EMPLOYEE BENEFITS AND EXPENSES REAL TIME COLLECTION OF TAX ON BENEFITS IN KIND AND EXPENSES THROUGH VOLUNTARY PAYROLLING

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1 EMPLOYEE BENEFITS AND EXPENSES REAL TIME COLLECTION OF TAX ON BENEFITS IN KIND AND EXPENSES THROUGH VOLUNTARY PAYROLLING Response by the Association of Taxation Technicians 1 Introduction 1.1 The Association of Taxation Technicians (ATT) is pleased to have the opportunity to respond to the consultation document Employee Benefits and Expenses Real time collection of tax on benefits in kind and expenses through Voluntary Payrolling ( the Consultation ) published by HMRC on 18 June This is a further consultation on the issue of payrolling benefits in kind ( BIK ) and expenses, following the Government s initial consultation in 2007, where a mandatory payrolling reform was suggested. That did not have general support. However, this new proposal would allow employers to choose whether or not to payroll benefits. We provide answers to the questions raised in the Consultation in section 2 below. Where appropriate, we reply to linked questions at the same time. 2 Our responses to the questions 2.1 Question 1: Do respondents agree that a voluntary payrolling framework presents the best overall opportunity for simplification? We do agree that the expansion of the current informal payrolling process could offer significant opportunities for simplification across the benefits and expenses system. Payrolling of benefits already exists so we should be able to build on the processes already being used. The significant advantage of the proposed new arrangement is the removal of the need to report the payrolled benefits on a P11D form. This will need to be extended to remove the requirement to file a P11D(b) in order to offer full incentives to employers to join the arrangement. However, it needs to be recognised that there will remain benefits that cannot be payrolled, certainly in the near future, so many employers will still find themselves having to prepare P11Ds. Where there are PAYE schemes for which some benefits are being payrolled and others Registered in England and Wales Registered Office: 1st Floor, Artillery House, Artillery Row, London SW1P 1RT A company limited by guarantee: Number Registered as a charity: Number VAT Registration: Number

2 dealt with via the P11D system, employers will need to be able to provide very clear guidance to employees so that they can either complete their self-assessment tax returns correctly or approach HMRC to correct their PAYE tax codes. We do have concerns as to whether the RTI system is ready for wide-scale voluntary payrolling. Paragraph 3.9 of the Consultation states that The current RTI system caters to a limited extent for informal voluntary payrolling (emphasis supplied). We should be realistic in determining how much work is necessary in bringing the RTI system up to speed, bearing in mind that it is still a relatively new system with a number of teething problems still existing in relation to its core function. This needs to be carefully considered when deciding exactly how soon these proposals could be implemented. 2.2 Question 2: Should employers have to payroll all BIKs endorsed by HMRC or choose freely from a set approved list produced by HMRC to suit their business? Question 3: Should payrolling apply to all employees within a PAYE scheme subject to a limited number of exceptions and special cases, and what should these exceptions be? Employers have widely differing circumstances so should be allowed to choose from a set approved list, rather than having to payroll all BIKs and expenses deemed suitable for payrolling by HMRC. What might work for one employer may not work for another. So that there is not too much complexity, payrolling should apply to all employees within a PAYE scheme who receive the BIKs and expenses that the employer has chosen to payroll. There needs to be equal treatment amongst employees in the same scheme. This will assist the employer in designing the guidance and information they will need to provide to employees so that they know how their benefits have been treated. Employers will only need to create one set of guidance if all employees within the same scheme are subject to payrolling for the benefit(s) chosen by the employer. If there were different treatments between employees in the same scheme, things could become very complicated and there would be an increased risk of error and misunderstanding. 2.3 Question 4: What might cause an employer to need to cease payrolling? Would employers prefer payrolling arrangements to be irrevocable once entered into, or for HMRC to develop terms of withdrawal which accommodate the necessary protection? It will be in the interests of HMRC to encourage as many employers as possible to opt for voluntary payrolling. If employers believe they are permanently tied into the arrangement, this will inevitably put many people off from joining in the first place. There are various reasons P/ATTTSG/Submissions/2014 2

