The People Bulletin

My new office mug is the antithesis of the ‘keep calm and carry on’[1] slogan; it reads ‘now panic and freak out’.  It, strangely, has a more calming effect than the original perhaps because it highlights so clearly the alternative!  We are close to the start of the P11D season, if you are a seasoned veteran, a newcomer to this ritual or somewhere in the middle I hope that this article will give you some helpful tips on how to prepare for it, produce accurate P11Ds and ensure that your 19 July payment to HMRC is correct, which is particularly important as the new late PAYE penalty regime means if you underpay the Class 1A NIC due you may find yourself with a new kind of penalty.[2] 

Know the rules

Employers must make a return of the expenses payments, benefits and facilities provided to directors and employees who earn at a rate of £8,500 or more per year to H.M. Revenue & Customs by 6 July following the end of each tax year on form P11D and P11D(b)[3].  P11Ds are prepared for each individual and a P11D(b) is a summary which totals the Class 1A NIC (National Insurance Contributions) due. Note in the first sentence above the word ‘facilities’, this means not only the expenses which an individual may claim on an expense form but also, for example, travel facilities such as accounts with travel agents, taxi firms or accounts with other suppliers and so on. 

A P9D is used for directors or employees who earn at a rate of less than £8,500 per year.  To determine whether an employee is earning less than £8,500 per year the employer must add together their cash earnings, including reimbursed expenses, all benefits provided and earnings received from intermediaries during the tax year.  Authorised deductions such as payroll giving and certain pension contributions are deductible from the total to give their total remuneration for the tax year.  The £8,500 limit is for the whole year and so if an employee is only employed for part of the year the £8,500 should be pro-ratad. 

A P11D reporting dispensation is something no employer should be without.  It takes away the need to report business expenses included in the agreement.  This will save you a lot of time and effort, but if you have one, check the wording.  Many such agreements are very old and perhaps do not cover all the expenses you think they might.

PAYE Settlement Agreements (PSA) are a way for the employer to cover the tax on minor and irregular benefits, for example staff entertainment such as working lunches and social events outside of the annual exemption, where it would be difficult to identify the cost attributable to each employee.

What you don’t need to report

Where any expenses or benefits are covered by either a dispensation or PSA they do not need to be reported on a P11D.  Purchases on behalf of an employer are not reportable, e.g. stationery for the office, stamps for business postage and computer software.  Exempt benefits such as annual events and private car mileage payments do not need to be reported. See figure 1.

Figure 1: summary what does and does not need reporting

Information gathering

Depending on the size and complexity of your organisation the information gathering may simply involve looking through one file or it may be that you need data feeds from multiple systems.  It is important to ensure that you give accurate instructions if you are relying on others to prepare data for you.  For example, that the correct population is picked up, that the correct date ranges are used and that you are clear about whether you have VAT inclusive or exclusive figures. For P11D purposes you must report VAT inclusive costs, this is regardless of whether your organisation may recover the VAT or not.  To give you an example of one expensive error, a company reported all the medical insurance benefit for their employees but omitted to include the Insurance Premium Tax in the calculation, the instruction to the HR department had been to provide the premium cost.

Start with a blank sheet of paper and write a list of everywhere you may need to look.  The following lists some suggested areas:

• expenses claim forms: expenses payments reimbursed to employees;
• company credit card bills;
• petty cash;
• HR systems/department (e.g. employee season ticket loans); and
• accounts payable.

The last item, accounts payable includes:

• bills paid on behalf of employee e.g. home telephone, TV licence, utility bills, etc;
• other services/goods purchased for employees e.g. professional subscriptions, relocation fees, clothing, etc;
• social functions;
• paying car costs relating to an employee’s personal car; and
• medical insurance.

And don’t forget accounts held with:

• rail/air/other travel providers e.g. travel agents;
• taxi firms;
• restaurants;
• fuel account; and
• company credit card providers.

Form preparation tips

Perhaps the trickiest part of the exercise is determining which box to enter data into. Refer to the HRMC’s A-Z Benefits Guide for detailed guidance (see note 2 below).

In each case it is important to collate the information in a way in which you can check to see that the final Class 1A NIC has been correctly calculated, and incorporate control checks.  It is only too easy to get too close to the form preparation only to realise later that you have missed a whole category of information.

• Payments on behalf of an employee. One common area for misunderstanding is that concerning payments made on behalf of an employee.  Household expenses or personal bills for example gas, electricity, council tax, water rates and telephone bills, etc. paid by the employer give rise to a taxable benefit in kind. Where the employee contracts with the provider and the employer pays the supplier directly, a Class 1 NIC charge will arise which will need to be accounted for via the payroll. The benefit is reportable on the employee’s P11D for tax purposes. Where the employer reimburses the employee the amount reimbursed should be processed through payroll for PAYE and Class 1 NIC purposes.
• Rules can change, the way something was done last year may not still be correct.
• Employee loans are taxable if they exceed £5,000 at any time during a tax year.  You therefore need to know not just the opening and closing balance but the maximum outstanding at any time.  If an employee has say both a season ticket loan and a gym loan you need to add them together to work out the maximum balance.
• Company car calculations need to take account of any car changes throughout the year and you must find out whether the employee received any fuel for private mileage.  Theoretically just one private mile can invoke the fuel scale charge.  Make sure employees have not inadvertently or otherwise claimed for ordinary commuting.
• Staff entertainment can be an emotive area, when an employee goes out for lunch with a colleague to discuss business it is unlikely that the employee will consider this to be staff entertaining, but that is what it is in HMRC’s eyes.  If only staff are present you must report it on the P11D or pay the tax through a PAYE settlement agreement[4].
• Reimbursing Oyster top ups and mobile phone top ups to employees without back up itemised bills count as a round sum allowances which are taxable through payroll.

If using a specialist P11D system, make sure you have brought forward the correct data.  For example, if any forms had to be corrected in the prior year are the changes included in your rolled over data? You will either be handwriting the P11D forms, using a specialist system or perhaps supplying data to your advisors for them to complete the forms.  In all cases back up your data and take copies of all handwritten forms.

Preparation is the key to success.  Now panic and freak out...

[1] http://www.keepcalmandcarryon.com/pages/history

[2] See also ‘Get it right first time’ in The People Bulletin, 4 June 2009.

[3] www.hmrc.gov.uk/paye/exb/overview/basics.htm

[4] See also ‘Festive trips slips trips and falls – an employer’s guide’ in The People Bulletin, 17 December 2009 for more on the tax treatment of Christmas parties