Stewardship Briefing Note 2016/1 employer/payroll update: changes relating to benefits and expenses from 6 April 2016 Stewardship, 1 Lamb s Passage, London EC1Y 8AB t: 020 8502 5600 e: enquiries@stewardship.org.uk w: stewardship.org.uk
ACKNOWLEDGEMENT: Our thanks to Jane Mellor of Ninian Tax Services for assistance in the preparation of this paper. CONTACT DETAILS Stewardship 1 Lamb s Passage, London EC1Y 8AB t: 020 8502 5600 e: enquiries@stewardship.org.uk w: stewardship.org.uk Stewardship is the operating name of Stewardship Services (UKET) Limited, a registered charity no. 234714, and a company limited by guarantee no. 90305, registered in England Copyright Stewardship 2016 COPYRIGHT This publication is the copyright of Stewardship. We want our resources to have the maximum impact, therefore you are welcome to reproduce or otherwise distribute this material in whole or part. We simply ask two things: (1) there must be no use for commercial gain, and (2) Stewardship is clearly acknowledged with the following wording Reproduced with permission from Stewardship. www.stewardship.org.uk. If extracts are to be used in another context, permission should be sought in advance by emailing enquiries@stewardship.org.uk or telephoning 020 8502 5600. Thank you. DISCLAIMER Whilst every care has been taken in the preparation of this material, Stewardship cannot be responsible for action taken or refrained from in reliance thereon. It is recommended that appropriate professional advice be sought in each relevant individual circumstance. 2 copyright Stewardship 2015 t: 020 8502 5600 e: enquiries@stewardship.org.uk w: stewardship.org.uk
1 Introduction One of the most significant changes in decades to the way employee expenses and benefits are handled for tax purposes starts in 2016. It is important that church treasurers are aware of changes coming in on 6 April 2016 which may have an impact on how they report expenses and benefits in kind to HMRC and what to do when they provide expenses which are exempt from tax and national insurance. The changes relate to: The option to tax certain expenses and benefits in kind through the payroll and therefore do not need to be reported on forms P11D. An automatic tax and national insurance exemption on certain employment expenses essentially those that are wholly business related. The abolition of the dispensation regime under which employers can agree with HMRC the exempt benefits and expenses being provided to employees and do not then need to report them on forms P11D at the end of the year. The abolition of the lower earnings rate of 8,500 and forms P9D for most categories of staff. We don t yet have all the detailed information from HMRC about how these changes will operate in practice but treasurers do need to be aware of them so they can consider what actions to take before 6 April. 2 Payrolling of benefits in kind: real time collection of tax on benefits At present, details of benefits in kind for a tax year (6 April to 5 April each year) are reported on forms P11D and are submitted by 6 July following the end of the tax year. Where relevant, class 1A national insurance is paid by the employer by 19 July following the end of the tax year. Employees are currently taxed on the benefits in kind through their self-assessment tax returns or by the issue of a tax calculation and an adjustment to tax codes. This can have the unfortunate result of unexpected tax bills for employees as it takes some time for the details to work through the system. Estimated benefits are often included in tax codes and it can be time consuming to sort out the discrepancies once actual details are available for a year. Whilst not widespread, some employers are currently operating a voluntary system of making payroll adjustments to tax benefits in kind as part of the PAYE system. Where voluntary payrolling of benefits operates forms P11D still needed to be completed showing the benefits in kind. copyright Stewardship 2015 t: 020 8502 5600 e: enquiries@stewardship.org.uk w: stewardship.org.uk 3
Following recommendations made by the Office of Tax Simplification, the Government is introducing a new formal system for 2016/17 onwards to allow for payrolling of benefits to replace the current informal arrangements. Registration for payrolling benefits in kind Employers intending to or already payrolling benefits and expenses must register them with HMRC using the online Payrolling Benefits in Kind (PBIK) Service. If you do this then you won t have to report the payrolled benefits on a P11D. If those currently operating an informal system continue to do so the benefits in kind details will continue to need to go on the form P11D. Registration of the specific benefits to be payrolled must take place before 6 April 2016. You won t be able to register after 5 April 2016 for the 2016/17 tax year as HMRC cannot process changes in year. Treasurers may want to consider registering much earlier than that. HMRC have indicated that in order to avoid being sent multiple codes for employees you should register before the annual coding process which usually starts around 21 December. In order to register the following link should be used: https://www.tax.service.gov.uk/payrollbik/sign-in?continue=/payrollbik/payrolled-benefits-expenses In order to use the service an employer will need their government gateway ID and have already enrolled for PAYE. Online Agents are not able to directly access the service on behalf of clients although HMRC are considering this issue. Not all types of benefits can be covered. Employers cannot use the service for: Vouchers and credit cards Living accommodation Interest free and low interest (beneficial) loans Employers can pick which other benefits in kind go through the payroll so may choose to payroll some benefits but not others. There will be the presumption that selected benefits in kind will be payrolled for all employees. If employers do not want to payroll a particular employee or groups of employees the employer will need to exclude them individually through the registration service. Where employees are excluded, form P11D will still need to be completed for them. An employee can be excluded at any time of the year but once that has been done the decision cannot be reversed within the tax year. Once the employer has registered, HMRC will assume that they continue to payroll the selected benefits in kind for all future tax years unless the employer indicates otherwise through the payroll registration service. Note that section M on form P11D is used to report other items. For payrolling, either all items included in this section must be payrolled or none at all. 4
