As the P11D season is now upon us, a timely reminder of developments in the reporting process for 2016/17 forms.
The P11D regime for reporting employee benefits in kind has changed quite significantly from April 2016, and many expenses that traditionally had to be reported will not now need to be included on the form. Employer dispensation agreements have been abolished, and replaced with a similar statutory regime, which applies to all employers.
The underlying framework remains in in ITEPA 2003 Part 3 starting with Chapter 2, with exemptions following in Part 4, and deductions in Part 5.
ITEPA 2003 s 72 says that where an employer pays an employee’s expenses, or reimburses those expenses to the employee, by reason of employment, then the sum should ordinarily be treated as earnings, subject to a number of deductions that then follow (s 336 et seq.)
Historically, this approach has required the employer to recognise and return details of such sums to HMRC, leaving the employee to make a corresponding personal tax claim where appropriate. FA 2015 introduced new ITEPA 2003 ss 289A – D, which work along similar lines to the old dispensations.
Shifting the Burden
Employers are now obliged to determine whether or not the employee would be entitled to a deduction from earnings for the expense being reimbursed or the benefit provided, in accordance with Part 5: where the reimbursement, etc., would be matched by such a qualifying deduction, (based on the assumption, where appropriate, that the employee had incurred the cost directly), then nothing need be reported to HMRC – the reimbursement, etc., is now exempt. This is likely to apply in most cases, and may mean that employers will no longer have to report any reimbursed expenses or other benefits provided in such categories such as
- Travelling and subsistence
- Business entertaining
- Business telephone at home
- Professional subscriptions
- Qualifying payments made under HMRC’s approved ‘benchmark rates’ or where a bespoke rate has been agreed
No Matching Deduction
However, where the reimbursement is NOT matched 100% by a qualifying employee expense, then the entire reimbursement will need to be put through the employer’s payroll, which will trigger further National Insurance costs. The employee may still independently claim tax relief for any element of the reimbursement that qualified as a business expense, as per the underlying legislation, but neither the employee nor the employer will be able to recover any of the National Insurance that has been paid.
These new rules do not apply where the expenses reimbursed, etc., are as part of a salary sacrifice arrangement. In such cases, the exemption will not apply and benefits will need to be reported as appropriate.
HMRC expects employers to have systems in place to deal with the additional responsibility of determining whether employee payments or reimbursements are exempt. There is now also a statutory duty to have a suitable “checking system” where benchmark rates, etc., are used, which may prove problematic where the company is a 'singleton' director.
While HMRC says that the P11Ds should be filed by 6 July, penalties will not apply so long as the forms are submitted by 19 July, as per our previous advice.