If an employer provides an employee with anything other than pay then it will either be an expense or a benefit in kind (“BIK”) and may need to be included on the employee's annual Form P11D. A P11D should be submitted for each individual who receives BIKs or expenses and either earns in excess of £8,500 per annum, or is a company director. Common examples of P11D reportable items are company cars, company vans, employer provided accommodation, beneficial loans, medical insurance etc. However, it is important to note, that even business expenses (such as business travel, subsistence, business entertaining) may need to be included on the P11D; unless a P11D Reporting Dispensation is in place (see below).

Items recorded on Form P11D generally result in the employee having to pay income tax on the cash equivalent of the BIK or expense. The income tax will either be collected via the employees self-assessment tax return or through a PAYE tax coding notice amendment. The employer may also have a Class 1A NIC liability (12.8% in the 2010/11 tax year increasing to 13.8% in 2011/12) which would be payable to HMRC on 19 July after the end of the tax year. The Class 1A NIC liability is summarised on Form P11D(b) which should be submitted to HMRC along with Forms P11D.

Time Savers

There are a number of agreements that an employer can make with HMRC to remove the necessity of reporting certain items on P11Ds.

P11D Reporting Dispensation

A P11D Reporting Dispensation is an agreement between the employer and HMRC that certain expenses and BIKs can be provided to employees without the deduction of income tax or NIC – normally expenses incurred by employees in the performance of their duties. It also means that the employer does not have to report these expenses on the relevant employees’ P11D. Without a dispensation the employer would have to report all expenses and BIKs (including business expenses) on each employee's P11D. It is then the employee's responsibility to claim tax relief on their business expenses either by writing to their local tax office or via their self-assessment UK tax return. This obviously creates additional paper work for the employer, the employee and HMRC.

It is normally recommended that dispensations are updated every four years to take account of changes in tax legislation or the employers’ expense policy.

Trivial Benefits Agreement

It is also possible to agree with HMRC that small non cash gifts to staff (that would normally be taxable) are so minor and infrequent that they can be paid tax free and not reported on Form P11D. Such items would include a bottle of wine/box of chocolates at Christmas or a bunch of flowers on the occasion of marriage/birth of a child. HMRC do not specify a de minimis level but it is generally accepted that a gift not exceeding £30 will be accepted as trivial.

PAYE Settlement Agreement (“PSA”)

An employer can enter into a PSA with HMRC, whereby they agree to pay the income tax and NIC liability on the employee's behalf. Items included on a PSA can therefore be excluded from Form P11D. PSAs are useful when the employer does not want to impose a tax liability on the employee following a reward or gift e.g. provision of high street vouchers, staff entertaining, expensive Christmas gifts etc. However, employers should note that the tax liability is calculated on a grossed up basis and therefore can prove to be an expensive alternative.

Common Benefits In Kind

The list of items which may need to be reported on Form P11D is extensive. However, HMRC's “A to Z of Benefits” (http://www.hmrc.gov.uk/paye/exb/a-z/a/index.htm) provides a comprehensive list as well as detailing how each BIK should be treated for P11D purposes. For the majority of BIKs the taxable amount to be entered on Form P11D is simply the cost to the employer, however, this is not appropriate in all cases. In certain circumstances a “cash equivalent” needs to be calculated. A brief overview of some of the more common and complex BIKs is provided below.

Company Cars and Fuel

Company cars continue to be a popular benefit provided to employees. Where the car is available for private motoring (which it invariably is-as private motoring includes home to work travel) the cash equivalent is calculated as a percentage of the list price of the car. The percentage (normally between 15% – 35%) is based on the CO₂ emissions of the car. The more pollutant the car is, the higher the percentage.

If, in addition to a company car, the employer also provides fuel for the car for private journeys then an additional BIK arises. The cash equivalent will be £18,000 (for 2010/11) multiplied by the relevant CO₂ percentage of the vehicle. Employees should consider whether the income tax they pay on this benefit is advantageous, after considering the cost of the actual private miles they travel in tax year.

Company Vans

If a company owned van is available for private use then a BIK will arise. The cash equivalent for 2010/11 is £3,000 and if fuel is also provided, then an additional BIK of £500 will also arise.

HMRC's definition of private use is less restrictive for vans than it is for cars. For these purposes home to work travel is not classified as private use and insignificant private use will not result in a taxable BIK. HMRC provide an example of “insignificant” as taking a mattress to the dump once a year or making a slight detour to buy a newspaper on the way to work. Using the van for the weekly shop would not, for example, be classified as insignificant. HMRC require employers to keep adequate records to prove that no private use has been incurred.

Accommodation

The cash equivalent in respect of employer provided accommodation is the annual rateable value of the property in cases where the employer owns the property. In Northern Ireland this is the “gross rating value” that was established in 1976. In general, this is normally a negligible amount. However, if the property cost the employer in excess of £75,000, an additional charge arises. The additional cash equivalent is calculated by subtracting £75,000 from the cost of the property and multiplying the result by the official rate of interest at the start of the tax year. In 2010/11 the official rate of interest was 4%.

In cases where the employer rents the property for the employee, the BIK is the annual rental cost.

It should be noted that if the accommodation provided is customary, necessary to perform duties of the employment or for the security of the employee then no BIK will arise.

Beneficial Loans

Where an employer provides an employee with an interest free (or at a “beneficial rate”) loan in excess of £5,000 a taxable benefit in kind may arise. The cash equivalent of the loan is normally computed by multiplying the average loan outstanding in the tax year by the official rate of interest (less any interest rate applied on the loan). This BIK rule is commonly overlooked when a director's current account has been overdrawn during an accounting period.

Conclusion

The key to successful P11D completion is good record keeping. The administration burden and risk associated with P11Ds can be greatly reduced by agreeing a robust Dispensation, trivial benefits agreement and PSA with HMRC.

It should also be remembered that the penalties for late submission can be harsh. If form P11D(b) is filed late, the employer will be charged a penalty of £100 per 50 employees for each month the return is outstanding after the 6 July deadline. In addition, if the P11Ds are also filed late a maximum penalty of £300 per Form will also be levied. As if the financial penalties were not enough, employers also need to consider how their risk rating with HMRC will be affected by late filing; which determines the employers that will be selected for a PAYE review - an experience all employers would be keen to avoid!

David Lynas is an Associate Director with KPMG's Belfast Tax Department.

Email: david.lynas@kpmg.ie