Now that the evenings are getting longer and summer is almost upon us, it's time for the annual P11D form filling exercise. This compliance process also presents an opportunity to discuss the tax implications of benefits being provided in the current tax year, with a view to minimising costs.

Taxing the Company Car

One of the most common benefits-in-kind (‘BIK’) reported on the form P11D (Return of Expenses and Benefits) is the company car. For the last ten years, company car tax (and the associated Class 1A National Insurance Contributions) charge has been calculated by reference to a car's ‘green’ credentials, with drivers of clean, low emission cars being rewarded with lower tax bills. However, now that more and more cars are meeting these credentials, the rewards are being withdrawn.

At Budget 2012 details of the proposed charges for the next four years were provided. In 2011/12 the tax charge for a petrol car with CO2 emissions of 120g/km was based on 10% of list price. In 2012/13 the tax charge for that same car has increased to 15% of list price and by 2016/17 the charge will have increased to 21% of list price. Even very low emission cars will see an increase. A petrol car with CO2 emissions of 75g/km will have had a tax charge based on 5% of list price in 2011/12, rising to 15% of list price in 2016/17.

At the other end of the scale, a petrol car with CO2 emissions of 220g/km will have had a tax charge based on 33% of list price in 2011/12, 35% from 2012/13 to 2014/15 and 37% in 2015/16 and 2016/17. The 3% diesel supplement that currently applies is to be withdrawn from 2016/17 onwards.

HMRC have calculated that, on average, the impact of the changes to the car benefit percentages will be to give year on year increases in the tax paid by an employee driving a petrol company car of £70 in 2014/15, £165 in 2015/16 and £165 in 2016/17. An employee driving a diesel company car will see average increases of £85 in 2014/15 and £190 in 2015/16, followed by a reduction of £85 in 2016/17.

Case Study

For company car drivers that have their private fuel paid for by their employer, the tax hikes will be even steeper, with an increase in the multiplier from £18,800 to £20,200 with effect from 2012/13, and a further increase at 2% above the rate of inflation to be applied in 2013/14. HMRC calculate that a basic rate taxpayer driving a typical car, such as a Ford Focus, will be paying approximately £100 more tax and a higher rate taxpayer around £200 more tax in 2012/13 compared with what they paid in 2011/12.

Dave drives a three year old petrol car worth £7,500 with CO2 emissions of 169g/km and a list price of £17,600. His newly hired colleague, Susan, is provided with the newly released equivalent model with CO2 emissions of 136g/km and a list price of £19,500. Both Dave and Susan are higher rate taxpayers. The company car tax charges will be as follows:

Year	Dave			Susan
	%age	Taxable	Tax due	%age	Taxable	Tax due
		£	£		£	£
2011/12	22	3,872	1,549	17	3,315	1,326
2012/13	24	4,224	1,690	18	3,510	1,404
2013/14	25	4,400	1,760	19	3,705	1,482
2014/15	26	4,576	1,830	20	3,900	1,560
2015/16	28	4,928	1,971	22	4,290	1,716
2016/17	30	5,280	2,112	24	4,680	1,872

The increase in the fuel benefit multiplier makes it more important than ever to keep proper records; if this benefit is not being provided. The fuel benefit is an all or nothing charge. If the fuel cost of even one private journey is met by the employer, then the fuel benefit charge should be applied. It is possible to withdraw the benefit part way through a tax year but only if no private fuel is provided after the date of withdrawal.

In the event of a compliance check by HMRC it will be necessary to provide records proving that no element of private fuel has been paid for by the employer. If these records are not available or are not complete, HMRC will seek to apply the benefit and collect the resulting tax/National Insurance Contributions (NICs) due.

It should also be remembered that the cap on list price for the calculation of company car benefit was removed with effect from 6 April 2011. Those employers who provide cars with a list price of more than £80,000 will see a big increase in their Class 1A NICs charge in July, while the drivers of such cars will have suffered a similar hike in their tax bill.