When registering HMRC have indicated that they will automatically: Identify all the employees that have the selected benefits or expenses in their tax code; Remove the selected benefit or expense and issue an amended tax code; Place a flag on each employee s record where benefits in kind are being payrolled to stop the benefit in kind being reinstated if HMRC are contacted by the employee. If this process does not run smoothly there is clearly a risk that a benefit in kind will continue to be included in an employee s tax code whilst tax is also being collected through the payroll. All employers registering may want to encourage their staff to check their tax codes carefully to ensure payrolled benefits have been removed. If payrolling, car and fuel benefit forms P46 (car) should not be submitted by the employer as this triggers the inclusion of car benefit in a code. How does it work? Once registered successfully employers will need to operate the new system from 6 April 2016 onwards in relation to the relevant benefits and employees. The tax due on benefits and expenses will be collected by adding a notional value to the employee s taxable pay on the payroll. HMRC guidance currently indicates that before making the first main payment to an employee in a tax year the employer will need to calculate the cash equivalent of the benefit as would have been done when preparing P11Ds. It is then necessary to work out the number of payments to be made to an employee during the tax year and divide the cash equivalent of the benefit by the total number of payments to be made. The resulting amount is the taxable value of the benefit which should be added to the employee s wage in the payroll each pay period as a notional value. Tax is then deducted or repaid as usual by reference to the employee s tax code. There is no change to the approach to national insurance: i.e. there will normally be no Class 1 National charge at this point but there will still be Class1A NIC paid on the value of the taxable figure at the end of year return (see more below). Payrolled benefits and expenses need to be included when reporting payroll information on the normal monthly payroll ( full payment submission'). The summary P11D (b) forms must still be completed at the end of the tax year including the total benefits and expenses whether or not the benefits have been payrolled. 1 At present the benefit in kind figures only have to be considered in detail at the end of the tax year for reporting on form P11D. Employers choosing to payroll benefits need to be clear on the figures when working out the amounts to payroll and may therefore need to consider carefully which benefits and employees to include within the system depending how easy it is to obtain the figures. 1 Only the items not payrolled should be detailed in the P11d itself. 5
How benefits in kind are valued has not changed. The notional value for the benefits in kind only requires the employer to work out the cash equivalent and how many pay periods there will be in a tax year. Regulations to be published (which are expected very early in 2016) will set out what to do if the employer realises they have been payrolling the wrong amount or if the benefit in kind changes during the year. They will also cover the situation where the employee s income may drop so the tax cannot be collected for one or more months and how payrolling interacts with the 50% of pay maximum tax deduction permitted. How does this affect us? In terms of operating the new system treasurers need to consider: a) Whether their payroll software or third party payroll provider will have the facility to operate the payrolling of benefits. It is advisable to check this before registering for the payrolling of benefits in kind; b) Where a third party payroll provider is involved will the treasurer be in a position to provide information promptly to allow the payrolling of benefits? The real time information payroll penalties are likely to be a real point when dealing with benefits using this method and we are hoping for more details in the regulations; c) Where a treasurer is running the payroll themselves (or using a third party which uses HMRC s basic PAYE tools) these don t support the payrolling of benefits in kind. We are not aware of HMRC having timetable to make this change. As many small churches use HMRC s basic PAYE tools they will not therefore have the option to payroll benefits in kind for 2016/17. It is not known if and when HMRC are likely to update the basic software to allow this. For churches using appropriate payroll software or payroll providers they may find it advantageous to payroll benefits where they can be confident of providing accurate benefit in kind figures. They should consider registering before the 21 st December 2015 where practical or as soon as possible thereafter to ensure there is time for the employee tax codes to be amended prior to the 6 th April 2016. They should also ensure they communicate with employees about the changes and suggest that they check the accuracy of their tax codes for 2016/17. Further guidance on the payrolling of benefits in kind can be found via the following links: https://www.gov.uk/guidance/paying-your-employees-expenses-and-benefits-through-your-payroll Employer bulletin 56: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/468293/employer_bulletin _56.pdf 6
