Are you ready for the 2018/19 expenses and benefits reporting season?

Fri 05 Apr 2019

Our clients tell us that it is increasingly challenging to manage their employment tax risks and reporting obligations. This year promises to test even the best prepared employers further, given the unprecedented scale and rate of change to consider. Combined with a more active and aggressive approach by HM Revenue & Customs (HMRC) to employment tax compliance and tax avoidance, it is more important than ever for employers to ensure that their systems and processes are robust and fit for purpose.

Employment tax compliance obligations are evolving, and we set out below some of the key issues for employers to consider:

1) Employment tax governance framework

HMRC continues to close the ‘tax gap’ for employment taxes with the introduction of new legislation to tackle anti avoidance and increases its compliance activity.  As a consequence there is greater onus on employers to ensure that appropriate policies, processes and controls are in place to evidence the tax and National Insurance Contributions (NICs) treatment applied to employee benefits and expenses. In our experience, many problems arise around decisions on what should or should not go through the payroll. If we take the reimbursement of expenses as an example, there are certain expenses which attract Class 1 NICs via the payroll.

Inaccurate coding of client entertaining, staff entertaining or subsistence may result in non-compliance. Similarly, in today’s ‘agile’ working environment, it is important to correctly identify an employee’s ‘temporary’ or ‘permanent’ workplace.

The responsibility for employment taxes often sits across several departments; HR, Payroll, Accounts Payable, Finance, Tax and Operations. Through discussions, HMRC can quickly identify whether there is a robust governance framework in place and whether it considers there is a high risk of non-compliance.

2) Payrolling benefits

Many employers, although not as many as expected by HMRC, have registered to payroll benefits and some are still deciding whether this option provides administrative ‘simplification’. Others are payrolling benefits without having registered with HMRC.

Employers should be aware that not all benefits provided to employees can be payrolled.  Additionally, Form P11D (b) still needs to be prepared each year to report employer’s Class 1A NICs and the payment needs to be made to HMRC by 22 July following the end of the tax year.

There could also be P11D reporting obligations for employers that payroll benefits.  This is because the value of the benefit provided for the tax year must be compared with the amount included in the payroll. If any amounts have not been included in payroll (e.g. reflecting a premium increase) then the remainder should be reported on Form P11D.

3) Optional Remuneration Arrangements (OpRA)       

Rules came into effect from 6 April 2017 removing the tax and NIC advantages for most benefits provided via salary sacrifice arrangements.

Except for ‘protected benefits (e.g. pensions, cycle to work, childcare vouchers) the taxable value of the benefit is the higher of the cash forgone or the cash equivalent calculated under normal benefit rules. In some instances, benefits that might otherwise be tax exempt (e.g. parking at or near a workplace, provided for free by an employer outside OpRA – so the employer bears the cost) could become a taxable benefit (where the employee sacrifices salary to cover the cost of parking or near work that they would otherwise have had to pay from taxed income). This should be considered when preparing Forms P11Ds for 2018/19 tax year and places yet another reporting burden on employers.

4) Short Term Business Visitors (STBV) Agreements

Overseas employees who come to the UK on business visits from countries with a double taxation agreement with the UK and perform duties in the UK for the benefit of the UK employer, may be covered by an Appendix 4 STBV Agreement with HMRC. For employees who can be included in this agreement, no UK Pay As You Earn (PAYE) deductions should apply. Where no PAYE is due, the overseas employees’ UK visits must still be reported to HMRC by 31 May following the end of the tax year.

There is an annual PAYE reporting scheme for STBVs who do not meet the Appendix 4 conditions, but whose visits to the UK are minimal (not exceeding 30 days, though this limit increases to 60 days from 6 April 2020).  Employers often make the mistake of treating the non-UK tax resident statutory directors as STBVs when they are specifically excluded from this arrangement, please see read our blog here.

How can we assist?

Form P11D reporting

Any firm can offer a form filling service: however, our approach adds value by seeking a deeper understanding of the expenses and benefits provided. The risk is often not in the items reported but those that are overlooked. Our employment tax specialists offer a service tailored to your specific requirements.

PAYE Settlement Agreement (PSA) assistance

It is common to report certain employee expenses and benefits on a PSA to ensure that no tax liability arises for the employee, for example a lunch to celebrate good performance or benefits which are not ‘trivial’.  We assist our clients with everything from obtaining PSA agreements with HMRC, reviewing tax sensitive ledger codes to ensure accurate tax accounting, through to preparing and submitting PSA computations.

Appendix 4 STBV Agreements

Many employers are of the view that if visits to the UK total less than 30 days, then there is nothing to report, and do not consider the “60 day” rule (where the employment costs generally have to be borne by the overseas employer, subject to treaty terms, but only for specifically identified employees), or the economic employer point.  We can support you in identifying the visits that need to be reported, as well as implementing a robust process to negate any risks going forward.

Expense and benefit strategic review

As discussed above, the UK expenses and benefits rules are inherently complex and there are many benefits to undertaking a review of your employee benefit and expense reporting following significant recent changes in legislation, such as correct year-end reporting or tightening control of your employee expense claims process

Often, we are asked to assist employers when HMRC compliance activity is underway but a key issue in this situation is that any liabilities arising are not considered ‘unprompted’ which impacts adversely on the penalty position. Where irregularities exist, better outcomes can be achieved through a self-initiated review and voluntary disclosure to HMRC, demonstrating a prudent approach to tax risk management.

Our approach

Our approach to self-initiated reviews is to provide an efficient and effective service to help minimise the risk of irregularities that can be costly and time-consuming to rectify without professional advice, not to mention damaging to your relationship with HMRC. By understanding your internal systems and analyzing your data we can add value by suggestions for process improvements that can further mitigate the risk of non-compliance.

Please contact the employment tax team if you wish to discuss further.