In addition to payroll obligations, UK companies have to file reports in respect of expenses and benefits they pay or reimburse employees.
Employee benefits and taxable expenses
If you provide employees or directors with taxable benefits and expenses there is an annual reporting requirement for the employer. The reports, known as Form P11D and Form P11D(b), need to be prepared and submitted annually for each employee. Additionally employers have a liability to calculate and pay employer’s social security tax (Class 1A National Insurance) on most taxable benefits. Interest and penalties may be charged for late or incorrect reporting. The deadlines for 2016/17 Forms P11Ds and P11D(b) is 6 July 2017 and Class1A NICs has to be paid by 19 July 2017.
Tax free expenses
If you only reimburse tax free expenses, for example expenses incurred by employees that are incurred "wholly, necessarily and exclusively" for business purposes, then these are exempt from tax and there are no P11D reporting requirements from 6 April 2016. However for the exemption to apply, employers will need to have a robust checking system in place to ensure that employees are correctly incurring these expenses and a tax deduction is allowed in respect of those amounts. Note that HMRC is currently reviewing these type of expense claims very carefully as there has been a significant increase in the number of bad claims.
This is a complex area and we recommend you review your current procedures to confirm that you are compliant with the new rules.
Expense and benefits policy
If you do not have a UK specific expense policy we recommend you create one. If do have one, are you sure it is up to date and adequate to cover the recent technical changes to reporting benefits and expenses? If not, this could leave you exposed to penalties and interest as you could end up responsible for underpaid tax and NICs of employees. Now is the time, therefore, to review your expense policy, and procedures and design expense claim forms that focus on compliance and planning opportunities.
PAYE Settlement Agreements
Please remember that a 2016/17 PSA needs to be agreed with HMRC by 6 July 2017 and the tax/NICs paid by 19 October 2017.
If you currently have a PSA, you also need to be aware of the recent changes announced by HMRC around P11D reporting and trivial benefits, as this may impact what items you include in your PSA this year so that you do not under or over pay tax. We therefore recommend you review your current PSA for these changes.
If you do not already have a PSA, you may wish to consider obtaining one. Broadly this agreement with HMRC allows an employer to make one annual payment to cover all the tax and National Insurance due on small or irregular taxable expenses or benefits for employees on a grossed up basis. It typically includes items such as staff entertaining, certain gifts to employees, home to work travel and excess relocation costs. If you agree a PSA with HMRC, then you would not need to include these specific benefits and expenses on the employee payroll or Form P11D so they become invisible to the employee.
Reporting business trips - Overseas visitors
If the overseas employer does not have a UK presence and the overseas employee is under their control or working at a UK business, the UK business may be regarded as a host employer, even for short periods of time.
A UK company therefore has an obligation to operate UK payroll deductions where an overseas employee does some work in the UK. This obligation is imposed even if the trip is just one day and HMRC (and other tax authorities) are getting tougher and tougher on this. As an alternative to the payroll, the company can apply for a Short Term Business Visitor Agreement ("STBVA") with HMRC. The company has no choice though - it is either payroll or a STBVA. Ignorance is not an excuse and strictly there is no de minimus. To comply therefore, we recommend you obtain an STBVA – please note the filing deadline is 31 May 2017 so you should make the application asap.
HMRC Employer Compliance Checks
All businesses may at some point be subject to an HMRC Employer Compliance Check regardless of their size or how few employees they have.
What are they?
Employer Compliance Checks are undertaken by HMRC. The aim is to ensure that PAYE is being operated properly and that NICs are being correctly calculated and paid over.There is usually a detailed inspection of salaries, benefits-in-kind, expenses payments and all other emoluments. The inspection may also cover national minimum wage records, collection of student loans and payment of tax credits. It will also cover the operation of the Construction Industry Scheme.
What powers do the officers have?
The officers have extensive powers to inspect relevant records and to take copies or remove them, as well as the right of entry at reasonable times.
Where there are irregularities, HMRC has the power to recover the arrears from the employer or, in certain circumstances, from the employee.
Do they give advance notice of a visit?
In the majority of cases the officer will notify a proposed visit.Where there is reason to suspect fraud, the officers may arrive unannounced and could have a search warrant.
How will the visit be conducted?
The officers will review a sample of records relating to pay, benefits-in-kind and expenses including the operation of PAYE and NICs. Where irregularities are discovered these will be investigated in detail and explanations sought. The officers may seek explanations at the time of the visit or set out the queries in a subsequent letter.
The inspections will almost always be carried out on the employer’s premises. The officers will take notice of other evidence than merely the records, for example conversations with staff, items on notice boards, internal magazines etc.
Are there common areas for error?
Errors commonly discovered include:
- Failure to operate PAYE on casual employees or part-timers.
- Failure to account for Class 1A NICs in respect of benefits-in-kind.
- Failure to deal correctly with termination payments and payments in lieu of notice.
- Treating individuals as self-employed when they should be treated as employees.
- Reimbursing home to office travel.
- Failing to identify and report benefits-in-kind.
- Not accounting for PAYE and NICs in respect of round sum allowances.
- Failing to report employees’ debts settled by the employer.
- Incorrect application of NICs to benefits and expenses.
- Operating outside the scope and terms of a P11D dispensation/exemptions.
- Are there any knock-on effects?
A report is sent to the Officer of Revenue and Customs dealing with the business accounts. Irregularities may be an indicator of weaknesses in the records that warrant the business accounts being taken up for an investigation. Also, there may be matters that need to be adjusted in the business tax computation or VAT returns, for example disallowable entertaining.
What should employers do at the time of the inspection?
When notification of a compliance visit is received, employers should contact their professional advisers who can then offer advice as to how the inspection should be handled.
The following action can be taken:
- An independent review, often called a health check, can be undertaken by a specialist prior to the inspection (although this is an advisable routine in any case).
- Generally, the inspectors should be given a room of their own with the documents and records taken to them.
- A key contact should be appointed within the company to deal with all additional enquires by the officer during the site visit.
- The officer should be asked to put unresolved issues and any proposals in writing to give an opportunity to consider them properly.
- Treat the officers courteously.
- Do not allow the officers to have access to all the staff or to records and documents unrelated to the inspection.
- Where the officers make notes, a copy of the discussions should be requested by the employer to ensure that they reflect precisely what was said.
For more information please contact Mark Abbs.