Expenses and Benefits Reporting - Consultation on abolishing forms P11D and P9D

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3 January 2008

On 31 March 2007, the Institute of Payroll Professionals (IPP) published a Report on a survey that was conducted among its members on the possibility of reducing the burden on employers by replacing the reporting of expenses and benefits on form P11D each year with a procedure for taxing them instead through the payroll. The practice of "payrolling benefits" was introduced successfully in the Republic of Ireland in 2004.

The IPP's report was submitted to the Government with a recommendation that a public consultation be undertaken and an Impact Assessment prepared. The Government has accepted the recommendation and HMRC has published a consultation document and a detailed explanatory Impact Assessment. The key recommendations are for

• the £8,500 earnings rate threshold, below which form P9D reporting rules apply, to be abolished from April 2009, and
  
  
• the taxation of all benefits and expenses through the payroll by all employers from April 2011.

The Impact Assessment document also explains various other options for change that were considered before deciding on the two major proposals mentioned above. These include:

• leaving the earnings rate threshold at its current level, or increasing it to a more significant level
  
  
• allowing employers to choose whether to complete P11Ds etc as now, or to tax benefits and expenses through the payroll
  
  
• phasing in payrolling of different benefits at different times.

For those interested, HMRC's reasons for rejecting those options can be considered in the two documents.

In the following notes, the term "lower-paid employees" is used for those employees for whom employers would submit a form P9D because their earnings rate is less than £8,500.

HMRC's assessment of the IPP's Report is that it confirms that employers and their representatives are unhappy about the burden of determining whether or not benefits-in-kind need to be reported for their lower-paid employees. Respondents to the survey were critical of the process, seeing it increasingly as outdated and burdensome, and suggesting that it was unnecessary as very few employees were now paid below £8,500 a year and even fewer of those receive benefits from their employment. The survey also found widespread support for abolishing form P11D. HMRC acknowledges that the P11D process is cited consistently by employers in all sectors of business as a major irritant, that it is a costly, time-consuming burden and that the frequent delays in updating employee's tax codes are frustrating.

The implications of these proposals are as follows:

From April 2009

• Form P9D would cease to be used for reporting benefits and expenses for lower-paid employees. There were only 19,000 P9Ds submitted in 2004.
  
  
• All lower-paid employees receiving benefits and expenses, both those for whom P9Ds are currently filed and those whose benefits are exempt from tax under the P9D reporting rules, would be liable for tax under the Benefits Code and a form P11D would have to be filed as necessary. Lower-paid employees currently have to pay tax on the provision of vouchers, credit cards and living accommodation but would, in addition, have to pay tax on assets transferred or made available to the employee, the provision of cars and vans, loans, and other employment-related benefits, such as private medical insurance.

From April 2011

• The value of benefits and expenses provided in a tax year would be added to gross pay for tax purposes, spread out proportionately over all of the pay periods in the tax year. Class 1 NICs would also be calculated for those benefits and expenses liable for Class 1 NICs, such as vouchers and non-business-specific expenses, but not for those that are liable for Class 1A NICs. There is no intention of changing the NICs on benefits in kind from Class 1A to Class 1.
  
  
• The provision of benefits in one tax year would no longer affect tax codes in the next, so there would be more standard tax codes, fewer K codes, and fewer changes of tax code.
  
  
• Existing informal arrangements between employers and tax offices for payrolling benefits would have to be handled according to the new statutory rules.
  
  
• Employers would still need to keep records of the benefits and expenses provided but would no longer have to complete forms P11D, P11D(b) and P46(Car).
  
  
• Additional information, but not in the same detail as given on forms P9D and P11D, would be reported annually on revised returns P14/P60. Class 1A NICs liabilities would be reported on return P35, to meet the 19 May deadlines instead of the 6 July deadlines.
  
  
• The deadline for payment of Class 1A NICs would continue to be 19/22 July.
  
  
• Employees who complete a self-assessment tax return only because of receiving benefits and expenses would no longer have to do so.

The cost impact of the proposals have been identified as:

Reductions

• Employers would no longer have to decide whether the tax rules for lower-paid employees apply and, from April 2009, would only complete form P11D - overall administrative savings estimated at £890,000 per year.
  
  
• From April 2011, reporting benefits and expenses on form forms P11D, P11D(b) and P46(Car) would cease - estimated annual savings of between £18 and £25 million.

Increases

• Lower-paid employees would pay tax for the first time on benefits such as private medical insurance - estimated increase in tax revenue of around £10 million per year.
  
  
• Class 1A NICs would be due on benefits reported for the first time for lower-paid employees - estimated increase in employer liabilities of £4 million per year.
  
  
• Additional work by employers would be involved in completing year-end returns - estimated at £3 million per year.
  
  
• Employer would incur one-off compliance and transition costs, such as learning the new reporting requirements, re-training and informing staff, setting up new payroll and accounting procedures, software changes - estimated at between £21 and £37 million

The consultation document identifies the following issues for employers:

When employees leave: An employee's new employer would not be liable for the tax and NICs implications of any benefits and expenses provided by the previous employer. When an employee leaves, therefore, the employer would have to ensure that all tax and, as appropriate, Class 1 NICs have been accounted for on the benefits and expenses provided in that employment. That could mean that any outstanding tax and NICs arising from the benefits and expenses in that employment would have to be deducted from payments made at termination. The current P45 makes no provision for reporting the benefits/expenses and the tax/NICs paid on them. In order for that information to be passed on cumulatively from one employer to the next, the P45 would have to be amended or replaced.