3 Exemption for certain employment expenses and abolition of the dispensation regime At present the basic rule is that all expenses and benefits provided to an employee are taxable unless they are subject to an exemption. As part of this, all expenses reimbursed to employees or paid on their behalf have been subject to a reporting requirement unless a dispensation has been applied for and granted by HMRC. In many cases where a dispensation has not been applied for or granted, the expenses reported have then been subject to a claim by the employee that they were incurred wholly, exclusively and necessarily in the performance of their duties and a matching tax deduction is therefore claimed against the expense. The reporting of expenses at the end of a tax year can result in a considerable amount of paperwork for employers and if employees do not take care and make a claim that they are business related they can end up being taxed on the expenses. As part of its work the office of tax simplification recommended that specific legislation was introduced to cover the payment of business related expenses. From 6 April 2016 an exemption from paying tax and national insurance will apply on qualifying paid or reimbursed expense payments. Where an employee is entitled to a fully matching tax deduction it will no longer be necessary to apply for a dispensation or report those expenses on forms P11D. Expenses which are not allowable for tax purposes will still be subject to tax and national insurance as they are now. Employees will continue to be able to claim for tax relief on certain expenses which they incur personally and which are not reimbursed by the employer eg qualifying professional subscriptions. This new exemption does not apply to expenses and benefits in kind provided under certain salary sacrifice arrangements. (These are not normally seen in churches and smaller Christian charities although we do see lots of informal arrangements which aren t always handled properly. For example an employee s personal costs paid by the church which are in reality extra salary rather than properly arranged salary sacrifice). All current P11D dispensations will no longer apply after 5 April 2016 there is no need for them under the new rules as all items previously covered by a dispensation should be within the new exemption. Benchmark rates for expenses will continue to be available and will be set through regulations. Any agreement currently in place on benchmark scale rates will continue to apply up to the 5th anniversary of the agreement without a further sampling exercise being required. Again we don t see this in practice in churches. It is, however, necessary to submit a simple application in order to continue to use existing rates. 7
Allowable mileage rates remain as before and employees can continue to make claims for tax relief where they are reimbursed less than the approved rates. How does this affect us? This change potentially removes the administrative burden on churches to agree P11D dispensations with HMRC and reduces reporting requirements where a P11D dispensation is not in place. Dispensations can still be issued up until 5 April 2016 and therefore churches currently paying expenses may still want to apply for a dispensation in order to ensure they do not need to report details on form P11D for the current tax year. A dispensation application can be dealt with using the following link: https://www.gov.uk/apply-for-a-dispensation Dispensations have provided treasurers some comfort as they have been able to give HMRC details of expenses and benefits being provided and secured agreement that they are not taxable and do not need to be reported. Going forward this will not be an option so treasurers need to take the opportunity to review current dispensations and practices and ensure that they are adopting the correct treatment of those items and that going forward they have robust processes and controls in place. Employers will still be expected to have a system for checking that employees are in fact incurring expenses where a tax deduction would be allowed for those expenses. It is therefore as important as ever to check employee expense claims closely and have a proper authorisation process. Further details to the changes on dispensations and expenses from 6 April 2016 can be found in HMRC s website and in particular in Employer bulletin 55: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/454667/employer-bulletinaugust-2015.pdf 4 Abolition of the 8,500 benefits threshold Currently, individuals with earnings (which includes pay plus the value of benefits in kind) of less than 8,500 are not required to pay income tax on certain benefits in kind. An employer is required to report relevant benefits in kind for these employees on a form P9D, as opposed to a form P11D used for employers earning above the threshold. This limit has not changed for 35 years and the office of tax simplification considered that the vast majority of employees are now earning at a rate of 8,500 or more so are taxable anyway on the full range of benefits. The 8,500 threshold is therefore abolished from 6 April 2016, however measures have been introduced to protect lower paid ministers of religion and home care workers. The abolition of the threshold means that, from 6 April 2016, employees receiving benefits in kind will be subject to tax in full on the benefits, regardless of their level of income. This will impact employees with 8
overall income in excess of the personal allowance whose income from a particular employment is less than 8,500. Employers are currently not required to pay Class 1A National Insurance contributions on benefits in kind provided to employees with earnings of less than 8,500. From 6 April 2016, as the benefits in kind will be subject to tax, the employer will be liable to Class 1A NIC on the value of those benefits. This will result in some minor additional costs for the employer and treasurers may want to consider the benefits provided and the associated impact on church budgets. The reporting requirements for employers will also change as forms P9D will be abolished from 6 April 2016, with benefits being required to be disclosed on forms P11D. Measures have been introduced to protect the position of lower paid ministers of religion. For these purposes, lower paid retains its original definition as earnings of less than 8,500 (including the monetary value of benefits). The effect of this exemption is that ministers of religion will see no change in the treatment of their benefits in kind for tax and NIC purposes following the abolition of the 8,500 threshold. (Remember: not every church worker is a minister of religion for this purpose. Most youth workers, pastoral assistants, worship leaders and administrative staff will not meet that criterion). 9