Following a review of benefits in kind by the Office of Tax Simplification (“OTS”), a number of changes were introduced with regard to the reporting of expenses and benefits.
- abolition of the threshold for the taxation of benefits in kind for employees who earn at a rate of less than £8,500 a year;
- a statutory exemption for trivial benefits;
- a system of collecting income tax in real-time through the ‘payrolling’ of benefits in kind; and
- replacement of the expenses dispensation regime with an exemption for paid and reimbursed expenses.
Changes have also been announced with regard to the PAYE Settlement Agreement ("PSA") process whereby employers will no longer have to agree formal PSA agreements with HMRC each year by 6 July, and also the PSA calculations can now be submitted to HMRC electronically.
In addition to the above, following the OTS review the government is looking at the current system of income tax relief for employees’ business expenses, including those that are not reimbursed by their employer, in order to better understand:
- whether the current rules or their administration can be clearer and simpler;
- whether the tax rules for expenses are fit for purpose in the modern economy since the main principles behind the current tax rules for expenses were introduced in the mid-nineteenth century; and
- why the cost to the exchequer of the tax relief for expenses which are not reimbursed has increased.
Following this review HMRC will no doubt introduce further changes to the expense process.
What does this mean for employers?
With the changes already introduced and further changes in the pipeline following the Government’s review of expenses as well as the introduction of the Corporate Criminal tax evasion legislation, the pressure on employers to be compliant and get things right has never been greater. Employers should therefore look to ensure that their checking systems and processes in relation to expenses meet HMRC’s requirements. The requirements are that:
- employees are in fact incurring and paying expenses of the kind reimbursed; and
- that the expenses incurred are business related which would qualify for tax relief. If not they are being picked up for inclusion on the form P11D, PSA or payroll.
Employers should look at their expense policies and ensure that they are up to date with the latest legislation. If they do not have one, it is useful to have a policy as it sets out the guidelines under which employees can claim expenses and also provides guidance on the approval process for those that approve the expenses.
Employers may find a health check beneficial, particularly where they have not been the subject of a HMRC compliance review. An Employment Tax Health Check is an independent review of your employee-related policies and procedures undertaken by an employment tax specialist.
A health check can establish:
- whether PAYE procedures are being correctly followed, all benefits in kind identified and returns made on time;
- whether Class 1 and Class 1A NICs are being deducted and accounted for as appropriate;
- that you are making effective use of the exemptions from reporting certain expenses payments and benefits, since this cuts down the work involved, the area for inspection and liability to Class 1A NICs; and
- if staff dealing with PAYE and NIC related matters are competent and kept up to date with new developments.
In addition, a health check should help identify the extent of any potential arrears of tax and national insurance or risk of penalties if there are any errors overseas. If the company pays for travel and hotels when the director attends a board meeting in the UK or fulfils similar UK director duties, then the UK company should report those expenses on a P11D (or PSA) and the tax should be paid by the director. All directors should be filing a UK tax return regardless of where they live.
For more information please contact Mark Abbs.