3 why employers might want to come out of the payrolling arrangement. One obvious reason would be if the employer found it impractical, for example because of employee resistance, changes in the pattern of employee retention or changes in the provision of benefits. Therefore, to recognise that the system may not suit every employer (which the Consultation implicitly acknowledges in not advocating compulsory payrolling) there needs to be a way to withdraw from the arrangement. To keep matters simple, it would probably be best to only allow withdrawal at the end of a tax year, otherwise, records would be fragmented and information provided to employees for the whole tax year might be difficult for them to understand. Similarly, entry to the arrangement should only be possible at the start of a tax year. If employers were allowed to join part way through a tax year, there would be more chance of incorrect adjustments to an employee s tax code where the tax was already being collected through payroll. We think that simplicity of operation is key to this. If employees found the arrangement confusing, that would put pressure on employers and could lead to withdrawal from voluntary payrolling. 2.4 Question 5: Would respondents welcome the option to account for Class 1A NICs in real time where the BIKs were being payrolled? Yes. It would provide an opportunity to make a payment on account of the total Class 1A NIC liability in respect of the payrolled benefits, reducing the bill due at the end of the tax year as this would be limited to the Class 1A NIC due on the benefits that are still being dealt with via a P11D. It may provide an incentive to some employers to join the voluntary payrolling arrangement if it helps them to budget for the Class 1A NIC during the tax year. We anticipate that there will be some employers who like the idea of payrolling and paying the Class 1A NIC in real time, but who would be put off from joining the arrangement because they know that they would still have to complete P11D forms for those BIKs and expenses that were not endorsed by HMRC for voluntary payrolling and do not want to operate parallel arrangements. If this does turn out to be the case, then we would hope that HMRC would consider adjusting the tax treatment of those unendorsed BIKS (such as loan benefit) so as to make them suitable for voluntary payrolling, in order to encourage a greater take-up of the arrangement. We should always be aware, however, that other employers could be seriously disadvantaged (in terms of cash flow) if it became a requirement to pay Class 1A NIC in real time. Therefore, we believe it should be available as an option but not made a requirement to pay Class 1A NIC in real time on payrolled benefits. Employers would then have the ability to make a choice based on the circumstances of their individual businesses. P/ATTTSG/Submissions/2014 3

4 2.5 Question 6: For employers experienced in payrolling, what are the most common reasons for errors in the amount of tax deducted, and what actions are commonly taken to address this, in particular after the payroll has closed? We provide a few summary examples: i) Failure to operate the correct tax code upon commencement of a new employee s employment. This could be due to the employee failing to provide copies of the P45. ii) New payroll staff member errors. iii) Mistakes in setting up payroll software for the new tax year. Many errors are detected following payroll reconciliations and where employees contact payroll teams with queries about their net pay. 2.6 Question 6A: Where tax is under-deducted should the existing approach for PAYE be adopted with recourse to the employer using existing principles? Yes, we agree that existing principles should be followed here. 2.7 Question 6B: What other exceptions exist where new PAYE rules may be required, for example, where HMRC issue a tax code to be operated on a week 1 / month 1 basis? We are not in a position to identify any other exceptions. 2.8 Question 7: The Government is interested to hear from employers experienced in payrolling on dealing with the issues covered at paragraphs 6.1 to 6.5. What are employers experiences of this, and do the options described provide workable alternatives? We would be in favour of introducing a year-end reconciliation procedure for voluntary payrolling. We are aware that employers who already informally payroll often use some form of balancing checks alongside the current year-end activities. Having a system like this in place could allow the use of estimated BIKs and therefore HMRC could consider introducing many more BIKs onto the list of those suitable for voluntary payrolling. The reconciliation then allows for the calculation of any over or under payment of tax, which could then be dealt with following existing principles. P/ATTTSG/Submissions/2014 4

5 It would also allow for the calculation of any over or under payment of Class 1A NIC that has been paid in real time. We note here that the current procedure for claiming refunds of NIC is not straightforward and we would urge HMRC to rectify this situation. If employers opt to pay Class 1A NIC in real time but then find that they have overpaid and experience difficulty in reclaiming that excess, this might again prompt employers to withdraw from the arrangement. 2.9 Question 8: Company Cars and Fuel a) How do employers deal with any payments or contributions for private use made retrospectively, and particularly those made from 6 April to 6 July? b) Do employers continue to submit form P46(Car) to report changes? In answer to point a) it was noted at the workshop that the important issue at the end of the tax year is the amount that the employee is intending to pay back to the employer in respect of private contributions, and not what is physically paid before 5 April. Therefore, this figure should be known when the end of year reconciliation procedure is being done. In answer to b) care is needed with the use of form P46(Car) as it is currently used to allow HMRC to update the tax code where the benefit is being dealt with on a P11D form. If the benefit was being payrolled, no coding change would be appropriate so the P46(Car) should probably not be submitted in these cases. If they are being submitted where the car benefit is being payrolled, then the form should have a very clear and distinct box to tick to show that the benefit is being payrolled Question 9: PMI (or gym membership fees) a) Where the policy renewal period falls part way through the tax year, unless the premium for the year is agreed in advance, what value is payrolled? Do employers project a value based on a previous year premium, or estimate the premium and begin payrolling on that basis and adjust once the premium for that year is agreed? b) Do employers payroll the total annual premium in the month paid? It would not really matter how the value of the benefit was being calculated at the start of the tax year, so long as a reconciliation process is used at the end of the tax year once the premium for the year is known. P/ATTTSG/Submissions/2014 5

