Payrolling of Benefits and Expenses - Results of IPP survey

27 March 2008

In March 2007, the Institute of Payroll Professionals (IPP) published the results of a survey of its members on the possibility of taxing benefits and expenses through the payroll, instead of reporting them annually on forms P9D and P11D. In response, HMRC published a detailed consultation document containing proposals to

abolish the £8,500 earnings rate threshold, below which form P9D reporting rules apply, from April 2009, and

tax all benefits and expenses through the payroll by all employers, from April 2011.

During the consultation period, which ended on 17 March 2008, the IPP conducted a further survey to obtain the views of the payroll profession to these proposals. The results of this survey were published in early March and have been forwarded to HMRC so that it can be considered alongside other responses to the official consultation.

The following are some of the perceived advantages and disadvantages of the current procedures, as mentioned by respondents to the IPP's survey.

Advantages of the current procedures

only having to calculate benefits and expenses once a year

calculations are more accurate as an annual process

details can be compiled throughout the year before they have to be reported

many ad-hoc payments and benefits are only identified as part of a business's normal annual accounting procedures when experienced accountants check the employer's records

employees' pay frequency is not relevant

keeps benefits reporting separate from payroll

does not use up payroll resources

there is a delay before employees have to pay tax on their benefits

third-party payments are more easily handled

some tax exemptions are expressed in a manner that only allows a benefit to be identified at the year end (e.g. expenses connected with exempted living accommodation, benefits that depend on the official interest rate)

flexible benefits schemes are ideally suited to an annual reporting process

many payroll departments are not currently involved in P11D reporting and do not have the necessary knowledge to apply the tax and NICs rules.

Disadvantages of the current procedures

tax liabilities and tax code changes can be applied more than a year after the benefit has been provided

year-end reporting involves two different processes with different deadlines

P11D reporting is a heavy year-end burden, causing panic for some employers

many employers responsibly collate benefits information throughout the year and then have to duplicate it on a P11D form

company cars have to be reported twice, once on a P46(Car) form and again on form P11D

when HMRC catches up with P11Ds, massive batches of P6 coding notices arrive

many employees have to complete self-assessment returns only because a P11D is issued for them

some benefits are taxed through the P11D but Class 1 NICs are deducted on the same benefits through the payroll

the requirement for a separate payment procedure for Class 1A NICs

employees do not understand P11D reporting but do understand payroll.

Other conclusions drawn from the responses are:

there should be a consistent framework for payrolling benefits and expenses and, to achieve that, the procedures should be statutory, without flexibility for local arrangements

the majority of respondents were in favour of payrolling benefits, although the main drawback with the proposals was seen to be the current lack of expertise among payroll staff and most small employers

comprehensive guidance would be required, written in simple terms and prepared by both HMRC and representative bodies

just over half of respondents were unhappy with the proposals for passing on information from one employer to the next, with some commenting that it would be impossible to calculate the outstanding tax due from leavers

a majority were not in favour of estimating benefit values and would prefer to see a change in the benefit process to make estimation unnecessary

if benefits are to be treated as taxable income, the requirement to report benefits separately on P14/P60 seems unnecessary - in contrast to payroll giving and AVCs where no separate reporting is required

most respondents agree with the abolition of the £8,500 threshold, although most did not actually report benefits using form P9D - the main concern is in the voluntary sectors, where low-paid voluntary workers will be disadvantaged by the proposal

over 60% of respondents thought that Class 1A NICs should be paid monthly rather than annually, using an employer-only Class 1 contribution

Some of the situations identified as problematic are:

directors who cannot be covered by a dispensation

employees whose residence status cannot be determined during the tax year

employees on unpaid leave or receiving statutory payments who continue to receive benefits

loans and accommodation, where the benefit charge depends on the official rate of interest which is not known until the year end

directors' loan accounts

taxation of mid-period leavers

employees with low earnings but high value benefits.

The Institute's recommendations are as follows:

"HMRC should re-visit the rules surrounding estimating

HMRC should, with a working group, look at all the concerns identified in the survey. It may be that resolutions can be found by amending policy, or permitting a year-end procedure for benefits that cannot be payrolled if this were to be the case.

HMRC to look at a simplification exercise of the expenses and benefits rules

HMRC to establish a working group that consists of:

Payroll representative
Agent/accountant representative
Business representative
Payroll bureau representative
Software developer representative
HMRC Better Regulation representative

HMRC Payrolling SRO (Senior Responsible Owner)

HMRC to abolish the £8500 threshold, but to consider an exemption for voluntary/low paid charity workers

HMRC to consider self-dispensation and self PSA options

HMRC to consider and resolve the issues surrounding low income in a period, for example Statutory Sick Pay

HMRC to consider allowing Class 1A to be remitted monthly, rather than a year-end process. This could be Class 1 employers' NI only. This was used previously prior to the 1% band."

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