Benefits In Kind Reporting Obligations – Making Life Simpler

Three significant changes affecting the reporting requirements for certain expenses and benefits in kind (BIKs) took effect from 6 April 2016. 

Those changes are:

Given the steady increase in the level of tax-free personal allowance over recent years, the vast majority of employees earning at a rate of less than £8,500 a year are no longer liable to pay income tax. The £8,500 threshold has therefore been abolished from 6 April 2016. 

Note, however, that from 6 April 2016 there is a new exemption for ministers of religion earning less than £8,500 a year, and an exemption for board and lodgings provided on a ‘reasonable scale’ to carers. 

The change means that employers will need to report all expenses and BIKs on forms P11D, unless they intend to use ‘voluntary payrolling’.

From April 2016, employers have the option to collect tax on BIKs through the payroll, a process known as payrolling. HMRC’s real time information (RTI) system is able to support voluntary payrolling, which provides the opportunity for employers to report total BIKs which have been taxed through the payroll alongside the total taxable pay to date figure in their normal RTI submissions.

Regulations published in December 2015 widened the scope of the initial legislation in this area, such that from April 2016, payrolling is available for all BIKs, other than accommodation, beneficial loans, credit tokens and vouchers. Additional reporting requirements for employers payrolling cars are to be introduced from April 2017.

Voluntary payrolling of BIKs should result in fewer PAYE tax coding notices being issued, as well as fewer under and overpayments of tax.

Formerly, where an employer paid or reimbursed deductible expenses (or provided BIKs covered by a matching deductible expense) to employees, they generally had to report these on form P11D and, in turn, those employees had to contact HMRC to claim back any tax relief they were entitled to. To ease the administrative burden of this ‘in-and-out’ reporting procedure, employers could apply to HMRC for a ‘dispensation’ - an agreement that specified certain expenses and benefits that could be provided to employees without deducting tax and National Insurance contributions, and without reporting them to HMRC.

From 6 April 2016, a new exemption means employers no longer have to agree a dispensation with HMRC or report expenses or BIKs on form P11D where the employee is entitled to tax relief for those expenses or BIKs. Those expenses or BIKs will now be exempt from income tax. This means, however, that businesses will need to determine the correct tax treatment of the expenses they pay to their employees and whether a matching deduction is due. Records will still need to be kept of what has been paid or reimbursed to employees. The exemption will not apply in conjunction with a salary sacrifice arrangement.

The exemption will also apply if an employer pays approved scale rates to their employees in respect of certain expenses that they incur, rather than reimbursing the actual amount of the expense. Businesses may use HMRC's benchmark scale rates for subsistence, or apply to HMRC for a ‘bespoke scale rate’ based on evidence of the amounts employees actually incur on the relevant expense. Where employers have recently agreed a bespoke scale rate with HMRC as part of their dispensation, they will be able to apply to continue to use that scale rate without providing further evidence until the fifth anniversary of the rate being agreed.

Finance Bill 2016 contains a proposed exemption from income tax for trivial benefits, effective from 6 April 2016, where certain conditions are met. This exemption is potentially good news for both employers and employees.