6 2.11 Questions 10: One off large BIKs in the form of the transfer of an asset (a property or valuable antique). These items with a large tax charge will require significant deduction of tax in a single pay period. a) Do any employers payroll these items? If so, how are they dealt with? Do employers spread the value of these across the remainder of the year or do they payroll the total in one pay period, or b) Do employers report items on a P11D with a note that it is a one-off? Due to the rule that no more than 50% of an employee s salary can be deducted in tax through the PAYE scheme, it must still be appropriate to include these large one-off items on a P11D rather than through the payroll. We note, though, that the current P11D form does not have any way for an employer to note that a BIK is a one-off. It would be useful if there was a tick box on the form for this. HMRC could then avoid carrying forward a one-off item into an employee s future years PAYE tax codes. 3 Conclusions 3.1 In summary, we believe that the implementation of a voluntary framework for payrolling benefits should work well to allow employers the flexibility to decide whether it is suitable for them to operate. There may be smaller employers for whom the administration involved in the monthly payrolling of BIK and expenses would outweigh the advantages. However, for the many employers it will suit, there should be significant savings made in administrative burdens. For those employers and for HMRC, there should be cost savings. Employees, employers and HMRC should mutually benefit from fewer PAYE tax code changes during a tax year. In the interest of simplicity, we think it will be necessary to impose some limitation on the permitted flexibility. Within the voluntary framework, we believe that it is acceptable to allow employers to choose from a list of endorsed BIKs and expenses to include in their voluntary payrolling arrangement. However, all employees within that PAYE scheme who receive those benefits should then have them payrolled. Employers will need to provide much more guidance to employees as to how their benefits have been treated, particularly if there is a mixture of payrolled and P11D benefits. Employers will want to be able to keep this as straightforward as possible. Treating employees differently within the same PAYE scheme would not achieve this aim. The guidance provided by employers to employees will also be of particular importance where an employee changes job and their benefits are not going to be dealt with in the same way P/ATTTSG/Submissions/2014 6

7 anymore. It could assist take-up of the arrangement if HMRC prepared model guidance that employers could customise. The current proposed framework should hopefully provide a good basis on which to introduce voluntary payrolling. However, if HMRC wishes to ensure as large a take-up as possible then they will need to consider ways in which an employer who decides to join the voluntary payroll arrangement can be entirely removed of the requirement to file any P11Ds or P11D(b) forms at the end of the tax year, as we are concerned that the prospect of running both systems will discourage employers. This may mean adjusting the tax treatment of certain benefits so they can be made suitable for voluntary payrolling. To ensure the full success of the voluntary payroll arrangement, HMRC will need to avoid scenarios where confusion sets in and benefits are not only payrolled but included in employees tax codes. If they want to encourage the payment of Class 1A NIC in real time, then HMRC also needs to ensure there is an efficient system for reclaiming any overpaid Class 1A NIC. Importantly, we think HMRC will need to allow sufficient lead-in time for RTI systems to be brought up to speed and employers to be fully ready to be brought on board. If there are significant system glitches at the start this will discourage employers from being a part of the arrangement. On a final point, there is one important area which does not appear to have been addressed by the Consultation and that is how the penalty regime will operate in respect of errors made under voluntary payrolling. We would like to see HMRC issue some clear and user-friendly guidance on this point. We would be happy to discuss further any issues raised in this response. 3.2 Contact details: Should you wish to discuss any aspect of these comments, please contact our relevant Technical Officer, Alison Ward, on or at award@att.org.uk. Yours sincerely Yvette Nunn On behalf of ATT Technical Steering Group P/ATTTSG/Submissions/2014 7

8 4 Note 4.1 The Association is a charity and the leading professional body for those providing UK tax compliance services. Our primary charitable objective is to promote education and the study of tax administration and practice. One of our key aims is to provide an appropriate qualification for individuals who undertake tax compliance work. Drawing on our members' practical experience and knowledge, we contribute to consultations on the development of the UK tax system and seek to ensure that, for the general public, it is workable and as fair as possible. Our members are qualified by examination and practical experience. They commit to the highest standards of professional conduct and ensure that their tax knowledge is constantly kept up to date. Members may be found in private practice, commerce and industry, government and academia. The Association has over 7,500 members and Fellows together with over 5,000 students. Members and Fellows use the practising title of 'Taxation Technician' or Taxation Technician (Fellow) and the designatory letters 'ATT' and 'ATT (Fellow)' respectively. P/ATTTSG/Submissions/2014 8

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