forms P9D and P11D and employees do not have to include them on their tax return.

These expenses and benefits are generally minor, irregular or impractical to apply PAYE to. Examples are small gifts which do not qualify as trivial, incentive award schemes, long service awards, taxi fares and Christmas parties and entertainment which do not already qualify for relief. Of course, there are also expenses or benefits which can be provided to employees tax and NIC free, known as trivial benefits.

Recent Changes

Benefits related to vehicles have regularly been the target of Government tax rate changes. From 6 April 2010:

• The benefit charge for cars/vans propelled solely by electricity was reduced to nil for the next 5 years
• The figure used for calculating car fuel benefit increased from ₤16,900 to ₤18,000
• The company van fuel charge increased from ₤500 to ₤550

Advisory mileage rates were most recently changed on 1 December 2009 and considering how the price of fuel at the pumps is increasing, it is likely to be changed again soon.

Penalties

There are a range of penalties for late submission or incorrect returns P11D and P11D(b) as well as the new penalties for late payment of Class 1A NIC.

• P11D submitted after 6 July 2010-penalty not exceeding ₤300 with a further penalty not exceeding ₤60 a day if the failure continues.
• Incorrect P11D submitted-maximum penalty of ₤3000 per each incorrect P11D.
• P11D(b) submitted late-penalty of ₤100 per month or part of the month for every fifty or part-batch of fifty employees provided with benefits. The return must be received by 19 July to avoid the penalty.
• P11D(b) submitted more than 12 months late-penalty not exceeding the amount of the Class 1A NICs paid late.
• Incorrect P11D(b) made carelessly or deliberately-penalty not exceeding the difference between the amount of Class 1A NICs shown on the P11D(b) and the amount that should have been shown.
• Class 1A NIC paid late – new penalty regime applies with 5% penalty if payment is not made within 30 days of due date of 19 July 2010, an additional penalty 5% if not paid within 6 months and a further 5% if still unpaid after 12 months.

P11D compliance mistakes by employers could now be very costly as the new penalty regime may prove to be a lucrative source of revenue for the Government as shown in the examples below.

Example 1

Employer fails to submit P11Ds and P11D(b) as he is unaware of the need to report the benefits provided to employees.

This is discovered over 12 months later with Class 1A NIC payable of ₤9,000.

Potential Penalty
P11D submitted late	₤300
P11D(b) submitted late	12 × ₤100
P11D(b) submitted more than 12 months late	₤9,000
Class 1A NIC paid late	₤1,350
Total penalty	₤11,850

Example 2

Employer omits an expense from P11Ds for two employees but submitted all P11Ds and P11D(b) on time with related Class 1A NIC paid on time.

The amended P11Ds and amended P11D(b) with extra Class 1A NIC of ₤700 are sent to HM Revenue & Customs on 31 January 2011, more than 6 months after the due date of 6 July 2010.

Potential Penalty
Incorrect P11Ds	2 × ₤3,000
Incorrect P11D(b)	₤700
Class 1A NIC paid late	₤70
Total penalty	₤6,770

Therefore it is important for employers to ensure they are fully compliant with the expenses and benefits reporting requirements.

Denise Heaney is Senior Tax Manager, with PricewaterhouseCoopers LLP, Northern Ireland.
Email: denise.heaney@uk.pwc.com