Radical Changes to the Tax Applied to Employee Benefits

In the 2014 Budget, George Osborne announced measures to alter certain aspects of the benefits in kind (BIK) tax rules and administration. Consequently, HMRC have now begun their 12 week consultation period on the four specific changes suggested. In the past, suggested alterations to the tax on BIK tax have rarely made it past the consultation period. However, in this circumstance, it has been widely acknowledged that these changes will go ahead and will come in to effect in April 2015. So, what are the four proposed changes?

Payrolling BIK

The government wishes to introduce payrolling for benefits in kind. Therefore, employers will be expected to calculate and process tax on any benefits at the time a benefit is provided, and will need to include the value in the payroll as if it were salary. Currently, HMRC only receive information about a benefit from the P11D and/or P9D forms, which means that the time between an employee receiving a benefit and then being taxed on that benefit can sometimes take up to a year. The problem with this suggestion is that for employees who receive fluctuating amounts of BIK every month, it will be time consuming and difficult for employers to update the tax they deduct from their salary; to ensure their employees are not being overcharged or forced into a higher tax band because of the additional values they are receiving. The good news is that the government is only considering this process as a voluntary option for employers.

P11D Forms Only

Currently, employers are expected to fill out a P9D form concerning BIK paid to their employees earning less than £8,500 per year. This is because these employees pay less or no tax on some of the benefits they receive. However, for those employees that earn more than £8,500 a year, a P11D form must be submitted. The government has now announced that the P9D form will be scrapped and employers must report all benefits made to their employees on a P11D form, regardless of the salary they receive.

This change will obviously not affect employers that do not have any employees eligible for P9D forms. However, for others it will significantly streamline the process.

Expenses Exemptions

The government has proposed to make it statutory for employers to not report benefits and expenses paid to employees when the employee is not liable to tax or NI on them. Presently, employers have to apply for dispensations in these circumstances. These exemptions are most commonly needed in regards to business travel and subsistence costs. Therefore, making these expense exemptions compulsory will remove the inconsistency that currently occurs between National Insurance Contributions (NICs) and tax treatments that currently apply when a dispensation is not sought. This will mean, however, that employees will need to keep a closer eye on staff expenses as all expenses will not be exempt.

Trivial Benefits Exemption

HMRC are looking to formalise exemptions to “trivial benefits” provided by employers. Therefore, ‘trivial benefits’ will now be given a monetary value that all employers will have to apply. Currently, seasonal or circumstantial gifts are treated differently by tax inspectors. For example, seasonal gifts of low value such as a hamper at Easter won’t generally count as a taxable benefit, but some tax inspectors may apply tax – there is no concrete rule. This new rule will make it easier for employers to understand which small benefits are and are not exempt from tax. The results of HMRC’s consultations on these suggested changes will be announced later this year, with the necessary changes being made in the Finance Act 2015.