Changes to Benefits in Kind

From April 2016, the government is introducing a voluntary framework to allow employers to settle the taxation of Benefits in Kind (BiK) through the payroll system, which means BiKs such as company cars, fuel and private medical insurance will be taxed in real time.

While the current system of reporting these benefits at the end of each year via a P11D form should ensure the correct amount of tax is paid each month via the employee’s tax code, there are often delays in communication between employees, employers and HMRC. This can lead to an underpayment (or overpayment) of tax which results in an adjustment at the end of the tax year and can be an unpleasant surprise for employees in the form of a large tax bill.

Under the new system, the onus is on the employer to make changes immediately by including a notional value for the BiK in the weekly or monthly payroll.

Benefits to employees

The benefits to employees are clear:

• They will pay the correct amount of tax when the benefit is received
• Self-assessment tax returns will be simplified, or no longer required, as the benefits are already included in the Taxable Gross on their annual P60
• They will have no nasty shocks of any underpayments a year or two later

The impact on employers

Employers will benefit from the simplification of the system by removing the need to submit P11D forms for each employee or send changes in company cars via P46 (Car) returns. However, unless there are a lot of staff receiving benefits, it might not make enough of a difference to persuade employers to adopt the new system as other factors need to be considered:

• The same calculation required to complete a P11D will need to be made to calculate the notional value to be included in the payroll.
• Changes will need to be communicated to the payroll department (or external payroll bureau) in good time so that the employees will not end up under or over paying tax.
• Care will need to be taken that Employees and Employers’ Class 1 NICs are not calculated against the payment processed through the payroll, otherwise the employee will pay NICs when none are due and the employer will end up paying NICs twice.
• The end of year company return (P11D(b)) will still be required as the Class 1a NICs due on the BiKs will still need to be reported and paid by the employer annually.
• At the moment, not all BiKs can be payrolled. Living accommodation, beneficial loans or credit vouchers and tokens will still require a P11D.
• Extra time will be required throughout the year to process the payroll and the payroll software will need to be aligned to the adoption of the new system.

However, one of the important potential benefits to the new system is that it could improve employee relations, as employees may feel more secure in the knowledge that they are paying tax in real time and see that the employer is helping with this. Plus, voluntary changes have a habit of becoming mandatory, so it’s probably worth making preparations now, even if you don’t adopt the new system just yet.

What next for businesses?

The first step is to decide whether or not you are going to adopt the system for next year and to communicate this to your employees.

If you do decide to adopt the new system and wish to do so for the 2016-17 tax year, you will need to register by 5 April 2016. However, we’d recommend registering before the end of December 2015, to ensure tax codes are processed before the start of the new tax year, hence time is limited. For more information about the new system, click here.

Alternatively, another option is to wait and let the new system bed in and to allow issues to be ironed out before deciding if/when it is right for your business. Either way, the employer should make a positive decision weighing up the facts and it would be best to communicate the decision to the workforce, rather than wait to be asked.

Providing expert advice

We will be keeping a watching brief over the introduction of the new scheme and any further changes over the coming months, as there are a number of uncertainties about the implications of the new scheme. For example, although employees currently do not pay NIC on these benefits, it will be very easy to change this once they are processed through the payroll.

We will be proactively discussing the options with our current clients as part of our ongoing service. If anyone else is keen to find out more about the implications of the new system for your organisation or for your clients, please feel free to contact us.

Next news article