Valuing benefits and expenses: HMRC proposes that, where the exact value of a benefit is not known, the best estimate should be used initially for inclusion in the payroll. (Best estimates are already used for taxing readily-convertible assets.) An adjustment would be made at a later period when the exact value is known. If the exact value is determined after the year end but before the P14 is completed, the estimated value and the difference between that and the actual value would be entered on the P14. If the exact value is still not known when the P14 is completed, the estimated value would be entered on the P14 and the exact value reported to HMRC not later than the following 31 January. (This is similar to the approach already taken for tax and NICs liabilities for tax equalised employees.)

Matters for further discussion: HMRC has highlighted the following exceptional situations which could prevent a benefit or expense being included in the payroll for tax purposes:

• where the tax due on the benefit or expenses in a particular pay period reduces the employee's net pay below a certain percentage of gross pay
  
  
• where there are insufficient cash earnings in a pay period from which to deduct the tax due on the benefits and expenses
  
  
• where it is not possible even to estimate the value of a benefit or expenses by the end of the tax year
  
  
• where exceptional circumstances mean that a benefit or expense cannot be included in the payroll, e.g. benefits provided for overseas workers where the main salary is paid via a UK-based payroll.

The consultation document includes the following example, involving the provision of private medial insurance (PMI), to illustrate the current procedure and what the new procedure would be.

Current Process

1. Employer contracts with a supplier of private medical insurance to provide cover for all employees in 2006/07 tax year. Details are reported to HMRC on form P11D and a copy provided to each employee before 7 July 2007.
   
   
2. Employer reports the Class 1A NICs due on form P11D (b) and pays what is due by 19 July 2007 for payments by post or in cash or 22 July 2007 for payment by an approved electronic payment method.
   
   
3. Employees who complete a Self Assessment Return must enter the value of PMI from their copy of the P11D on their Self Assessment Return and submit it to HMRC by 31 January 2008, using the information provided on their copy of the P11D.
   
   
4. Any tax liability arising on benefits provided in the previous year can be included in the employee's tax code for the following year, depending on the amount due together with the estimated value of the benefit for the current year.
   
   
5. Irrespective of whether individuals are required to complete a Self Assessment return; where there is a discrepancy between what has been included in the tax code and the figure on the P11D the tax code is automatically amended to reflect the correct figure provided on the P11D.
   
   
6. As adjustments to tax codes are not made until the P11D and/or SA return has been received, it is generally some months into the next tax year before the new tax code reflects the value of the benefit provided and further underpayments can arise. This is estimated at the time the code is amended and included in the employee's tax code for the following year in addition to any underpayment from the previous year.
   
   
7. The revised coding notice is sent to employer and employee.
   
   
8. Employer actions the new tax code and deducts the tax due accordingly.
   
   
9. Employer reports details of pay received and tax deducted to HMRC and employee on form P14/P60.

Statutory Payrolling Process

1. The employer includes the value of the benefit, which can be spread over the remaining number of pay periods in the tax year in the payroll and deducts the tax from cash earnings in the pay period. No adjustment is needed to employee's tax code.
   
   
2. Employer reports details of benefit included in the payroll to HMRC on the modified P14 and the Class 1A NICs due is reported on form P35 by 19 May after the end of the tax year.
   
   
3. Employer pays the Class 1A NICs due by 19 July following the year of assessment for payments by post or in cash; or 22 July for payment by an approved electronic payment method.
   
   
4. Employees receive details of benefits and expenses provided on a modified form P60 and that information is used to complete their Self Assessment Return where required to do so.
   
   
5. Only where it has not been possible to account for all the tax due through the payroll on the benefit provided would HMRC need to calculate any further tax liability and adjust the employee's tax code accordingly.

Employers, their payroll agents, their software providers and their representative bodies and employees are all invited to respond to the various questions raised by HMRC in the consultation document. In summary, these questions are:

1. What advantages and disadvantages do you see of operating the current statutory P11D process compared with the proposal to include benefits and expenses in the payroll?
   
   
2. What are your views on the proposal to introduce a statutory basis for payrolling and a framework to ensure consistency across all arrangements?
   
   
3. What do you think will be the advantages/disadvantages of formally introducing a system that enables employers to account for the tax due on benefits and expenses through PAYE?
   
   
4. What guidance would you like from HMRC and what would your preferred style/format be for that guidance e.g. paper, internet or CD-ROM?
   
   
5. What are your thoughts on HMRC's proposed approach for handling the tax implications of benefits and expenses provided when an employee changes employment?
   
   
6. What issues, if any, would you see with extending the practice of best estimates to Benefits and Expenses generally; but only where the actual value is not known?
   
   
7. What views do you have on the information provision requirements, particularly in relation to the P14/P60?
   
   
8. What are your thoughts on the proposal to remove the £8,500 earnings threshold for Benefits in Kind?
   
   
9. If you provide benefits or pay expenses to lower-paid employees, can you provide some examples of the circumstances when this situation arises?
   
   
10. How would your estimate of the potential savings for you compare with those included in the Impact Assessment document?

Written responses to these questions should be sent to the addresses and in the format given on pages 29 and 30 of the consultation document, not later than 17 March 2008.

...UK Payroll News - Latest

Further information:
Institute of Payroll Professionals - Final P11D Report - 31st March 2007
Including Benefits in Kind and Expense Payments in the Payroll - A Fresh Approach
Impact Assessment of Including Benefits in Kind and Expense Payments in the Payroll

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