As the company car tax charges increase, care should be taken to ensure that HMRC are kept updated with changes in company car provision. It is a requirement to submit a form P46 (Car) within 28 days of the end of the quarter in which a car is first provided to or is withdrawn from an employee. It is also possible for the employer to inform HMRC online of replacement cars and this would be good practice to ensure that fluctuations in the company car tax charge are dealt with in a timely manner.

Dispensations

It is widely known that subscriptions paid to professional bodies included in the HMRC ‘List 3’ are an allowable expense for income tax purposes. However, there is still a requirement to report these amounts on the P11D if they are paid by the employer. The employee then claims a deduction for the amount included. This has the effect of cancelling out the charge imposed by the P11D.

This rather unwieldy process can be circumvented by applying for a dispensation.

The purpose of a dispensation is to reach agreement between the employer and HMRC regarding payments of expenses and benefits for which the employee would be able to claim a tax deduction i.e. that are wholly, exclusively and necessarily incurred in the performance of their employment duties. Any payments covered by a dispensation do not need to be reported on form P11D, so no corresponding claim for tax relief is required by the employee.

Other payments suitable for inclusion on a dispensation include certain travel and subsistence payments and payments for the business use of a home telephone.

Tax-Free Benefits

If an employee uses their own car for business travel then tax free amounts can be paid within the Approved Mileage Allowance Payments (AMAP) rates. These payments do not need to be reported on form P11D and do not require a dispensation.

If an employer does not pay for business mileage, or pays at less than the statutory allowed rates, employees can claim tax relief on the difference between what is received and what is allowed under the approved rates. It may be necessary to explain to these employees that this does not mean that HMRC will pay them 45p per business mile!

Other tax-free benefits that do not need to be reported on form P11D or included in a dispensation include the provision of one mobile phone (this includes certain smartphones, but not tablets) if used for business and private use. There is no limit on the number of mobiles provided for purely business use. The provision of a parking space at or near the workplace is also a non-taxable BIK.

These are a couple of examples of items that could be included in a tax-efficient remuneration package.

P11D Completion

HMRC have provided a ‘quality standard’ that sets out requirements that forms P11D must meet to avoid being rejected:

• the employer reference must be included
• the employee's name and National Insurance number must be included
• if the employee's National Insurance number is not known, then their date of birth and gender must be provided
• if a car that that has been provided to an employee is being reported, the list price must be included
• if box 10 in section F (total cash equivalent of car fuel provided) is completed, then box 9 (total cash equivalent of cars provided) must also be included
• if a beneficial loan has been provided to an employee and is being reported in section H, then box 15 (cash equivalent of loans) must also be completed.

Other errors that could cause delays include using a prior year paper form, not ticking the ‘director’ box where applicable and sending in P11Ds when it has been indicated on the form P35 (Employer's Annual Return) that none are due. Such errors could also flag the records for a compliance visit so it is well worth taking care to avoid them.

Summary

Now is the time to start planning with regard to the provision of company cars for the next five years. Proper mileage records need to be maintained to avoid unwanted fuel benefit charges and dispensations should be reviewed to reduce reporting requirements. Remuneration packages should be examined to see if tax efficiency can be improved and care should be taken to make sure that the ‘quality standard’ is met for each P11D submitted.

Following these steps will help to minimise employment costs and facilitate a smooth P11D compliance process.

It should be kept in mind that the P11D is not the only way to advise HMRC of a taxable BIK. Although the employer is not required to report BIKs in year (other than on the provision/withdrawal of a company car as discussed above) it is possible for the employee (or their authorised agent) to contact HMRC and advise them of a new BIK, or an increase or decrease in an existing BIK. This can help keep their PAYE code up to date and prevent under or overpayments of tax arising due to the lag between the change in taxable benefit and the processing of the P11D after the year end.

Don't forget – the deadline for filing forms P11D and accompanying P11D(b) is 6 July with Class 1A NICs due for payment by 19 July (extended to 22 July if paid electronically).

Judith Gardner is principal at JG Tax Consulting

Email: jgtaxconsulting@gmail.com
Website: www.thetaxreturnsite.com